A little more than three years ago I made the worst investment decision of my entire life. It was October. “You know, Dad,” my then 15-year-old son said, “you really ought to buy some bitcoin.” Yes, that’s right, bitcoin: the newfangled “crypto-currency” based on some weird thing called blockchain technology, invented back in 2008 by a mysterious individual using the alias Satoshi Nakamoto.
Listen, son, said the omniscient historian of finance, that is no way to invest my hard-earned pounds, shillings and pence.
Son: Dad, what are shillings?
Me: Never mind. The point is that since ancient Mesopotamia, money has tended to be monopolised by states. That’s why the Queen’s head appears on the notes in my wallet and the coins in your pocket.
Son: Actually, I don’t bother with notes and coins these days, I can pay with my phone — look, I’ll show you . . .
Me: Trust me, the governments of the world are not about to let their monopolies on national currencies be undermined by a currency that’s already being used for nefarious purposes by criminals and money launderers.
Son: Yes, but . . .
Me: No buts — and no bits, for that matter — I’m not throwing real money down the virtual drain.
On October 7, 2014 — when something like that exchange took place — the dollar price of one bitcoin was $334. As I write, it is $15,150 (£11,323). Yes, you read that correctly. If I had listened to my son, I would have increased the dollar value of my investment by a factor of 45 — or, if you prefer, I’d have made a return on the investment of 4,436%.
The moral of the story is clear: when it comes to technology, pay heed to teenagers.
It’s never too late to recover from an investment blunder, of course. But now the terrible question arises: what if buying bitcoin now would make me the “greater fool” — the last man in, who gets left holding the bitcoin when the bubble bursts and the price plummets back to $334, if not $0?
That fear is not groundless. Financial history is full of examples of investment manias that at some point turned into panics and crashes. Like the five stages of grief (denial, anger, bargaining, depression and acceptance), there are five stages to most financial bubbles.
1 Displacement: a change in economic circumstances creates new and profitable opportunities. A new financial asset is born.
2 Euphoria: a feedback process sets in: expectations of rising profits lead to a rapid growth in the price of the new asset.
3 Mania: the prospect of easy money attracts first-time investors as well as swindlers eager to part them from their cash.
4 Distress: the insiders discern no future gains can possibly justify the now exorbitant prices and begin to take profits by selling.
5 Revulsion or discredit: as prices fall, the outsiders all stampede for the exits, causing the bubble to burst altogether.
Typically, in other words, the insiders make the money by selling at the 11th hour to the outsiders, otherwise known as suckers. Precisely this fear was what caused me to hold back when my prescient son, now 18, came to visit me in September this year. The price of bitcoin was $3,672 at that point. If I’d taken his advice and bought then, I’d still have quadrupled my money. Did I do it? Is the moon made of green cheese?
The analogy favoured by bitcoin sceptics is the mania for tulip bulbs that swept Holland between 1634 and 1637. Bitcoin is “worse than tulip bulbs”, said Jamie Dimon, JP Morgan’s chief executive, at a conference in September. “It’s a fraud,” he declared.
“Bitcoin is a sort of tulip,” observed European Central Bank vice-president Vitor Constancio at around the same time. “It’s . . . an instrument of speculation for those that want to bet on something that can go up and down 50% or 40% in a few days, but certainly not a currency.”
The Nobel laureate and vituperative New York Times columnist Paul Krugman has been taking bites at bitcoin since December 2013. “Can [it] actually work?” he asked then. “I have to say that I’m still deeply unconvinced.” Ten months later he dismissed “bitcoin fever” as the product of “libertarian anti-government fantasies”.
That should have been my signal to buy. After all, this was the same Krugman who in 1998 predicted that “the growth of the internet [would] slow drastically” as “most people have nothing to say to each other”.
“By 2005 or so,” Krugman famously predicted, “it will become clear that the internet’s impact on the economy has been no greater than the fax machine’s.”
