Extreme Money

The Masters of the Universe and the Cult of Risk

Satyajit Das

• Publisher: Wiley
• Year: 2011
• Print ISBN: 9781118153697
• eBook ISBN: 9781118153727
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

A definitive cultural history of high finance from one of the industry's most astute analysts

Written by internationally respected financial expert Satyajit Das, Extreme Money shows how real engineering was replaced by financial engineering in the twentieth century, enabling vast fortunes to be made not from goods produced or services performed, but from supplying and trading money.

Extreme Money focuses on this eviscerated reality—the monetary shadow of real things—and what it means today. The high levels of economic growth and the wealth that inevitably follows, driven by cheap debt, financial engineering, and speculation, were never sustainable, and the last few years have borne this out. The book shows how policy makers and regulators unknowingly underwrote the risks, substantially reducing their ability to control economic outcomes. Extreme money concentrated economic power, wealth, and risk in the hands of a small community of gifted, dynamic financiers largely outside the regulatory purview and the democratic process, and there's no going back.

• Explains the extreme money games (via private equity, securitization, derivatives, hedge funds, and other means) invented by the elite financiers of last century
• Raises deeper questions about the nature of the economic structure and assumptions about ongoing financially engineered prosperity that readers, politicians, and financial figures need to be asking
• The book is timed to coincide with the next phase of the financial crisis, as prospects of recovery diminish and the global economy becomes mired in a Western version of Japan's "Lost Decade"

Ambitious in scope and coverage, the book is the indispensible, in-depth guide to the age of modern money. An age defined by extremes of financial behavior.

Part I

Faith

Faith—confidence of belief based not on proof but trust in a person, thing, or teaching.

In the later half of the twentieth century, a money culture dominated. Money changed from a mechanism of exchange into something important in its own right. It ceased to be a claim on real things, becoming instead a way to create wealth, increase economic activity, and promote growth.

Money came to dominate individual lives, through saving for retirement and debt to finance consumption. Companies relied on money games to boost profit. Newly deregulated banks took advantage of the new opportunities to move into central roles in modern economies. Cities and countries became financialized.

Financialization was reinforced by the media, which increasingly provided 24/7 coverage of money matters.

Chapter 1

Mirror of the Times

There’s old money; then there’s new money. Old money is the stuff of storied Mayflower descendants in the Hamptons or hyphenated names and titles in London’s South Kensington. New money is the arriviste stuff brandished by Russian oligarchs who buy Chealski football club, and hedge fund managers with a taste for modern art works called The Physical Impossibility of Death in the Mind of Someone Living.

There’s hard money, there’s fiat money, and there’s debt. Gold, greenbacks, dollars, pounds, euros, loonies (Canadian dollars), aussies (Australian dollars), kiwis (New Zealand dollars), Chinese renminbi, Indian rupees, Russian roubles, Brazilian reals, South African rands, Kuwati dinars, Saudi riyals, and the Zambian kwatcha. In the film Other People’s Money, Lawrence Garfield, aka Larry the Liquidator, played by Danny de Vito, tells his lawyer that everyone calls it “money” because everybody loves “money.”

In truth, money exists only in the mind. It is a matter of trust. With trust, comes the possibility of betrayal. The late Michael Jackson understood money’s essence, urging people to lie, spy, kill, or die for it.1

Some Kinda Money

There are different sorts of money. Most of the participants at the Portfolio Management Workshop run by a prestigious business school were in their late 20s or early 30s, already managing other people’s money. One man did not fit the typical attendee profile. Almost 80 years old—tall, straight-backed, and gaunt—he was there to learn to manage his own money better. He told an interesting story about gold.

He was a boy when the great earthquake struck San Francisco at 5:12 a.m. on Wednesday, April 18, 1906, one of the worst natural disasters in U.S. history. The man and his family survived the earthquake and subsequent fire, managing to get out of the destroyed city by boat. His father paid the boatman, who would not accept money, in gold, secreted away for emergencies. Gold, the sweat of the god as the Incas called it, is hard money. It is the only money when chaos ensues.

In the 1970s many Indians emigrated in search of a better life. Indian foreign exchange controls prevented legal conversion of worthless Indian rupees into real money—American dollars or British pound sterling. Emigrants resorted to Hawala or Hundi—an informal money transfer system.

You needed an introduction to a money broker. You paid him your rupees. In return you received a small chit of paper on which were scrawled a few words in Urdu, a language spoken mainly in Pakistan and India. This chit had to be presented to another money broker outside India to receive the agreed amount of dollars. There was no guarantee that you would receive the promised dollars. It was a pure leap of faith. Hawala is paper money, based entirely on trust and honor.

In July 2008, a bank in Zimbabwe cashed a check for $1,072,418,003,000,000 (one quadrillion, seventy-two trillion, four hundred eighteen billion, three million Zimbabwe dollars). In the 28 years since independence, Zimbabwe, the former colony of Rhodesia, progressed from one of Africa’s richest states into an economic basket case. The government’s answer to economic collapse was to print money until the Zimbabwe dollar became worthless. This is mad money—paper money made valueless through inflation and its extreme mutation hyperinflation.

