Ascent

Ascent of Money Paper

University of Phoenix

Principles of Macroeconomics

ECO 372

Ascent of Money Paper

Part 1: From Bullion to Bubbles.

On this episode the economist Niall Ferguson analyzes the recent worldwide financial crisis in the background of the financial history of the west. The economist starts by telling the audience that one of the greatest innovations of modern history is the invention of the joint-stock limited-liability company, which allows individuals to pool resources while not having to risk their entire personal fortune. In spite of the theory that vigilant shareholders hold control over the management through a non-executive director, the practice is that millions of shareholders will continually buy and sell the infinitesimally small part of the company, thereby estimating the future cash flows it will realize. This results in a kind of collective ‘mood’ on the stock exchange. Usually it follows 5 tracks:

1. Displacement, where a shift in the economic environment creates profitable opportunities.

2. Euphoria: a feedback loop of buyer creates ‘overtrading’

3. Mania: buyers not having a clue create the bubble

4. Distress: the exorbitance becomes clear to the well informed

5. Revulsion: the bubble bursts and especially the uninformed sell off in large quantities

Niall also says that the number of factors will typically facilitate this process, such as information asymmetry towards insiders, easy credit and the free flow of capital. What is also very common is the short duration of the investors’ memory, helping to create the next bubble rapidly.

Nevertheless, over the long run it has shown profitable to invest in stock rather than bonds, especially in the US. John Law was the first one to ever create a stock market bubble. He learned the stock market dynamics in Amsterdam, where the United East India Company (VOC) had come to existence in 1602. Its shares, and dividends, were widely traded in the years...