The Ascent of Money Documentary - All Episodes

Dreams of Avarice Transcription:

  The Ascent of Money Episode 1: Dreams of Avarice.

"Welcome to the world of money, bread, cash, dosh, dough, loot, lucre, moolah, the readies, the wherewithal. Call it what you like, money can break us or it can make us.

In the past year, it's certainly broken more than a few of the biggest names on Wall Street and in the City of London. And while former masters of the universe crash and burn, the rest of us are left worrying if our savings would be safer in a mattress than in a bank.

The great financial crisis that began in the summer of 2007 has most of us utterly baffled. How on earth could a little local difficulty with sub-prime mortgages in the United States unleash an economic tsunami big enough to obliterate some of Wall Street's most illustrious names, to force nationalisations of banks on both sides of the Atlantic and to bring the entire world economy to the very brink of recession, if not downright depression? Shouldn't this series be called The Descent Of Money?

Well, I want to explain to you just how money rose to play such a terrifyingly dominant role in all our lives. What's more, I want to reveal financial history as the essential back story behind all history. Banks financed the Renaissance while the bond market decided wars. Stock markets built empires, and monetary meltdowns made revolutions. From Ancient Mesopotamia right down to present day London, the ascent of money has been an indispensable part of the ascent of man.

But money's rise has never been a smooth, upward ride. As we'll see, financial history has repeatedly been interrupted by gut-wrenching crises of which today's is just the latest. From the fluctuating prices of the homes we own to the high-speed industrialisation of China, the power of finance is everywhere we look and it affects all of our lives.

SEAGULLS CRY

But are you in on the secret? Do you know what causes a bank run or a monetary meltdown or a stock market crash? Can you tell the difference between a sub-prime loan and a prime loan? Well, I think these financial technicalities only really make sense once you know where they came from. And that's why financial history is of more than merely academic interest. Not knowing this stuff can seriously damage your wealth.

Crisis or no crisis, the amount of money sloshing around planet finance still boggles the mind. By one measure, the US stock of money is now $8,700,000,000,000, up 12% since last year. And some people are still pocketing a huge share of that cash. Last year, despite the onset of the biggest financial crisis since the Depression, his hedge fund paid George Soros a cool $2.4 billion. That's roughly 41,000 times more than the average American family earned. As they say on Wall Street, ''Way to go!''

Now, however, imagine a world with no money. 500 years ago, the most powerful society in South America, the Inca Empire, had no real concept of money. The Incas appreciated the aesthetic qualities of rare metals - gold was the sweat of the sun, silver the tears of the moon - labour was the unit of value in the Inca Empire, just as it was later supposed to be in a communist society.

But in 1532, the Incas ran into a man whose hunger for money had led him across an ocean. Francisco Pizarro and his fellow Conquistadores had come from Spain to what they called Upper Peru inspired by the legend of El Dorado, the realm of the gold-covered king. After.

The price the Jews paid for performing this service was social exclusion. Hence the ghetto. And hence the centuries-long association between Jews and finance, one of the few forms of economic activity from which Jews were not once excluded.

In the end, of course, Shylock is thwarted. For although the court recognizes his right to a pound of flesh, the law also prohibits him from shedding Antonio's blood. And, because he's a Jew, the law also requires the loss of his goods and life for so much as plotting the death of a Christian. He only escapes by submitting to baptism. It turns out to be a risky business to be a moneylender.

The Merchant of Venice raises profound questions about both economics and anti-Semitism. Why don't debtors always default on their debts - especially when the creditors belong to unpopular ethnic minorities? Why don't the Shylocks always lose out?

To get a better idea of how primitive money lending works, you don't need to travel back in time. There are plenty of modern-day Shylocks remarkably close to home. And they don't need to be Jewish to suffer a similar fate to Shylock.

This is Shettleston in the East End of Glasgow. It's actually where my grandmother used to live. And I think with its distinctive steel shuttering, it's one of the grimmest places in the whole of Western Europe. In fact, average male life expectancy here is just 64, which is slightly worse than Bangladesh. That means that the average Shettlestonian doesn't actually live long enough to collect his state pension.

You might think nobody would be mad enough to try and provide financial services here. But someone does. That someone is a loan shark. You give him your benefit card as security and he gives you a loan. On the day your benefit arrives, he gives you back the card and you go to the post office to get your money, repaying him the interest. It's a modern version of Shylock's business model. Usury is alive and well and living in Scotland.

These are some pages from the loan book of a Glasgow loan shark. And it's kind of interesting to see how the business model works. You lend out maybe £10 to someone and you expect to be paid back £12.50 at the end of the week. Now that's 25% a week, but if you work that out at an annual rate it comes to 11 million percent.

So why do people scraping by on just £5.90 a day pay such horrendous interest on loans? These, surely, are loans you'd be mad not to default on. But here in Glasgow, defaulting on your loan is highly inadvisable. You won't literally lose a pound of flesh, but grievous bodily harm isn't an unknown consequence of letting down the loan shark. Quite simply, individual loan sharks have to be rapacious and ruthless because the costs to them of even a single defaulter are so high. And that explains why, from Renaissance Italy to modern Scotland, the moneylender is so often a hated figure. He's providing a service, but at a socially unacceptable price.

So how did lenders learn to overcome this fundamental problem? If they were too generous, they didn't make any money, but if they were too hard-nosed, borrowers would eventually default. The answer was to get bigger and more powerful. It was time to invent banks.

