07 Mar 2012 | Person To Person

Interview with Philip Coggan 

Philip Coggan talks to Heather Farmbrough about the meaninglessness of Paper Money.

As Buttonwood columnist, capital markets editor of The Economist and a former Lex columnist, Philip has had a ring-side seat at many financial crashes. As a former Personal Finance editor at the FT, he is acutely aware of what happens to savers when the value of money is eroded. In his latest book, Paper Promises: Money, Debt and the New World Order, he has brought the two worlds together with a look at what has happened to the value of money since it stopped being pegged to any kind of standard, whether gold or the US dollar.

In the book Philip argues that money is simply worth what we agree it is worth, as we can create electronic money at the click of a computer mouse. The consequence has been a catastrophic imbalance between borrowers and lenders as well as a series of asset bubbles like the dotcom and housing booms and crashes and the elevation of the financial sector over its underlying value. 

“Hundreds of years ago, people might have only accepted gold for goods but now we can hand over bits of paper,” Philip says. “If a bank creates money to lend to someone to buy a house, then that is as real money as anything else. What is unique about the last 40 years though is that there has been no end to that money. That is why this cycle is more extreme.”

As the author of 'The Long View' in Weekend FT for many years, where his sane and rational views often contrasted with the markets, Philip saw several cycles, not just closely but clearly.  He also wrote 'The Short View' column which looked at general stock market themes from day to day.

I question if one can find a theme in a day’s trading and Philip mentions Nassim Taleb’s first book, Fooled by Randomness, in which a financial journalist tries to explain what drives the markets on any given day. It is impossible because there is no rational analysis. Taleb’s message is that we look for explanations when there are none, and in Philip’s view, this certainly applies to short term trading. It is just about buyers and sellers, he says.  

Not surprisingly he found writing 'The Long View' more satisfying because he could stand back. “I don’t think you can make sensible predictions about what happens to the markets over the next day or so,” he says, “but it is possible to see things happening over five or ten years because there is evidence that markets reverse the mean in terms of valuations.”

What is the long view? How many years? Five to ten at least, he replies. “It is only over that period that the odds start to operate in your favour. People obsess too much about the short term when they should be saving for retirement, for their childrens’ college fees or weddings or whatever, and those should be 10 or 15 year decisions. If you’re worried about the next year, you should have your money in cash anyway.”

Indeed, Philip has most of his own money in cash, as he sold his house in West London a few years ago and finds that it is cheaper to rent than to buy. Ah, but the trouble with cash is that it is hard to make much of a return on it, I say. 

Yes, he agrees, “and rates change, and as your readers will know, you have to spend ages monitoring the building societies and banks. But I do have a portfolio of equities and mutual funds and other things.”

A former FT colleague, Barry Riley, recently sent Philip an e-mail saying that it is savers who are being robbed in this crisis because they are the only ones with money. Philip says that as always, Barry was right: once you allow for tax and inflation, it is very hard to earn much from cash.

Our discussion moves back towards the conclusion of Paper Promises, which looks at China’s increasing role in the international monetary environment. Philip suspects that it may take another crisis, in which the US might default or the dollar collapses entirely, before an official monetary arrangement is agreed between the US and China.

“It might be 2020 before we get there, and then the question is what sort of financial system do the Chinese like?” he muses. “They don’t like free financial markets or free-floating currencies, so there might be a system of managing the dollar and renminbi, and everybody else’s currencies are managed against the two of them, with the renminbi becoming an alternative to the dollar as a reserve currency. But that’s only one option. ”    

Closer to home, we talk about the problems of the Eurozone countries, whose currencies are effectively and unofficially tied to the Deutschmark. As Philip argues, if the currency is effectively tied, it will stay fixed but everything else has to change in response to economic circumstances. “And so the Greek and Portuguese economies become uncompetitive. The only answer is to make them competitive, but because you can’t alter the currencies, you have to cut wages and prices, but that is extremely painful.”

Imposing draconian financial measures within a democracy is acutely difficult and Philip is concerned about the democratic implications of austerity measures. So much so, in fact, that he has already sketched out the thesis for his next book on the subject. The problem may be in judging when the book should end.

Baillie Gifford sponsored Philip Coggan's event at Aye Write! Glasgow's Book Festival 2012.

The views expressed in this article are those of the author and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

Author: Heather Farmbrough
Heather worked in the city as a stockbroker and fund manager before joining the Financial Times where she was Junior Markets and Smaller Companies correspondant. She has contributed to publications including Weekend FT, Management Today and broadcast on Radio 4.