Name: Paper Promises
Rating: 4.1 (14 reviews)
Author: Philip Coggan

Introduction

What’s in it for me? Learn how we accumulated tons of financial debt before the financial crisis.

How far in the red are you? Without glancing at credit card bills, student loan statements or mortgage commitments, you wouldn’t be alone if you said you had a good amount of outstanding debt.

But what happens when you don’t pay back your debt, as agreed? Yep, bad things happen. You’re fined, or slapped with a bad credit rating – or if things really go bad, you develop a criminal record.

Yet just like you and your friends, companies and even countries in recent years have compiled tons and tons of debt. Yet as you’ll discover in the following blinks, these entities didn’t sweat the details of paying those debts back.

The result? One of the biggest financial crises in history. You’ll learn exactly how we got to this point and why such irresponsible borrowing behavior was allowed to happen in the first place.

In these blinks, you’ll discover

how many zeros there are in a trillion;
why it’s easier to buy a sheep with cash than with a loaf of bread; and
why you may be buried in debt, but your grandparents are not.

Key idea 1 of 7

Bartering a loaf for a lamb was how trade was done in early times. Today, money moves markets.

If money is just ink on paper, why is it that we worship it so? The answer rests in how we use it.

Money’s primary function is as a medium of exchange. Before we used money, deals were settled through bartering. If you were a baker, for example, and you wanted a pair of pants or a leg of lamb, you could find a shepherd and trade. If you gave him 100 loaves of bread, he’d give you a lamb.

But what if the shepherd had no need for bread? You’d then have to find something he did want, perhaps a new knife. You’d then have to find a blacksmith (who needs bread) to make the knife, which you could trade for the lamb.

Trying to find the right thing to trade could lead to some intricate, time-consuming bartering. Money cuts through this confusion: if you want something, you simply exchange it for money, which the seller can then use to buy something else. The transaction is simple, and direct.

Money also functions as a unit of account, or a means of measuring a product’s value.

To trade an item, we need to understand its worth. Bartering makes this difficult. Could you say accurately how many lambs one knife is worth? Or does it depend on the needs and resources of the shepherd and the blacksmith?

Money makes valuation easy, as beforehand its value is agreed upon.

Finally, money can be used to store value, for example, by maintaining the value of a specific product.

Most of the world’s countries keep the value of their money more or less stable to foster investment and prevent inflation, in which prices rise but the value of money decreases.

Understanding money’s many functions is essential to understanding the way it can influence the economy and society.

Key idea 2 of 7

Borrowers show confidence; lenders offer trust. A heady combination led to far too much lending.

With an understanding of how money functions, we can now look at one of its major roles in modern society: the concept of debt.

People often lend and borrow money to and from one another based on trust. In fact, the word “credit,” another way to describe debt, stems from the Latin word credere, meaning “to believe.”

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Key idea 3 of 7

Confidence keeps vertigo away from the debt market. Once it hits, however, everything falls apart.

If you go to Times Square in New York City, you might notice a particular clock. This clock doesn’t tell the hour but instead records the accumulation of debt by the U.S. government in real time.

When the clock was built back in 1989, it was equipped with enough digit places to display an amount in the trillions, or a one followed by 12 zeros.

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Key idea 4 of 7

The collapse of Lehman Brothers created a domino effect that dried up lending across the globe.

The sudden realization of the degree of indebtedness caused countries and banks across the world to panic and halt lending. But how did this actually result in a global financial crisis?

The golden years of borrowing had created a bubble in the financial system. As countries, companies and banks borrowed more and more, they created an artificial boom in the global economy.

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Key idea 5 of 7

While the 2008 financial crisis was a big one, there have been many debt crises throughout history.

After the 2008 financial crisis, many people believed the end of the world was nigh.

But really, those that predicted the end times had no grasp of economic history. The truth is, large financial crises happen all the time, whether in ancient periods or modern times.

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Key idea 6 of 7

The world is still shaking off its debt hangover. What does this mean for future generations?

Post-crisis, it’s easy to understand how people could be pessimistic. Is there any silver lining to look for in the global financial system for the future?

There is, but we have to deal with the consequences of changing global demographics.

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Key idea 7 of 7

Grandpa kept cold cash under his mattress, while we collect credit cards and run up huge debts.

Most young people today carry some sort of debt, in the form of an overdrawn checking account, a housing loan or even a weighty student loan.

The ease with which we accumulate debt is a relatively new development. Our great-grandparents, survivors of the Great Depression in the United States, avoided banks and would have rather been seen eating garbage than borrowing money. Even Baby Boomers still fear debt as bad or unusual.

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Paper Promises summary