In 15th century Italy, the key financial service of providing credit moved out of the ghetto to become the legitimate preserve of banks. This transition was symbolized by the rise of one family - the Medici. With their ascent, credit came of age.

In sub-prime America, there's a wide range of services available for people who are broke. You can consult a tax advisor to claim low-income credits, borrow money on the equity you own in your car, or get an advance on your next week's paycheque. If you're really desperate, you can sell your own blood at ZLB Plasma for $25 a pop. It's a whole economic sector based on people who are struggling financially.

Repossessing cars is a routine matter in the bankruptcy capital of America. Every week, United Auto Recoveries auctions off 500 repossessed cars to the trade, which end up in the same car lots and are sold to the same people. For debtors, there's virtually no social stigma, and nobody seems to be getting hurt.

In Tennessee, when the house has been stripped bare and the repo man has taken your car, you end up in the hands of one of Memphis's bankruptcy lawyers, along with around 13,000 other people who filed for bankruptcy in the past year. Bankrupts gather here with their lawyers to hammer out deals with their creditors, including fast-track lanes.

From 1996 to 2006, there were between one and two million bankruptcy cases a year in the United States, nearly all of them involving individuals who elected to go bust rather than meet their obligations. This ability to walk away unscathed from unsustainable debt and start again has been a defining characteristic of American capitalism. For rich and poor alike, bankruptcy has become as much of an inalienable right as "life, liberty, and the pursuit of happiness."

The theory is that American law exists to encourage entrepreneurship by giving people a break when things don't work out the first time or even the second time. The born risk-takers don't get wiped out as they learn through trial and error how to make that first million because today's bankrupt might be tomorrow's billionaire. It's a theory that seems to work, as many of America's greatest successes failed in their early years.

Human Bondage Transcription:

  The Ascent of Money Episode 2: Human Bondage.

The video opens with the sound of helicopter rotors thrumming, and a narrator begins to speak. The narrator notes that many people believe that power resides with presidents, prime ministers, and other political leaders. However, in today's world, real power lies in the hands of an elite group of unassuming men who control the world's bond market. These men work in anonymous, open-plan offices and manage vast portfolios of bonds worth billions of dollars.

The narrator introduces Bill Gross, the boss of PIMCO, the world's biggest bond-trading operation. Gross is widely regarded as the king of the bond market, and manages a portfolio of bonds worth $700 billion. The narrator notes that bonds are the magical link between the world of high finance and the world of political power. Governments always spend more than they raise in taxation, and they make up the difference by selling bonds that pay interest. If an investor wants to get rid of a bond, they can take it to a bond market like the one at the Tokyo Stock Exchange and sell it. This is the magic of bonds - the government doesn't have to give the investor the cash back.

The narrator explains that the birth of the bond market was the next big revolution in the history of finance after the rise of banks. The bond market created a whole new way for governments to borrow money, and funded wars that plagued northern Italy 600 years ago. It dictated the outcome of the Battle of Waterloo and created the world's greatest financial dynasty. It ensured the defeat of the South in the American Civil War. In modern times, the bond market has brought once-wealthy nations like Argentina crashing to their knees.

The narrator notes that today, governments and companies use bonds to borrow on an unimaginably vast scale. There are bonds out there worth around $85 trillion. The fortunes of most people are directly linked to the bond market. If the bond market tanks, then the value of pensions, which is a huge part of individual wealth, will go down. In the financial crisis that has gripped the world since the summer of 2007, US government bonds have been seen as a safe haven for investors seeking shelter from the storm of falling property and share prices. If Bill Gross were to lose faith in those bonds, it would hit the financial world like a thunderball.

The narrator notes that the bond market was invented during the Italian Renaissance as a way to finance war through the bond market. Rather than require their own citizens to do the dirty work of fighting, each city hired military contractors called condottieri, who raised armies to annex land and loot treasure from others. Among the condottieri of the 1360s and 1370s, one stood head and shoulders above the others - Sir John Hawkwood, an Essex boy who was so skilled in war that the Italians called him Giovanni Acuto, or John the Acute. Hawkwood was a mercenary who was willing to fight for anyone who'd pay him - Milan, Padua, Pisa, or the Pope. These incessant wars plunged Italy's city-states into crisis, and Florence was drowning in deficits to pay the likes of Sir John Hawkwood. However, the city of Florence was where the money was, so Hawkwood switched sides to fight for them. This led to the creation of the Monte Commune, which was quite literally a mountain of debt.

The video ends with the narrator noting that the bond market has become a powerful force that shapes our world today. The men who control the bond market are the ones with the real power, and their decisions have far-reaching consequences.

On July 20, 1815, the London Courier reported that Nathan Rothschild had made "great purchases of stock," specifically British government bonds. Nathan's gamble was that the British victory at Waterloo would send the price of British bonds soaring upwards. Nathan bought and, as the price of bonds began to rise, he kept on buying. Despite his brothers' desperate entreaties to sell, Nathan held his nerve for another year. Eventually, in July 1817, with bond prices up by 40%, he sold his holding. His profits were worth approximately £600 million today.

