New Money

David Roche and Bob McKee are President and Chief Economist of Independent Strategy, a global investment consultancy. Both experienced market economists with a wealth of practical investment and financial market knowledge, they self published New Monetarism in 2007 and issued a new edition in 2008.

The book is the most succinct and penetrating analysis of the changes in financial order that took place in the last 10-15 years that is available. Pithy (the text runs to around 100 pages), untrammelled by jargon and extraneous garbage (generally deployed by authors to obscure or rescue a failing argument) and mercifully free of interviews and anecdotes, New Monetarism sets out the key drivers of the build up of liquidity and its effect on the global economy.

Messrs Roche and McKee present a convincing argument of how much of global “growth” over the past 20 years was, in reality, driven disproportionately by borrowing that fuelled asset price bubbles that in turn have allowed further borrowing. The authors show how the growth in liquidity was driven by macro-economic factors (the decline of inflation and low oil prices) and changes in financial markets (the growth of derivatives, changes in intermediaries such as banks, investors, hedge funds and “innovative” new financial products).

The book covers the rise of emerging markets and the massive liquidity vortex created by the large foreign exchange reserves and its affect on capital flows, cost of capital and ultimately growth.

Importantly, New Monetarism succeeds in tying the disparate elements together in a coherent narrative.

Presciently, the first edition of New Monetarism appeared in September 2007 just prior to the calamitous collapse of financial markets. The new edition is updated and also includes a new chapter Parched World that looks at a post-GFC world. It provides a useful guide to possible developments in financial markets.

Paul Krugman, writing in the New York Times, called the U.S. economy the “Madoff Economy”. Messrs Roche and McKee show that the world for the last decade or two has been a gigantic Ponzi game.

The only lesson that central bankers and politicians have learned is that there is nothing wrong with a Ponzi scheme. It is just that you can’t allow the game to end. Present initiatives to arrest the problems are merely designed to prolong the game without addressing the root cause and imbalances.

© 2009 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).