Inflation in Zimbabwe was 516 quintillion percent (516 followed by 18 zeros). Prices doubled every 1.3 days. The record for hyperinflation is Hungary where in 1946 monthly inflation reached 12,950,000,000,000,000 percent—prices doubled every 15.6 hours. In 1923, Weimar Germany experienced inflation of 29,525 percent a month, with prices doubling every 3.7 days. People burned Marks for heat in the cold Northern German winter. It was cheaper than firewood. The butter standard was a more reliable form of value than the Mark. The German government took over newspaper presses to print money, such was the demand for bank notes. The abiding image of the Weimar Republic remains of ordinary Germans in search of food pushing wheelbarrows filled with wads of worthless money.

To avoid calculators from being overwhelmed, Gideon Gono, the governor of Zimbabwe’s central bank who despised bookish economics, lopped 10 zeros off the currency in August 2008. It did not restore the value of the Zimbabwe dollar but made it easier to carry money.

You receive a letter, a fax, or an email. The letter is from the wife of a deposed African or Asian leader, a terminally ill wealthy person, a business being audited by the government, a disgruntled worker, or corrupt government official who has embezzled funds. He or she is in possession of a large amount of money—in the millions—but cannot access the money. You will receive 40 percent if you can help retrieve the money or deal with it according to the owner’s instructions. You just need to send a little money.

It’s a scam. Any money you send is lost. This is bad money. Scammers are known as Yahoo millionaires. “Ego” or “pepper” is money. To be fooled in a scam is to “fall mugu.” “Dolla chop” refers to the receipt of money from a victim.

Money is pure trust and faith. Money itself can have value—gold. It can have no intrinsic value—paper. Money can be easily debased. It can corrupt and, in turn, be corrupted.

Trading Places

In trade, two parties willingly exchange goods and services. The economist Adam Smith observed that people have an intrinsic “propensity to truck, barter, and exchange one thing for another.”2 Trade originally involved barter, the direct exchange of goods and services. If you have two items to trade, then you agree a rate of exchange—for example, five of this is worth one of that. If you have 100 items, then traders would have to remember 4,950 exchange ratios. For the 10,000 different items that a supermarket may stock, you need to remember 49,995,000 exchange ratios.

In the eighteenth century the French opera singer, Mademoiselle Zelie, performed in French Polynesia during her world tour, receiving one-third of the box office—3 pigs, 23 turkeys, 44 chickens, 5,000 coconuts, and considerable amounts of fruit. Unable to consume the payment, Mademoiselle Zelie’s fee equivalent to 4,000 francs—a considerable sum at the time—was wasted.3 When naturalist A.R. Wallace was exploring the Malay Archipelago, he planned to obtain food through barter. But he found that the indigenous people did not want the commodities he brought. Wallace nearly starved as his and the Malays’ needs rarely coincided.4

The problems of barter are overcome where traders negotiate through a medium of exchange—money. Money allows separation of buying and selling in the process of exchange. Any traveler in the Malay Archipelago today carrying cash or an American Express or Visa card is unlikely to suffer the indignities and privations of Wallace.

Barter still exists. During the Cold War era, communist economies bartered for essential goods. The UK exchanged Russian grain for Rolls Royce jet engines that were used to power Soviet MiG fighters in the Korean conflict. “Returned with interest,” Glynn Davies, a monetary historian, grimly noted. In 2010, North Korea’s cash-strapped totalitarian regime, through its Bureau 39, offered several tons of ginseng, a curly white root claimed to improve memory, stamina, and libido, to settle $10 million in accumulated debt owed to the Czech Republic.5

The Invention of Money

Money is universally accepted as payment, a claim on other things—food, drink, clothing, operatic arias, travel, knowledge, or sex. It is a medium of exchange, a measure of the market value of real goods and services, a standard unit of value, and a store of wealth that can be saved and retrieved in the safe knowledge that it will be exchangeable into real things when retrieved.

Commodity money is anything that is simultaneously money but is a desired tradable commodity in its own right—money that is good enough to eat. Humans have experimented with dried fish, almonds, corn, coconuts, tea, and rice.6

The ancient Aztec cultures used cacao. The large green-yellow pods of the cacao tree produce a white pulp that, when dried, roasted, and ground, becomes chocolate. Some European pirates seized a ship full of cacao beans—a true El Dorado worth more than galleons filled with gold doubloons. Unaware of the value of the cargo and mistaking it for rabbit dung, the pirates dumped the cacao into the ocean.7

Commodities have intrinsic value and their supply cannot be changed easily. But restrictions on the availability of a commodity can artificially limit the amount of money, in turn limiting the volume of activity and trade. If water were used as a form of commodity money, then hoarding it to preserve wealth would reduce the amount available. People might die of thirst, but they would die rich. Commodities are also difficult to store, so inhibiting the capacity to amass and store wealth.

In economic chaos, war or collapse, commodity money reappears. In post-Saddam Iraq, mobile phone credit became a popular quasi-currency, rivaling banks and the Hawala system. Prostitutes asked for payment by way of mobile phone airtime credits, leading to the nickname scratch-card concubines. Even kidnappers asked for ransoms to be paid in the form of high-value phone cards.

Over time, more permanent forms of money have developed—massive stone tablets, animal skins and fur, whale tee...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• About the Author
• Publisher’s Acknowledgements
• Prologue
• Part I: Faith
• Part II: Fundamentalism
• Part III: Alchemy
• Part IV: Oligarchy
• Part V: Cracks
• Epilogue
• Select Bibliography
• Index