Money Mania
Author: Bob Swarup
Publisher: Bloomsbury, Rs499
The book blends hard-nosed financial investment theory, quotes of economists, and financial history from the Roman era with psychology of people in relationship to money, says GAUTAM MUKHERJEE
Bob Swarup — a london-based expert on financial markets and investments, educated at Cambridge and Imperial College — has written a fascinating book on money management with a broad and flamboyant sweep. It blends hard-nosed financial investment theory, some lateral commentary from experience, the quoting of economists and financial history from the glorious reign of the Roman Caesars, that of ancient Greece, the more recent boom and bust cycles in Japan, Europe in the World War years and the psychology of people in relationship to money the world over.
Swarup has left out the latest 2007 onwards global bust, except in passing, as much has already been written about it. But he seems to imply the historical markers, the essential thinking that fuels a boom and sows the seeds of the eventual bust, are no different in this ‘sub-prime crisis’ either.
The title of this book and Swarup’s central thesis suggests a somewhat manic, irrational approach to the pursuit of riches with dollops of exuberant money-lending, while most sober analyses and business/financial investment models are cautious and cleave to the majority view. The author explains that most of us fear “social exclusion” and find it very difficult to “divorce emotion from principles and actions”. And the way we view financial opportunities are through the very same emotional prisms of wanting to belong to the circle of winners.
Human psychology “lends itself naturally to boom and bust,” says Swarup. “The first-ever documented sovereign default was in the fourth century BC in ancient Greece”, which was an aggregate of city states at the time “when 10 Greek states defaulted on their debt to the temple of Apollo at Delos”. Even back then, the idea was to leverage growth through debt and the over-optimism involved led to the default.
Swarup cites economist Hyman Minsky “who saw fragility and financial instability as intrinsic to any economy that contained banks and debt”. Minsky’s protégé Charles Kindleberger wrote in 1978 what Swarup calls “the definitive book on manias and panics”. He quotes Kindleberger: “Speculation for capital gains leads away from normal, rational behaviour to what has been described as a “mania” or a “bubble”. The word “mania” emphasises irrationality…”
Indeed, even a genius, the renowned physicist Sir Isaac Newton, lost 20,000 pounds sterling — the equivalent of $5 million today — by speculating in “the South Sea Bubble of 1720”.
Some booms and busts had a lot to do with the waxing and waning of political power. The 16th century was defined, says Swarup, “by the rise of Protestantism and the increasingly violent confrontations between the Protestant north and Catholic south of Europe”. These skirmishes, competitions and wars were funded with borrowed money from bankers to the kings, such as the German family, with the interesting name of Fugger. But even royalty was far from immune to the boom and bust cycle. Catholic Spain, one of the wealthiest, “managed to default seven times over the course of the 16th and early 17th centuries”.
Swarup writes of entrepreneurs and speculators who make large sums of money as “being among the first to a new party” in reference to the early-bird phenomenon. And he cites cascading dynamics at the other end of the cycle when a bust takes place. This is due to something that mimics a law of physics. It is the “long history of endlessly repeated cycles — optimism, arrogance, greed, fear and capitulation”.
“Speculation”, writes Swarup, “needs money and conquers sense. Ego denies the hand of luck and instead thanks skill, knowledge, and prescience. Where there is insufficient money, people find ways of creating more — the history of finance is replete with innovations such as bills of exchange, bonds, paper money, and derivatives”.
If economics was largely population-driven in the ancient and old world, “post 1700, the Industrial Revolution unleashed a surge in productivity thanks to technological innovation…thereafter, economic growth appeared to decouple from population growth,” he writes.
The world became increasingly more complex. long term-planning and management was given short shrift. Most Governments and those who ran them tended to have a short-term outlook. As a consequence, there were problems that were routinely swept under the carpet. Swarup calls it a “disequilibrium beneath the surface” that has no choice but to erupt from time to time.
But, writes Swarup significantly, given the financial multiples involved “money did not birth credit and was not the natural evolution of bartering but rather the convenient medium of borrowing, lending and taxing. For example, the actual base amount of money in a system may be very small…the United States had a monetary base of about $3 trillion in 2012, meaning of course just the physical notes and coins, but if we add in all the credit that is out there…it exceeds $51 trillion and that is without counting the derivatives”.