The Rothschilds had shown that bonds were more than just a way for governments to fund their wars. They could be bought and sold in a way that generated serious money, and with money came power. Mayer Amschel Rothschild had repeatedly admonished his five sons, "If you can't make yourself loved, make yourself feared." As they bestrode the mid-19th century financial world as masters of the bond market, the Rothschilds were already more feared than loved. But now, they had become hated too. The fact that the Rothschilds were Jewish gave a new impetus to deep-rooted anti-Semitic prejudice.

A colleague of a Rothschild in their office found an extraordinary example of anti-Semitism, a poster that epitomized the most extreme forms of undesirable capitalism as practiced by Jews. Above all, the Rothschilds' seeming ability to permit or prohibit wars aroused the most indignation. You might have thought that the Rothschilds actually needed war, but the trouble with war, and even more so with revolution, was that it increased the risk that a debtor state might fail to meet its commitments, and that hit the price of existing bonds.

By the mid-19th century, the Rothschilds were no longer mere traders; they were fund managers carefully tending to a vast portfolio of their own government bonds. Now, they stood to lose much more than to gain from conflict. The Rothschilds had helped decide the outcome of the Napoleonic Wars by putting their financial weight behind Britain. Now they would help decide the outcome of the American Civil War by choosing to sit on the sidelines. Once again, it was the masters of the bond market who would be the arbiters of war.

50 years after the Battle of Waterloo and on the other side of the world, another great war would be decided by the power of the bond market. But this time, it would be the vanquished who made the big bet and lost. The traditional view is that the key turning point in the American Civil War came in June 1863, two years into the conflict. That was the month when Union forces captured Jackson, the Mississippi state capital, and forced a Confederate army to retreat westward to Vicksburg, their backs to the Mississippi River. Surrounded, with Union gunboats bombarding their positions from behind, the Southerners held out for a month before laying down their arms. After Vicksburg, the Mississippi was firmly in the hands of the North. The South was literally split in two. Yet this military setback wasn't the decisive factor in the South's ultimate defeat. The real turning point came earlier, and it was financial.

200 miles downstream from Vicksburg, where the Mississippi joins the Gulf of Mexico, lies the port of New Orleans. This is Fort Pike, built after 1812 to protect New Orleans from a future British attack. But 50 years later, it wasn't able to protect the South from a Northern attack when Captain David Farragut seized New Orleans on April 28th, 1862. It was a crucial moment in the Civil War as New Orleans was the principal outlet for the South.

When Bill Gross buys or sells bonds, it affects more than just financial markets and government policy. It affects the value of our pension funds and the interest rates we pay on our mortgages. The lethal danger that inflation poses is that it undermines the value of being paid a fixed rate of interest on a bond. If inflation goes up to 10% and the value of a fixed-rate interest is only five, then that means that the bond holder is falling behind inflation by 5%. At the first whiff of higher inflation, bond prices fall, and in some cases, keep falling. To see how bad things can get when the inflationary genie escapes from the bottle, you just have to look at the example of Argentina.

Many Argentines date the steady decline of their economic fortunes to a day in February 1946 when the newly elected President, General Juan Domingo Peron came to the Central Bank in Buenos Aires. He was astonished at what he saw. "There is so much gold," he marvelled, "you can hardly walk through the corridors." The very name Argentina suggests wealth and plenty - it means "The Land Of Silver". The river flowing past the capital is the Rio de la Plata, "The Silver River". At one time, its per capita income was 18% less than that of the United States.

By February 1989, the financial system was about ready to blow. Inflation had already reached 10% per month. Banks were ordered to close as the government tried to lower interest rates and stop the currency's exchange rate from collapsing. But it didn't work. In just a month, the austral fell 140% against the dollar. With no cheap loans forthcoming from the World Bank, the government tried to finance its deficit by selling bonds to the public. But investors were hardly likely to buy bonds with the prospect that their real value would be wiped out by inflation in just a matter of days. Nobody was buying.

In April, furious customers overturned shopping trolleys after one supermarket announced over the loudspeaker that prices were being raised by 30% immediately. Shops emptied of goods as owners weren't making enough money to buy new stock. Government bond prices plunged as fears rose that the Central Bank's reserves were running out. With no foreign loans and no one willing to buy bonds, there was only one thing left for an increasingly desperate government to do - get the Central Bank literally to print more money. But they couldn't even get that right. On Friday, April 28th, Argentina literally ran out of money.

The faster the printing presses rolled, the less the money was worth. The government was forced to print higher and higher denominations of notes. In May, the price of coffee went up by 50% in a week. Farmers stopped bringing cattle to market as the price for one cow was now the same as for three pairs of shoes. By June 1989, inflation in Argentina had reached a monthly rate of 100%, an annual rate of roughly 12,000%.

Blowing Bubbles Transcription:

  The Ascent of Money Episode 3: Blowing Bubbles.

[Introduction]
Some people today believe that companies, particularly multinational corporations, wield immense power and influence in the world. This notion may be difficult to comprehend given the seemingly insurmountable natural barriers of South America, but one company's successful construction of a $1.5 billion gas pipeline from Bolivia across the continent to the Atlantic coast of Brazil proves otherwise. Another feat of modern capitalism was the creation of the joint stock company in the 17th century, which allowed companies to transform our lives and depend on the stock market for growth.

[The Rise of Joint Stock Companies]
The rise of the joint stock limited liability company was the next step in the story of the ascent of money. It enabled investors to pool their resources and spread their risks, and was crucial in fueling the growth of industrialization. The ability of the company to transform our lives would depend on another innovation - the stock market. The price that people are prepared to pay for a company's shares in the market tells you how much money they think it'll make in the future.

