February 08, 2012
There are plenty of books on economics that are written by people who are very confused on the topic. When a news outlet like NPR chooses to devote a major segment to one such book, it should at least make sure that the person interviewing the author has some understanding of economics. That does not seem to have been the case in its treatment of Philip Coggan, who just wrote the book, Paper Promises: Debt, Money and the New World Order.
According to the segment, Coggan’s thesis is that when the United States went off the gold standard in 1973, it opened to door to the creation of asset bubbles. There are two obvious problems with this story.
First, we had plenty of asset bubbles when the economy was on the gold standard. A knowledgeable reporter might have asked Coggan why the gold standard did not prevent the stock bubble of the 1920s or the land bubbles of that decade in many parts of the country. Other countries on the gold standard also had asset bubbles.
The other major problem with Coggan’s thesis is that the United States was not really on the gold standard after 1933. Usually the gold standard is taken to mean that the currency can be redeemed for gold at a fixed rate. This was not true for individuals and businesses after 1933. In fact, they were prohibited from owning gold. Only foreign central banks could redeem dollars for gold and this practice was strongly discouraged as a matter of policy.
Other parts of his story also don’t correspond well to reality. The United States went completely off the gold standard in 1973. The first notable bubble did not arise until the mid-90s, more than 20 years later. That seems a pretty weak link.
The piece then quotes Coggan:
“‘The result of all that [central banks supporting the economy after bubbles burst] was that it was kind of a one-way bet for speculators: Keep borrowing money to keep buying assets; central banks will always bail you out,’ Coggan says. ‘And that’s why we ended up in this mess that we are in … with lots of debts and central banks creating money to try and prop the whole system up.'”
Coggan may have missed it, but the Fed did not prop up the stock market when the bubble burst in the years 2000-2002. The Nasdaq fell from a peak of more than 5000 to a low of less than 1200 in the summer of 2002. It never came close to recovering even half of these losses. If the issue is supposed to be that the Fed prevented investors from losing money, this is clearly not true. Plenty of people lost lots of money in the collapse of the stock bubble, why would they think the Fed would bail them out if the housing market collapsed?
In short, nothing presented in this segment makes any sense. If the segment accurately represents the main points of this book then it is one that richly deserves to be ignored.
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