Tulip mania is not the right analogy for understanding bitcoin, any more than the fax machine was the right analogy for understanding the internet. As the South Sea Bubble of 1719-21 revealed, financial innovations are often accompanied in their initial stages by bubbles; the inevitable bust doesn’t necessarily kill the innovation. The price of shares in the South Sea Company may have inflated and then collapsed, but that didn’t spell the end of tradable shares as financial instruments. On the contrary, shares went on to become the foundation of corporate finance.
Something similar, I now believe, will prove to be true of bitcoin and crypto-currencies in general. It’s not so much that blockchain-based coins and tokens will replace the fiat money we have grown accustomed to using since the demise of the gold standard. Rather, there are at least three other uses for the new financial technology that will persist even after this bubble bursts.
First, bitcoin has established itself as a kind of digital gold: a store of value for wealthy investors, especially those located in countries with weak rule of law and high political risk.
Second, “initial coin offerings” that raise money in bitcoin and another big crypto-currency, ethereum, have emerged as a quick and easy way to finance innovation — a digital alternative to issuing shares.
Third, because blockchains are a near-unhackable, cryptographic method for preserving data across a computer network, they can be used for a whole variety of transactions. In future the title deeds for property will take this form. Indeed, this is already happening in the republic of Georgia. Meanwhile, Estonia is planning to store its citizens’ medical records on blockchain.
At some point, no doubt, regulatory changes in the US will deflate the current bitcoin bubble. But they will not halt, much less undo, this financial revolution.
Think about it this way. The maximum number of bitcoins that can be created is 21m. The number of millionaires in the world, according to Credit Suisse, is 36m. Their total wealth is $128.7 trillion. If millionaires collectively decided to hold just 1% of their wealth as bitcoin, the price would be not $15,000 but north of $60,000. If they raised that to 5%, the right price for bitcoin would be above $300,000.
I am not saying this is certain to happen. I’m just saying my teenage son thinks it could.
Niall Ferguson’s new book is The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power (Allen Lane)
The thing about which I have been most right in my career is the thing for which I have received the least credit. Beginning in June 2006, I wrote a series of articles and gave numerous speeches that predicted, with considerable precision, the global financial crisis.
I began in June 2006 by observing that interest rate increases by the Federal Reserve would sooner or later have an effect on heavily indebted American households. “Over the next two years,” I noted, “the monthly payments on about $600bn of mortgages taken out by borrowers in the so-called subprime market . . . will increase by as much as 50%.”
In November 2006 I was all but pelted with bread rolls at a Morgan Stanley conference for arguing that the developed world as a whole might end up in the same mess that Japan had been in since the 1990s, fending off deflation with monetary and fiscal expedients and stagnating in terms of growth. The Fed’s habit of intervening to prop up asset markets, I warned, had “encouraged speculative behaviour” and spread the dangerous belief that “everyone is too big to fail”.
Two months later, I found it “perfectly possible to imagine a liquidity crisis too big for the monetary authorities to handle alone . . . Governments would need to step in . . . Federal bailouts for the likes of Goldman Sachs may seem unimaginable to us now. But financial history reminds us that [such] events do happen. And, when they do, liquidity can ebb much more quickly than it previously flowed.”
By the autumn of 2007, it was becoming apparent to the professionals, if not to the public, that something was indeed amiss. But still people underestimated the danger. I argued that we confronted “a more toxic cocktail than many investors still want to believe”, and that the crisis would be global and not just confined to America.
In December 2007, I predicted a “great dying” of financial institutions as a “man-made disaster — the subprime mortgage crisis — works its way through the global financial system”. On August 7, 2008, more than a month before the bankruptcy of Lehman Brothers, I anticipated a “global tempest” that would swiftly make the term “credit crunch” an absurd understatement.
Looking back, I now realise I should have kept all of the above to myself, set up a hedge fund and short-sold everything in sight, beginning with US mortgage lenders. Instead, like the fool of an academic that I am, I wrote a book (The Ascent of Money) that was published just as my predictions were coming true.