[Stock Market Bubbles]
Stock markets can be like soap bubbles, as we never quite know when they're going to burst. Recent months of financial turmoil have exposed this truth, as exemplified by Enron, the biggest corporate fraud in modern American history. Enron proposed vast projects in Latin America that were ultimately undermined by corporate greed and deception. Unfortunately, shady practices in the stock market have been a key cause of the financial crisis that we are living through now. Despite centuries of history demonstrating the dangers of stock market bubbles, humans have found it difficult to learn from history.

[John Law's Story]
The story of John Law of Edinburgh, the man who invented the stock market bubble, is an astonishing tale of adventure in financial history. Law was a convicted murderer, a compulsive gambler, and a flawed financial genius. He not only caused the first true boom and bust in asset prices, but also indirectly caused the French Revolution. Law's story is a classic tale of boom and bust, and it is relevant to our own times.

[Law's Path to Notoriety]
Law was born in Edinburgh in 1671 and was the son of a successful goldsmith and heir to the estate of Lauriston. In 1694, while living in London, Law killed a man in a duel over a woman and was sentenced to death. Somehow, he managed to escape from prison and fled to Amsterdam, which was the world capital of financial innovation in the 1690s. The Dutch had created one of the world's first national lotteries, the first central bank, and the company. The Dutch traders had spread out all over the world, and the East Indies became their primary target of commercial expansion due to the high demand for spices like pepper, cloves, nutmeg, ginger. The Dutch plan was to fetch them by sea, and that pungent aroma was the smell of money to be made.

[Conclusion]
The story of John Law and the history of stock market bubbles teach us that humans find it difficult to learn from history. Despite the dangers of stock market bubbles, they continue to occur, and shady practices in the stock market continue to cause financial crises. Nevertheless, the joint stock company and the stock market have been crucial in fueling industrialization and transforming our lives.

The video describes John Law, a Scottish financier who rose to power in France during the early 18th century. Law was appointed as the Controller-General of French Finances, giving him control over the collection of all indirect taxes, the national debt, the production of gold and silver coinage, trade with Africa and Asia, the Louisiana colony, and the Company of the Indies (also known as the Mississippi Company).

Law was able to amass an enormous amount of wealth and power, owning multiple country estates, plantations in Louisiana, and a hundred million livres of shares in the Mississippi Company. He was also responsible for printing money to drive up the price of his company's shares. This strategy created a Ponzi scheme, where new shares were sold to pay out promised returns to earlier investors.

The French economy became inflated with paper money and public confidence, leading to a mania known as the Mississippi Bubble. However, Law's scheme was unsustainable, and the bubble eventually burst. The promised profits from the Louisiana colony did not materialize, and the Mississippi Company's monopoly on trade with the colony became worthless.

Law's economic success was based on confidence, but it was ultimately a confidence trick. The first rumors began to circulate that all was not well with Law's system, and the share price of the Mississippi Company began to slide. In a desperate bid to avert meltdown, Law called on the Duke of Orleans for help. However, it was too late, and Law's system collapsed.

The video highlights the dangers of financial bubbles and Ponzi schemes, showing how they can lead to economic collapse and ruin. It also demonstrates the importance of financial regulation and oversight to prevent these types of schemes from taking hold in the first place.

In fact, there have been seven stock market crashes in the past century. However, those who feared that the brief panic of October 1987 would turn into the next great crash were proven wrong, as the market had one bad month and then rallied. Nevertheless, that bubble provided a golden opportunity for corporate fraud. Enron, a company that promised its investors wealth beyond the dreams of avarice, claimed to have reinvented the entire financial system, and used its impeccable political connections to ride all the way to the top of the bull market.

Enron, named by Fortune Magazine as ''America's Most Innovative Company'' for six consecutive years, was the company that ended the 20th century bubble. Seven years after its collapse, most of us have consigned Enron to the dustbin of financial history, yet it pioneered many of the dubious business practices that continue to plague us today.

In the three years up to August 2000, shares of the Houston energy company had gone through the roof. Once a small-time gas company in Nebraska, Enron was now the fifth-largest company in the United States, with stated revenues of 111 billion dollars. Enron was the darling of Wall Street. Yet, a little historical knowledge might have made Enron's investors think twice. Indeed, the story of Enron was like a re-run of the Mississippi Bubble 280 years before.

John Law's plan had been to revolutionize French government finance. Ken Lay, the chairman of Enron, planned to revolutionize the global energy business. For years, the industry had been dominated by huge utility companies, which both produced the energy, pumped the gas and generated the electricity, and sold it on to consumers. Lay's big idea was to create a kind of energy bank, which would act as the intermediary between suppliers and consumers. His dream was to make Enron the greatest energy company in the world.

Caught up in the heady spirit of the times was senior Enron executive, Sherron Watkins. "It was very electric. You felt like you could... If you came up with a good idea, Enron would give you the money, and you could go for it at a very young age." Like John Law, Ken Lay had friends in high places. He contributed generously to George HW Bush's presidential campaign. As President, Bush duly pushed through legislation that deregulated the energy industry.

