Dreams of Avarice
Niall Ferguson pointed out the reasons why certain groups of people clamor for the establishment of a cash-less society. History provides gruesome tales of how human beings were treated like beasts of burden because of the pursuit of money. The author tells how Europeans exploited the native inhabitants of South America to mine precious metals. The evil schemes that were perpetuated due to the people’s love for money seemed to justify the need to eradicate the financial system based on coins and paper money.
However, Ferguson was quick to explain that the advantage of money is manifested in its ability to eliminate the inefficiencies inherent in the barter system. Besides, paper money and coins enable human beings to enter into economic transactions over long periods, and the need to conduct business transactions that cover significant geographical distances. This insight into the importance of a reliable financial system is not a byproduct of enlightened minds or modern thinking. The author asserted that the earliest known coins were dated as early as 600 B.C. The concept was so important to human progress that the evolution of the financial system needed to support social and economic development resulted in the establishment of the banking system known today.
The author was correct in his assertion that money is a necessary evil. The romantic notion of a cash-less society exists only in works of fiction. Primitive societies that survived without the benefit of a financial system are characterized as barbaric people prone to violence because of the desperate need to secure the needs related to food, clothing, and shelter.
Of Human Bondage
The author asserted that the modern world created the bond market to facilitate the borrowing of money to sustain government expenditures. He also pointed out that this new system of borrowing traced its roots to the medieval warfare that plagued Europe. Traditional warfare was characterized by local inhabitants or citizens of the state defending its property and resources against invaders.
However, the military conflict described during Europe’s medieval age involved battles that were fought not by the citizens of the realm but by mercenaries. It is interesting to note that the bond market started as compulsory investments when wealthy citizens were compelled to lend money to the state to pay for the cost of war. Thus, bonds evolved into a financial instrument that kept nations afloat. However, its weakness is too glaring to ignore.
The author was correct when he said that human beings are in bondage to the bond market. People’s behavior towards bonds is comparable to a drug addict with perfect knowledge of the risks involved in consuming prohibited drugs but has no power to stop. It is interesting to note that bonds are prone to produce declining yields. It is also important to develop prudent strategies to rectify the inherent weakness of bonds. The urgent need to find effective solutions is made more desperate by the realization that the number of retirees is growing steadily. The absence of solutions means a bleak future for those who depended on a steady stream of income during their retirement years.
Blowing Bubbles
The author attempted to simplify the complicated nature of the stock market by linking it to the evolution of the banking system and the bond market. He began by explaining the reason for the existence of the stock market. It is the inevitable outcome of the invention of the “company” that enables a group of investors to engage in a business venture that is fraught with risk. The concept of selling shares was borne out of necessity because of the type of business ventures that were created as a result of economic expansion. Nevertheless, investors are led to believe that the reward justifies the risk. In the 400 year history of the stock market, there were numerous instances wherein investors were guided by irrational exuberance that led to the creation of a stock market bubble.
The stock market is less predictable than the bond market. Its greatest weakness is a built-in feature that allows for the exaggerated valuation of the shares and the rapid decline of the prices of the same. The capability to set prices based on projected earnings is affected not by sound mathematical calculations but by mood swings and paranoia. Also, the price of the company’s share does not reflect the true state of the company.
Corporations like Enron were able to deceive shareholders and investors. Those who purchased Enron stocks were led to believe that the company was a profitable business venture. The stock market is a flawed system. However, it will stay, because it is the best system when it comes to generating funds from investors. The money from the stock market is utilized for business startups or the expansion of the company’s business operations.
The Return of Risk
The author traced the development of insurance companies as the logical outcome of the need to save in advance to mitigate the impact of future adversity. It is interesting to note that the origin of modern insurance companies is traceable to a fund that was established to support the widows of clergymen in Scotland.
Therefore, the original purpose of an insurance policy is to mitigate the impact of loss or disaster. The success of modern insurance companies is attributed to the power of actuarial science that enabled insurers the capability to predict with precision the life expectancy of a group of individuals. Thus, insurers can prepare in advance the funds that they needed to pay at any given moment. The popularity of insurance premiums is not only the assurance of a relatively risk-free investment; it is also the direct result of the need to establish a better alternative to the welfare state.
It is prudent to acquire an insurance policy from a private company because a country’s welfare state is unreliable. However, the majority cannot afford to pay the premium required for a private insurance policy. Although it is important to follow this path, the reality of the situation prevented ordinary people from getting this type of insurance coverage. As a result, the government struggles to find the resources needed to pay retirees and treat them when they get sick.
To solve the problem of the welfare state, the solution is considered unthinkable by different sectors of society, because it calls for steady growth of the population so that there is enough number of younger people who will provide the needed resources to sustain the growth of the country’s social security system.