Book review: Paper Promises: Debt, Money and the New World Order< by Philip Coggan

By Professor Jeffery Atik

As its subtitle suggests, Philip Coggan's book examines the relationship between debt and money and its implications for the 21st century economy. Coggan takes us through familiar territory (the nature of money) and familiar debates (Keynesianism vs. monetaristm), yet offers a novel framing that make this book a valuable read.

Coggan has an unusual view of the fundamental divide in political economy. Rather than seeing class struggle everywhere, Coggan treats the conflict between creditors and debtors as the central fracture motivating politics, though he notes that -- all things being equal -- creditors tend to be wealthier (and fewer in number) than debtors.

In speaking of debt, Coggan slides (perhaps too easily) between private and public debt. The debt that interests Coggan is the burgeoning debt that tends toward default (as opposed to the under-remarked debt that is extinguished by repayment in the ordinary course). This is the persisting debt that in usual times is rolled over upon each maturation. He writes of unsustainable debt -- again, both private and public -- that will of necessity lead to some degree of default. In the case of public debt, the default scenarios include -- importantly -- devaluation, a course open to most states to reset the exchange value of the money in which a debt is expressed and thus unilaterally reduce the value of the debt (as expressed in some other value, such as gold or a harder currency).

For most states, there is a limit to this strategy. Devaluation has consequences. It may throttle domestic expectations, igniting inflation. And devaluation -- in a global society -- has consequences, distributing at least some of the lost value to other countries (by readjusting the terms of trade) as well as to the disappointed creditors. Devaluation will also make future borrowing more difficult.

But -- of late -- there appeared the possibility for at least one country to escape the devaluation trap. The United States has enjoyed an extraordinary privilege, in that its currency seemed to be highly valued notwithstanding its horrific trade deficits. This reflects its historical (though waning) primacy in world economic affairs. What matters now is the role of this particular national money as place for storage of value: China (as do Japan and others) continues to re-funnel its vast export earnings into dollar-denominated obligations of the U.S. Treasury, thus keeping prevailing U.S. interest rates low. Exchange values may reveal more about capital flows than trade balances, Coggan argues.
This perceived signal within the U.S. economy is a green light for expansion.

Prior to the 2007 financial crisis, this green light released a frenzy of asset acquisitions, including the real estate bubble. And even now, the continued low interest rates may serve to mask the severity of the U.S. debt crisis. Confronting the debt crisis may be postponed (though not avoided) through the simple expedient of increasing the U.S. money supply.

Money today is simply debt, Coggan reminds us. Money has been detached from its historic anchors (precious metals), as each sovereign seeks to discover the sweet spot between too little and too much money. The likely course is one of oscillation, where the costs of each extreme is regularly felt. Post-crisis austerity, while an upright policy, may lead to a downward spiral, as consumers pull back current expenditure to service debt (their own and, via taxes, those of the state), magnifying economic contraction. And too much debt can drive away the creditors -- the monolithic bond market James Carville fears -- as they come to believe that 'borrowing' is just a ruse to transfer their accumulated stores of wealth to others. Better to hoard (if that remains possible).

Moving debt into the future has been a viable strategy - but it resembles a Ponzi scheme, in that success depends in part of an increasing number of new players, the upcoming generations. Their ability to work off the burdens of their grandparents may depend on the prospects of their grandchildren, and so on. But the intergenerational strategy seems to have limits as well, as advanced economies (such as the United States, Japan and Europe) feature extremely low population replacement rates. In an odd way, pushing the U.S. debt back onto China (through a devaluation of the dollar against the renminbi) has both an international and an intergenerational aspect, given China's continued projected population growth.

Coggan paints a rather bleak future, involving inevitable U.S. decline. More crisis is ahead, as the mountain of public and private debt is either devalued or postponed - or results in outright default.

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