Riding a global wave of energy privatization, Enron snapped up assets all over the world. In Latin America alone, the company had interests in Colombia, Ecuador, Peru, and Bolivia, where they laid a huge pipeline across the continent to Brazil. And thanks to the intervention of Ken Lay's personal friend, George W Bush, Enron was able to acquire a controlling stake in the largest natural gas pipeline network in the world, here in Argentina.

Above all, however, Enron traded. Not only in energy, but in virtually all the ancient elements of earth, water, fire, and air. It even traded in internet bandwidth. Enron led a Wall Street surge unnervingly reminiscent of the Mississippi Bubble. Despite his half-hearted warnings against ''irrational exuberance,'' this bull market was propelled upward by the chairman of the US Federal Reserve, Alan Greenspan. As in John Law's time, a stock market bubble could only happen if money was abundant. And by raising interest rates only once between February 1995 and June 1999, Greenspan made sure that it was.

In the space of just three years after 1997, the Enron stock price rose by a factor of nearly five, from below 20 dollars a share to above 90. It was the Mississippi Company all over again.

Risky Business Transcription:

  The Ascent of Money Episode 4: Risky Business.

Saving for a rainy day is the most basic financial impulse of all. The future is unpredictable and the world can be a dangerous place, and so we must deal with the risks and uncertainties of the future. The question is how we should do so - should individuals insure themselves against disaster, rely on voluntary charity, or count on the state to bail them out when calamity strikes?

The British pay a larger proportion of their income on insurance than any other people in the world, despite living in one of the safest countries on Earth. Overcoming risk has been a constant theme in the history of money, from the invention of life insurance by two Scots clergymen to the rise and fall of the welfare state, to the explosive growth of hedge funds and their billionaire owners.

At the core of our struggle with risk is an insoluble conflict - we want to be financially secure, but the future always seems to come up with new and unpleasant ways to take us by surprise. We want calculable risk, but we are stuck with random uncertainty.

Hurricane Katrina hit New Orleans in August 2005, causing death and destruction. The hurricane didn't hit the city directly, but a huge storm surge raised the water level in the Industrial Canal so high that it broke the levee, pouring gallons of water from Lake Pontchartrain into the Ninth Ward and St Bernard, a blue-collar community of homeowners, all covered by private insurance.

Councillor Joey DiFatta refused advice to leave the city, staying put during the storm. He eventually had to retreat to the roof of the town hall as the waters kept rising. The whole of St Bernard Parish was inundated in just 15 minutes, and only five houses out of 26,000 were not flooded. More than 2,000 people were killed in Hurricane Katrina and the subsequent flooding, with 148 people losing their lives in St Bernard Parish alone, mostly because they became trapped in their houses as the flood waters rose.

Three years later, people can't live in New Orleans anymore because they can't insure their homes. Former navy pilot Richard F Scruggs, a lawyer who has taken $50 million from the asbestos industry and $248 billion from tobacco companies for failing to warn smokers of the danger of lung cancer, has made it his mission to show the limits of private insurance when it comes to a really big crisis. His clients, hundreds of homeowners whose houses were destroyed by Katrina, argued that the companies were refusing to pay up on genuine claims - a view the insurers disputed.

In summary, the video explores the struggle with risk and the importance of insurance in the face of natural disasters like Hurricane Katrina. It also raises the question of who should be responsible for insuring against disasters, and the limitations of private insurance in times of crisis.

In 1923, Tokyo was devastated by a huge earthquake, which left private insurance policies practically worthless. As a result, a new idea emerged in Japan: that the state should take care of risk. However, this was to be state protection allied with imperial ambition, as the Japanese set up a welfare state in order to promote warfare. The state healthcare system would ensure a fitter populace and a steady supply of able-bodied recruits to the Emperor's armed forces, thus delivering him an empire. In effect, to nationalize risk, the answer was for the government to step in, as the world was just too dangerous a place for private insurance markets to cope with.

After World War II, the Japanese experiment with state-sponsored welfare continued, and they came up with their own comprehensive welfare system in October 1947. The Japanese welfare state covered them against all the vagaries and vicissitudes of the modern world, and if they couldn't afford education or find work, were too ill to work or retired, or finally died, the state would pay. The welfare state seemed to make so much sense as it had achieved security for all, the elimination of risk, and rapid economic growth, making Japan the welfare superpower.

However, the design of the post-war welfare state had a fatal flaw, which caused predictions of Japan's ultimate triumph to fail to come true. The welfare state looked to be working smoothly enough in 1970s Japan, but elsewhere, there were signs that all was not well. The welfare state had removed the incentives without which a capitalist economy simply cannot function - the carrot of serious money for those who strive, and the stick of hardship for those who are idle. As a result, low growth and high inflation characterized the welfare state in Britain and throughout the western world, leading to stagflation. To reintroduce people with a sharp shock to the unpredictable monster they thought they had escaped from, one of the great economic trends of the past 25 years has been for the welfare state to be dismantled, thanks in large measure to the influence of one man and his pupils who thought they knew the answer.

There is a downside to Chile's pension system, since not everyone has a full-time job and can participate in the system. This leaves a substantial chunk of the population without pension coverage. La Victoria, a suburb of Santiago, where I am standing in front of the Communist Party headquarters, was once one of the hotbeds of opposition to the Pinochet regime. However, most people in this neighborhood are either unemployed or work in the informal sector, which makes it impossible for them to pay into the pension system, resulting in not getting anything out of it. The poor in Chile may not have a private pension plan and may have to make do with a meager government handout in their old age, but even they have benefited from Chile's rapidly growing economy.

