Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Monday, 30 April 2012

The Crisis Reading List

Successful trading/investing in the present environment requires a clear understanding of the situation. Knowledge of history and a long term view are essential to rise above the profit killing noise of headlines. In this, the five books listed below have helped me stand apart from the momentum chasers and carry traders ever since the crisis began. They provide invaluable perspective on the current sovereign debt crisis and help in gauging what the future holds. In no particular order:

1. The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMF
Author: Paul Blustein
This is very relevant to the current crisis as it lays bare the politics and infighting which make crisis resolution extremely difficult. It shows the inability of the IMF and officialdom to resolve the Asian financial contagion. A point of interest is the German opposition to bailouts and how they were bullied into submission even as the bailout itself proved inadequate to stop capital flight. Sound familiar?

2. And the Money Kept Rolling in (and Out): Wall Street, the IMF and the Bankrupting of Argentina
Author: Paul Blustein
Another Blustein book and the sequel to the first one. Excellent analysis of the Argentinian default which shows that the IMF has learnt very little if anything from its past debacles. There are many parallels with the current peripheral situation and it is an indicator of how things are going to turn out in Europe. Argentina defaulted six months after its debt swap (Debt-Swap on 3rd June, Corralito on 1st December, official default announcement on 23rd December). Greece is almost at the finishing line and the others are running in the same direction.

3. The Economics of Inflation: A Study of Currency Depreciation in Post-War Germany, 1914-1923 (Monetary Economics)
Author: Constantino Bresciani-Turroni
An unrivalled study and analysis of Weimar hyperinflation by an economist who was there at the time it took place. Provides the background for the Bundesbank distaste for easy money policies. It also shows one of the end games of the QE experiment now being conducted.

4. This Time Is Different: Eight Centuries of Financial Folly
Authors: Carmen M Reinhart, Kenneth Rogoff
Essential backgrounder for the current sovereign debt crisis. A masterpiece of data analysis which blows away incredible arguments being made today such as '120% debt-GDP ratio is sustainable'. It not only shows how the endgame pans out for debt-burdened states but also the shape of subsequent recovery from busts (whether sovereign, housing or banking). The latter is important for those decrying the USA's "anaemic" recovery.

5. Lords of Finance: 1929, The Great Depression, and the Bankers who Broke the World
Author: Liaquat Ahamed
The most entertaining and easy to read book of the lot, it chronicles the pre World War-I and inter-war period. Ahamed's financial analysis is a bit weak but the presentation of historical facts and storytelling make up for it. The gold standard and central bank policy mistakes of the era have an uncanny resemblance to the current period. The former is reflected in the Euro, the current de-facto gold standard for the Eurozone, and the latter is echoed in the misguided policy of austerity.

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