I tell you all this only so that you will read attentively my current thoughts on the global economy. After all, there is a lot about the present time that is reminiscent of those pre-crisis days. Almost every asset class is up. In all but a handful of housing markets (notably Ireland), inflation-adjusted home prices are above where they were on the eve of the crisis. From peak to trough, US home prices plunged by a quarter between 2006 and 2012. They have now recovered all that and added some on top. New York condos are 19% above their pre-crisis high. And real estate isn’t the best performer of 2017.
Back on January 1, you would have done even better to invest in emerging market equities. Another winner for the year was the Fang tech companies: shares in Facebook, Amazon, Netflix and Google are up between 30% and 60%. And the best trade of all? Bitcoin, up by a factor of seven since the year began.
Altogether now: “Thanks, Fed!” For it was the Federal Reserve, with its bold policies of zero interest rates and “quantitative easing”, that saved the world from deflation and a second Great Depression.
Now consider the following four reasons to be nervous. First, the monetary policy party is drawing to a close. The Fed and now the Bank of England are raising rates. The combined assets of the big four central banks — the Fed, European Central Bank, Bank of Japan and Bank of England — will peak in December 2018, but the rate of expansion has already started to slow. Moreover, global credit growth in aggregate is slowing.
History shows that monetary tightening acts with long and variable lags. But it does act, often on stock markets.
Second, as the economist Charles Goodhart and others have argued, we are at a demographic inflection point. Globally, the ratio of workers to consumers has peaked. Between now and 2100, China’s working-age population is projected to shrink from 1bn to below 600m. Already many labour markets look tight, with unemployment rates and other measures of slack leading economists to expect a surge in wages and inflation. Countries such as Germany that think immigration will help matters will be disappointed as many newcomers lack the skills to be easily absorbed into a modern workforce. What is more, the rising dependency ratio as populations age doesn’t translate into higher saving but into higher consumption, especially on healthcare. Welfare safety nets have encouraged many retirees not to provide completely for the costs of a prolonged old age.
This leads to the conclusion that the end of the 35-year bond bull market is nigh. Bonds will sell off; long-term rates will rise. The question is whether inflation will increase as much or more. If not, then real (inflation-adjusted) interest rates will rise, with serious implications for highly indebted entities. The Bank for International Settlements recently published “early-warning indicators for stress in domestic banking systems”. Two big economies with flashing red lights are China and Canada.
Point three: regardless of monetary policy, a networked world — whose biggest companies are dedicated to reducing the cost of everything from shopping to searching to social networking — is a structurally deflationary world.
According to the World Bank, a bewildering range of occupations — from food processors to finance professionals — have a 50% or higher probability of being “computerised”, with technology entirely or largely replacing human workers. Already Waymo’s driverless cars are on the streets of Phoenix, Arizona. Last week, Elon Musk unveiled the spectacularly cool Tesla truck, which no doubt shares the self-driving features of Tesla cars. I have seen the future and it drives itself. Today’s drivers need to retrain as nurses.
Oh, and if you debtors were pinning your hopes for an inflation surprise on a new Middle Eastern crisis, as in 1973, 1979 and 1990, I have to disappoint you. According to the International Energy Agency, America is halfway through the biggest expansion in oil output by any country in history — an additional 8m barrels of oil a day between 2010 and 2025 — thanks to the ingenuity of shale oil drillers. Even without electric cars, we would avoid a serious oil shock even if Iran and Saudi Arabia went to war tomorrow.
No two financial crises are the same. The next one will not be like the last one. But there will be a next one and, as the monetary medication begins to be withdrawn, it draws nearer. This time, mark my words.