According to Jose Pinera, growth makes a difference in the life of every citizen, and the poverty rate in Chile has gone down from about 50% to 13%. The pension reform has been a critical element in this. The improvement in Chile's economic performance since the Chicago Boys' reforms is hard to argue with. In the 15 years before Milton Friedman's visit, the growth rate was a measly 0.17% a year. In the subsequent 15 years, it increased by a factor of nearly 20. The poverty rate in Chile has decreased to 15%, compared to 40% in the rest of Latin America. Santiago's shiny new financial district shows why the Chilean pension reform has been imitated right across the region and around the world.

However, Japan, the country that needs this recipe the most, has not tried it yet. The Japanese welfare state was too successful that by the 1970s, life expectancy was the longest in the world. The problem was that the programs run by Japan's Ministry of Welfare rely on an ever-smaller number of active workers to support an ever-rising population of retirees. Back in 1960, there were about 11 active workers for every one retired person. However, by 2025, that number could sink as low as two, which means that there will be one old-age pensioner for every two bureaucrats working at the Ministry. The cost of social security benefits has risen in relation to Japan's national income by a factor of four. Today, almost all Japan's health insurance societies are in deficit, and the pension funds are almost out of money too. Japan's once-super welfare state is now threatening to bankrupt the nation.

Disasters like 9/11 and Katrina exposed the limits of both traditional insurance and the welfare state. However, there are other ways to buy protection against future shocks. These days, the smart way of doing it is by being hedged. Hedge funds can make you stupendously rich, but they are a mystery to most people. Ken Griffin, the founder of the Citadel Investment Group, one of the world's biggest hedge funds, navigated his way through the credit crunch so successfully last year that he was able to pay himself more than a billion dollars. The key to managing risk lies in a mixture of mathematical precision and brilliant intuition. The origins of hedging are agricultural, and nothing is more important for a farmer than knowing the risks of the future.

Safe As Houses Transcription:

  The Ascent of Money Episode 5: Safe As Houses.

The game of property, Monopoly, is a popular game in the English-speaking world. Invented in 1903, it was meant to expose the social system's unfairness, where a small number of landlords took advantage of the majority of tenants. 30 years later, Charles Darrow patented a new version of the game based on the streets of Atlantic City, introducing little houses and hotels. Contrary to the inventor's intentions, Monopoly suggests that owning property is a wise decision. In the world of finance, lending money to people who own real estate is considered safe. Property ownership has become the foundation of a unique economic and political experiment - the property-owning democracy - which some believe is a model the world should follow. Property ownership gave rise to a new era in finance, and trillions of dollars have been borrowed on the back of property, some by subprime borrowers who previously preferred renting to owning a home. However, real estate is fundamentally no different from any other financial asset; its price can go down as well as up. Therefore, it is essential to question whether property is as safe as houses, or whether our love affair with real estate has become disproportionate.

Property ownership was once reserved for the aristocratic elite who passed estates from father to son, along with titles and political privileges. Everyone else was a tenant who paid rent to their landlord. Even the right to vote was originally linked to property ownership. Although much has changed since then, in Britain, 40 million of the 60 million acres of land are still owned by only 189,000 families. However, they no longer monopolize the political system, thanks to reform of the House of Lords, which is phasing out the hereditary peerage.

The decline of the British aristocracy was partly due to finance. Until the 1830s, the British land-owning elite, around 30 families with gross annual income from their lands above £60,000, had vast property assets, which allowed them to flourish. However, they ignored a fundamental truth about property: it is only a security to the person who lends you money. As a borrower, you still have to earn the money to pay back the loan. For the great landowners of Victorian Britain, this became very difficult to do. They saw the value of their property as a cash cow and borrowed more than the property was worth.

Stowe House in Buckinghamshire was arguably the greatest private residence built in England in the 18th century. However, it was the principal victim of the first modern property crash, owned by the 2nd Duke of Buckingham. The Duke owned around 67,000 acres in England, Ireland, and Jamaica, and his properties seemed more than adequate to back his extravagant lifestyle. He spent money as if it might go out of fashion, on mistresses, illegitimate children, and anything that he felt was compatible with his standing as a Duke of the Realm. However, by 1845, he was unable to earn enough money to pay back his loans, and his properties had to be sold. Stowe was only a part of his vast empire of real estate, and the Duke's decline was a warning that property ownership did not guarantee financial success.

In conclusion, the game of Monopoly tells us that owning property is a smart decision, but it is crucial to question whether it is as safe as houses. Property ownership has given rise to a unique economic and political experiment, the property-owning democracy, which has become a model for some. However, it is essential to remember that property ownership alone does not guarantee financial success, as history has shown us.

The practice of giving whole neighborhoods a negative credit rating came to be known as "redlining". This meant that when people from these neighborhoods needed mortgages, they had to pay significantly higher interest rates than the folks in the predominantly white part of town. Half a century later, the two categories of borrowers would come to be known euphemistically as prime and sub-prime. But in the 1960s, this divide was the hidden financial dimension of the Civil Rights struggle. Blacks were excluded from the new property-owning society, and there was a heavy price to pay for this exclusion. On July 23rd, 1967, property in Detroit literally went up in flames.

