Tuesday, August 7, 2007

Book Review: Niall Ferguson's The Cash Nexus

[Note: this post was written and published on June 14, 2012 but has been backdated.]

I just finished Niall Ferguson’s tome, The Cash Nexus (2001) (paperback, by Basic Books).  It took me a long time to get through it, and I still think The Ascent of Money is a much better book, but I wanted to share some tidbits:

1.  For whatever reason, the engineers I know don’t tend to be great investors.  So I wasn’t overly surprised to learn that Sir Isaac Newton, the genius of his time, failed at investing, buying at the peak and selling at the low—of a bubble, no less.  However, I was surprised to read that Karl Marx, of all people, was a daytrader or short-term trader.  He wrote his socialist friend, Ferdinand Lassalle, in 1862 about his market-timing skills:

I have, which will surprise you not a little, been speculating--partly in American funds, but more especially in English stocks, which are springing up like mushrooms this year (in furtherance of every imaginable and unimaginable joint stock enterprise) are forced up to a quite an unreasonable level and then, for most part, collapse. In this way, I have made over £400 and, now that the complexity of the political situation affords greater scope, I shall begin all over again. It’s a type of operation that makes small demands on one’s time, and it’s worth while running some risk in order to relieve the enemy of his money.   [page 319]

2.  Ferguson seems to have predicted the collapse or at least the instability of the present-day EU.  He points out that many historians believe that a “homogeneous nation-state was the only proper setting for a liberal polity” and then describes Europe's ethnic and linguistic diversity, especially in Central and Eastern Europe. [page 378 and 379]

Earlier in the book, he referred to a Freedom House survey that "suggests that countries without a predominant ethnic majority are less successful in establishing open and democratic societies than ethnically homogeneous countries (defined as countries in which over two-thirds of the population belong to a single ethnic group).  Of the 114 countries in the world which possess a dominant ethnic group, 66--more than half--are free.  By contrast, among multi-ethnic countries only 22 of 77 are free--less than a third." [pages 375-376]

Personally, I think the EU's current instability owes more to the lack of a single dominant language and differing corruption and tax enforcement levels (e.g., efficient Germany vs. corrupt Greece) than any ethnic differences.  Also, Ferguson is highlighting a survey with a 57.8% to 28.6% numerical difference--which is perhaps not statistically significant unless one examines the survey's definition of "ethnic" and the time periods involved (which could be either too limited or too broad).  In any case, Ferguson does not elaborate much on the survey's methods or underlying data.  

3.  Ferguson states that the Germans were the “worst offenders” in terms of ethnic conflict and forced resettlement: “In addition to murdering between five and six million Jews, their racial policies were responsible for the deaths of around three million Ukrainians, 2.4 million Poles, 1.6 million Russians, 1.4 million Belorussians and a quarter of a million gypsies.” [page 380]

4.  On state monopolies in relation to commodities: “Around 5 percent of American state and local government revenue comes from state utilities and liquor stores.  State lotteries play a similar role: in each case the state monopolizes the gratification of a particular vice…And like the vices themselves, the revenues they generate can be hard to give up.” [page 55]

5.  For the gold bugs: most gold is used for jewelry, and India consumes 700 tons of gold annually (at least per 2001 data).  Ferguson also includes this interesting note: "It should be emphasized that, contrary to popular belief, gold has been a poor hedge against inflation in Britain and the United States.  The purchasing power of gold has actually increased more in periods of deflation like the 1880s and 1930s; whereas during war-induced inflations it has lost ground relative to industrial commodities needed for military purposes.  The real attraction of gold is that it is accessible and exchangeable even when established monetary institutions fail."  [page 325]

Ferguson relies on The Changing Relationship Between Gold and the Money Supply, by Michael D. Bordo and Anna J. Schwartz, and Gold as a Store of Value by Stephen Harmston.  

6.  On the increasing size of government: “In 1891 total government personnel amounted to less than 2 per cent of the total labor force in Britain.  The figures on the continent were higher, but not by much.  For Italy in 1871 the equivalent was just 2.6 per cent; for Germany in 1881 3.7 per cent.  Even the famously elaborate Habsburg bureaucracy was small in relation to the swelling population of the Empire. But from the turn of the century onwards there was sustained growth in the public sector almost everywhere.  By the 1920s public employment exceeded 5 per cent of the workforce in Italy, 6 per cent in Britain and 8 percent in Germany.  [pages 90 and 91]

According to the United States Census Bureau, in 2010, state and local governments had 16.6 million full time employees.  (See here.)  The federal government had about 3 million total employees, with 2.583 million having full time jobs.  These federal numbers apparently do not include the 185,295 employees within the Department of Homeland Security.  (See here.)  Taken together, the aforementioned numbers indicate that we had about 19,368,295 full time government employees in 2010.  In 2010, the U.S. Census Bureau indicated that the resident population of the United States on April 1, 2010 was 308,745,538.  These figures indicate that in 2010, total government personnel in the United States was about 6.27% of the total resident population.  

7.  Some general facts: 

“At the time of [Bill] Clinton’s inauguration, more than 13 per cent of US federal government bonds were in foreign hands.” [page 263] 

Ferguson seems to have predicted the 2008 financial collapse when he wrote the following in 2001: 

“And the growth of international derivatives markets has been even more rapid.  The total amount of futures and options instruments traded on exchanges rose from $7.8 trillion at the end of 1993 to $13.5 trillion at the end of 1998.  The amount of so-called 'over-the-counter' (OTC) instruments traded outside established exchanges rose from $8.5 trillion to an astonishing $51 trillion.  The OTC derivatives market is now by any measure the biggest financial market in the world—more ‘terrifying’ even than the $34 trillion bond market.” [page 263] 

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