Niall Ferguson’s new book is The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power (Allen Lane)
When a president finds his approval rating in the doldrums and Congress slow to enact his domestic agenda, he naturally turns to foreign policy in search of quick wins. That, at any rate, is the cynical interpretation of President Donald Trump’s decision to launch 59 Tomahawk missiles against a Syrian airfield in Homs, in retaliation for Bashar al-Assad’s use of chemical weapons in an attack that killed more than 80 civilians.
My view of Trump’s action is more positive. It is not that I think one salvo of missiles is going to end the civil war in Syria. Of course it won’t. But I think we can now discern the beginning of the improvement in US foreign policy we have been waiting for ever since President Obama packed his bags, collected the biggest book advance in history and departed to the eight-bedroom schloss in Kalorama where he now resides.
Bear in mind that Obama’s worst mistake as president was his indecision about Syria. Back in August 2011, as you may recall, he told Assad to “step aside”. He didn’t. In February 2012, Obama tried going through the UN security council, but Russia and China vetoed action on Syria. Under pressure from Republicans to arm the Free Syrian Army, Obama refused. Defence secretary Leon Panetta explained that arming the FSA would lead to “a terrible civil war”. A terrible civil war happened anyway.
In the summer of 2012, Panetta, secretary of state Hillary Clinton, CIA director David Petraeus and chairman of the joint chiefs Martin Dempsey all pressed Obama to arm rebel groups. Obama reluctantly authorised CIA training of just 10,000 rebel fighters. These fighters prove useless.
It was in the wake of these failures, in an attempt to sound tough, that the White House warned Assad that if he used chemical weapons he would “cross a red line”. Guess what: he used them anyway. In September 2013, Obama’s red line proved to be a pink dotted line when he announced that he would seek congressional approval for military action.
Enter the Russians, who said they would persuade Assad to hand over his chemical weapons to avert any such action. In a lame address to the nation, Obama announced that America was no longer the “global policeman”. Less than a year later, Isis murdered James Foley and other western hostages, leading Obama to authorise airstrikes in Syria, but only against Isis targets. The Russians intervened on a much larger scale in late 2015, deploying not only jet fighters but also ground forces to Latakia and warships to the Caspian Sea. They directed their fire against Assad’s opponents.
Obama has said he remains “very proud” of his decision not to enforce the red line. I find that hard to believe. Syria lies in ruins. The total death toll lies somewhere between 320,000 and 470,000. The Syrian Network For Human Rights puts the number of civilian fatalities at 207,000. More than 10m people have been driven from their homes; half of them have fled abroad. Not only did Obama leave Syria in ruins, he left American credibility in the region in a similar state. Matters were hardly improved by his readiness to conclude a nuclear “deal” with Iran that did nothing to restrain that country’s intervention in support of Assad.
The termination of this shameful saga of American impotence is surely to be welcomed. Not convinced? Well, one indication that a decision is really good is when really bad people line up to denounce it. Step forward Ann Coulter, scourge of the left, author of books with titles such as Adios, America: The Left’s Plan to Turn Our Country Into a Third World Hellhole, and until this point an ardent fan of Trump.
“Trump campaigned on not getting involved in Mideast,” Coulter tweeted shortly after the Tomahawks struck. “Then he saw a picture on TV.” And: “He told us he would be the president of America, not ‘the world’. Could somebody show him pictures of Americans raped & killed by illegals?”
Next up: Glenn Greenwald, scourge of the right, darling of Guardian readers, and confederate of Edward Snowden, the “whistleblower” who fled to Russia after exposing the National Security Agency’s data surveillance operation.
“The idea that a person only becomes a ‘real US president’ by killing foreigners is a long-standing media theme to encourage US war,” Greenwald tweeted.
Finally, let’s hear from Greenwald’s pals in Moscow. According to the Kremlin, Trump was guilty of “aggression against a sovereign state in violation of international law”. Vladimir Putin’s spokesman warned that the chances of collision between Russian and American forces in Syria were now much higher. The head of the Russian propaganda outlet RT observed darkly that the airstrikes had been ordered on the centenary of the US entry into the First World War.