Four days of rioting, looting, and arson rocked the city of Detroit in the worst outbreak of urban racial violence that year. Anger at economic discrimination spilled over into five days of rioting that left 43 people dead. Significantly, most of the violence was directed not against people, but against property. Nearly 3,000 buildings were looted or burned. The real lesson for policymakers was that excluding ethnic minorities from the property-owning democracy was a fast track to trouble. To make people feel like stakeholders in the social status quo, you had to make them property owners. Indeed, widening home ownership might even turn the malcontents into conservatives.

This was a lesson that Margaret Thatcher was quick to learn. Here in Britain, the idea of the property-owning democracy became a keystone of 1980s Conservatism. By selling off council housing at bargain-basement prices, Thatcher ensured that more and more British couples had a home of their own. That also meant that more people than ever had mortgages. Up until the 1980s, government incentives to borrow money and buy a house made pretty good sense for the average British family. Interest rates were relatively low in the '60s and '70s, and the inflation rate tended to creep up, so that the real value of mortgage debt tended to fall. But there was a sting in the tail.

The very same governments that professed their faith in the property-owning democracy were also committed to fighting inflation, and that meant raising interest rates. The British and American policy of encouraging people to take out mortgages and then cranking up interest rates led in the late '80s to one of the most spectacular booms and busts in the property market's history. It was to the '80s what the sub-prime meltdown has been in our own time - the first, but not the last time that America's mortgage market has gone stark raving mad.

To many of us, it's come as a shock that a crash in the American property market could trigger a major financial crisis. In fact, as so often in the ascent of money, it's happened before. In March 1984, American government regulators received a copy of a video showing mile after mile of half-built houses and condominiums along Interstate 30, just outside Dallas in Texas. You can still see the empty slabs today. The investigation triggered by these unbuilt homes would expose one of the biggest financial scandals of all time - a scam that would make a mockery of the idea of property as a safe form of investment. This isn't a story about real estate - more like surreal estate.

The video starts with a man reading out addresses of homes that are about to be auctioned off on the steps of the Memphis Courthouse. Mortgage lenders foreclosed on these homeowners for failing to keep up with their interest payments. In the past five years, Memphis has become Foreclosure City, with approximately one in four households receiving a notice threatening them with foreclosure.

The video explains that the subprime mortgage market that began to turn sour in the early summer of 2007 spread shockwaves through all the world's financial markets. It wiped out hedge funds, obliterated venerable investment banks, and cost the survivors hundreds of billions of dollars. Established Wall Street names like Bear Stearns, Lehman Brothers, and Merrill Lynch vanished, and this crisis extended worldwide.

Property markets can soar in value only to crash in the most spectacular way, and houses are pretty illiquid assets. As a result, the housing market, like any asset market, is prone to booms and busts. However, the video suggests that there could be another way of looking at property - as a means of unlocking new wealth by providing collateral for aspiring entrepreneurs.

The video introduces Peruvian economist Hernando de Soto, who saw shabby residences in developing countries all over the world as representing literally trillions of dollars of unrealized wealth. The problem is that the people who live in these homes and shanty towns around the world don't have secure legal title to their homes. Without legal title to property, they can't use it as collateral.

The video then discusses the idea of a property-owning democracy and whether we should export our model to the rest of the world. It suggests that property ownership could be the answer to the problems of the world's poorest countries. To illustrate this point, the video talks about Argentina, where economic underachievement has been a way of life for a century. These slums on the outskirts of Buenos Aires seem a million miles from the elegant boulevards of the Argentine.

Chimerica Transcription:

  The Ascent of Money Episode 6: Chimerica.

"In our time, we've witnessed the zenith of global finance. In 2006, the world's total economic output was worth around $47 trillion - that's 47 followed by 1 2 zeroes. The total value of stock and bond markets was roughly $1 1 9 trillion - more than twice the size. And the amount outstanding of the strange new financial life form known as derivatives was $47 3 trillion - ten times larger.

By the summer of 2007, it seemed as if the Earth had turned into Planet Finance. As never before, the world was interconnected, but not just by cables, container ships and jet planes. By 24/7 dealing rooms and international investment banks.

In this series, we've seen how the markets for credit, bonds, stocks, insurance and real estate all evolved in Europe and North America. Well, now it's time to tell the story of how those financial innovations conquered the world. This is the story of financial globalization.

Globalization is something we take for granted today. And yet for all the advantages of an interconnected world, perfectly exemplified by Hong Kong's astonishing humming container port, there's a downside to globalization, and that is its vulnerability - its vulnerability to financial shocks, because finance isn't an exact science, and its vulnerability to political forces beyond the control of the bankers.

The ascent of money has seldom been smooth. Time and again, it's been punctuated by big and painful crises. Just ten years ago, it seemed that these crises were more likely to blow up in emerging markets, like Asia. Yet today, it's the West that's caught up in a full-blown credit crunch, while Asia seems scarcely to have noticed.

Indeed, a new phenomenon has come to define the world economy. American borrowers have come to rely on Chinese savers - a symbiotic relationship between China and America that I call "Chimerica". But can we be sure that Chimerica will save this era of financial globalization? The chilling reality is that a hundred years ago, another age of financial globalization ended not with a whimper, but with a bang. And there's no reason why that shouldn't happen again in our time.