It is true that America went to war in April 1917 partly for humanitarian reasons: wartime propaganda never tired of condemning German “atrocities” against Belgian civilians and passengers aboard the Lusitania. Yet these were not the principal reasons why President Woodrow Wilson opted for intervention in Europe. A German plot to back Mexican territorial claims against America had been exposed by British intelligence. More importantly, Russia’s revolution had given Germany the prospect of victory. Intervention gave America an opportunity to tip the scales in Britain and France’s favour and to reshape the postwar international order.
Wilson, in short, had a strategy. Does Trump?
Certainly, last week’s action has signalled to the world that a new sheriff is in town and he doesn’t fire blanks. That in itself is good. Second, Trump has also made it clear to his guest at Mar-a-Lago, the Chinese President Xi Jinping, that he will not shirk from using force against rogue regimes. That includes China’s wayward client North Korea.
Third, we can presumably now forget the theory that Trump is the “Muscovite candidate”, controlled remotely from the Kremlin. “Russia faces a choice,” the White House said on Thursday: “Either it takes responsibility for ensuring that Assad complies with the removal of these weapons, as Russia committed it would do, or it admits that it lacks the ability to control Assad.” Some puppet.
Yet none of this amounts to a coherent strategy to stabilise the Middle East. If Thursday was merely a return to the old Clintonian habit of firing missiles into the sand without any wider strategic purpose, then the disappointment will be intense. If, on the other hand, we now see steps in the direction of a US-led peace conference, then a bright new red line will have been drawn — a line under the failed American foreign policy of the Obama era.
Since former Federal Reserve Chairman Ben Bernanke uttered the word "taper" in June 2013, emerging-market stocks and currencies have taken a beating. It is not clear why talk of (thus far) modest reductions in the Fed's large-scale asset-purchase program should have had such big repercussions outside the United States. The best economic explanation is that capital has been flowing out of emerging markets in anticipation of future rises in U.S. interest rates, of which the taper is a harbinger. While plausible, that cannot be the whole story.
For it is not only U.S. monetary policy that is being tapered. Even more significant is the "geopolitical taper." By this I mean the fundamental shift we are witnessing in the national-security strategy of the U.S.—and like the Fed's tapering, this one also means big repercussions for the world. To see the geopolitical taper at work, consider President Obama's comment Wednesday on the horrific killings of protesters in the Ukrainian capital, Kiev. The president said: "There will be consequences if people step over the line."
No one took that warning seriously—Ukrainian government snipers kept on killing people in Independence Square regardless. The world remembers the red line that Mr. Obama once drew over the use of chemical weapons in Syria . . . and then ignored once the line had been crossed. The compromise deal reached on Friday in Ukraine calling for early elections and a coalition government may or may not spell the end of the crisis. In any case, the negotiations were conducted without concern for Mr. Obama.
The origins of America's geopolitical taper as a strategy can be traced to the confused foreign-policy decisions of the president's first term. The easy part to understand was that Mr. Obama wanted out of Iraq and to leave behind the minimum of U.S. commitments. Less easy to understand was his policy in Afghanistan. After an internal administration struggle, the result in 2009 was a classic bureaucratic compromise: There was a "surge" of additional troops, accompanied by a commitment to begin withdrawing before the last of these troops had even arrived.
Having passively watched when the Iranian people rose up against their theocratic rulers beginning in 2009, the president was caught off balance by the misnamed "Arab Spring." The vague blandishments of his Cairo speech that year offered no hint of how he would respond when crowds thronged Tahrir Square in 2011 calling for the ouster of a longtime U.S. ally, the Egyptian dictator Hosni Mubarak.
Mr. Obama backed the government led by Mohammed Morsi,after the Muslim Brotherhood won the 2012 elections. Then the president backed the military coup against Mr. Morsi last year. On Libya, Mr. Obama took a back seat in an international effort to oust Moammar Gadhafi in 2011, but was apparently not in the vehicle at all when the American mission at Benghazi came under fatal attack in 2012.