It used to be said that "emerging markets" were places where they have emergencies. Investing in faraway places can make you rich, but when things go wrong, it's often been a fast track to financial ruin. That's why many of today's apparently unstoppable emerging markets are really re-emerging markets. These days, of course, the ultimate re-emerging market is China. To talk to some people, there's simply no limit to the amount of money to be made here. And it's certainly true that over the past 20 years, the mainland has followed the example set here in Hong Kong, and boomed.

And yet this isn't the first time that foreign investors have piled into China, aiming to make megabucks from the world's most populous nation. And the last time, those foreign investors lost almost as many shirts as the local tailors here can stitch together in a week.

The key problem with overseas investment, then as now, is that it's hard for an investor in London or New York to see what a foreign government or company is up to when they're an ocean or more apart. If the foreign borrower decides to default on its debts, what's an investor to do? The answer before 1914 was brutally simple but effective. Get your government to send in the navy. By guaranteeing European political control, gunboat diplomacy provided reassurance for British investors even at the remotest extremities of the world economy.

The Royal Navy provided the firepower that underwrote the first age.

The video starts by discussing George Soros and his success with short selling, a strategy in which an investor borrows stocks or currencies and sells them in the hope of buying them back at a lower price, making a profit. Soros was particularly successful at identifying losers rather than winners, and his biggest success came from betting against the British pound in 1992.

At the time, the British pound was linked to the German mark through the European Exchange Rate Mechanism (ERM). As German interest rates rose due to reunification costs, British rates also had to rise, hurting homeowners and businesses. Soros believed that the British Chancellor, Norman Lamont, would be forced to withdraw from the ERM and devalue the pound. He placed a $10 billion bet on the pound's decline, which was more than the entire capital of his fund.

On September 16th, 1992, Lamont announced that Britain was withdrawing from the ERM, causing the pound to plummet. Soros made a billion dollars that day, and it accounted for 40% of his fund's annual profits. The video then shows an interview with Soros in which he discusses his sense of triumph and satisfaction at winning the bet.

The video then transitions to a discussion of mathematical formulas and their potential for guaranteeing double-digit returns in finance. The concept of a planet without the complications caused by human beings is introduced, where inhabitants instantly absorb new information and use it to maximize profits. In such a world, a catastrophic stock market crash would be incredibly rare, occurring only once in four million years of trading.

The discussion then shifts to two mathematicians, Myron Scholes and Robert Merton, who came to Greenwich, Connecticut, in 1993 with a big idea. Scholes had invented a revolutionary new theory of pricing things called "options," and he and Merton were the original "quants" - speculators who used quantitative mathematics to make money. Their idea was based on the option contract, which allows an investor to buy a stock at today's price in the future if they predict that the stock's value will rise.

Merton and Scholes faced the challenge of pricing an option accurately, taking into account the unpredictable movement of the stock price in the intervening period. They developed a formula, sometimes referred to as a "black box," that accurately priced options and revolutionized the financial industry.

The video concludes with a discussion of the potential benefits and drawbacks of relying on mathematical formulas and quantitative models in finance. While these tools can be incredibly powerful and accurate, they can also be flawed if they don't account for all relevant variables or if they are misused.

The speaker poses the question of whether the 2008 financial crisis could happen again, but on a larger scale involving more hedge funds and without the possibility of being bailed out. He suggests that the answer to this question lies not on another planet, but in China.

The speaker notes that for some people, financial history is just "water under the bridge," and they may not remember previous financial crises like the 1997/98 Asian crisis. In fact, if they entered the markets after 2000, they experienced seven years of booming stock markets, bond markets, commodity markets, derivatives markets, and every other kind of asset market. Additionally, the markets for luxury items like vintage Bordeaux and luxury yachts also saw significant growth during this time.

The speaker acknowledges that these boom years were also mystery years, as markets soared despite rising short-term interest rates, glaring trade imbalances, and escalating political risk. The key to this seeming paradox, he argues, lay in China.

Specifically, the speaker introduces Chongqing, a city on the banks of the Yangtze River in western China, as the fastest-growing city in the world. He notes that it is currently undergoing massive construction to build new office space in an effort to turn it into the financial capital of western China, and possibly even the world. Thanks to this growth, China has seen a significant increase in the number of millionaires and billionaires.

The speaker points out that one reason for China's crisis-free ascent is that most Chinese investment has not been financed by foreigners but rather out of China's own savings. While there has been foreign investment, it has mostly been direct investment in things like factories that cannot easily be liquidated and sent home in a crisis. Additionally, China's enormous savings have enabled a "mighty U-turn" in globalization, with the direction of capital flow now from East to West rather than from West to East.

The speaker dubs this new hybrid country of China and America "Chimerica," highlighting how the South Western Stock Exchange in Chongqing is where hundreds of residents come to invest their savings in the stock market. He notes that this is what defines the Chinese economy today and increasingly defines the world economy, as Chinese investors try to figure out what to do with their abundant savings.

The speaker notes that Chinese households save a high proportion of their incomes in contrast to Americans, who save none at all. As a result, China has become a banker to the United States, lending a remarkably large proportion of its current account surplus to the US. This is because, from China's point of view, exporting manufactures to the US consumer was the best way of employing its vast population, and to ensure that those exports were cheap, China had to stop its currency from strengthening against the dollar by buying billions of dollars on world markets. This arrangement seemed to benefit the US until recently.