Syria has been one of the great fiascos of post-World War II American foreign policy. When President Obama might have intervened effectively, he hesitated. When he did intervene, it was ineffectual. The Free Syrian Army of rebels fighting against the regime of Bashar Assad has not been given sufficient assistance to hold together, much less to defeat the forces loyal to Assad. The president's non-threat to launch airstrikes—ifCongress agreed—handed the initiative to Russia. Last year's Russian-brokered agreement to get Assad to hand over his chemical weapons is being honored only in the breach, as Secretary of State John Kerry admitted last week.
The result of this U.S. inaction is a disaster. At a minimum, 130,000 Syrian civilians have been killed and nine million driven from their homes by forces loyal to the tyrant. At least 11,000 people have been tortured to death. Hundreds of thousands are besieged, their supplies of food and medicine cut off, as bombs and shells rain down.
Worse, the Syrian civil war has escalated into a sectarian proxy war between Sunni and Shiite Muslims, with jihadist groups such as the Islamic State of Iraq and Syria and the Nusra Front fighting against Assad, while the Shiite Hezbollah and the Iranian Quds Force fight for him. Meanwhile, a flood of refugees from Syria and the free movement of militants is helping to destabilize neighboring states like Lebanon, Jordan and Iraq. The situation in Iraq is especially dire. Violence is escalating, especially in Anbar province. According to Iraq Body Count, a British-based nongovernmental organization, 9,475 Iraqi civilians were killed in 2013, compared with 10,130 in 2008.
The scale of the strategic U.S. failure is best seen in the statistics for total fatalities in the region the Bush administration called the "Greater Middle East"—essentially the swath of mainly Muslim countries stretching from Morocco to Pakistan. In 2013, according to the International Institute of Strategic Studies, more than 75,000 people died as a result of armed conflict in this region or as a result of terrorism originating there, the highest number since the IISS Armed Conflict database began in 1998. Back then, the Greater Middle East accounted for 38% of conflict-related deaths in the world; last year it was 78%.
Mr. Obama's supporters like nothing better than to portray him as the peacemaker to George W. Bush's warmonger. But it is now almost certain that more people have died violent deaths in the Greater Middle East during this presidency than during the last one.
In a January interview with the New Yorker magazine, the president said something truly stunning. "I don't really even need George Kennan right now," he asserted, referring to the late American diplomat and historian whose insights informed the foreign policy of presidents from Franklin Roosevelt on. Yet what Mr. Obama went on to say about his self-assembled strategy for the Middle East makes it clear that a George Kennan is exactly what he needs: someone with the regional expertise and experience to craft a credible strategy for the U.S., as Kennan did when he proposed the "containment" of the Soviet Union in the late 1940s.
So what exactly is the president's strategy? "It would be profoundly in the interest of citizens throughout the region if Sunnis and Shiites weren't intent on killing each other," the president explained in the New Yorker. "And although it would not solve the entire problem, if we were able to get Iran to operate in a responsible fashion . . . you could see an equilibrium developing between Sunni, or predominantly Sunni, Gulf states and Iran."
Moreover, he continued, if only "the Palestinian issue" could be "unwound," then another "new equilibrium" could be created, allowing Israel to "enter into even an informal alliance with at least normalized diplomatic relations" with the Sunni states. The president has evidently been reading up about international relations and has reached the chapter on the "balance of power." The trouble with his analysis is that it does not explain why any of the interested parties should sign up for his balancing act.
As Nixon-era Secretary of State Henry Kissinger argued more than half a century ago in his book "A World Restored," balance is not a naturally occurring phenomenon. "The balance of power only limits the scope of aggression but does not prevent it," Dr. Kissinger wrote. "The balance of power is the classic expression of the lesson of history that no order is safe without physical safeguards against aggression."
What that implied in the 19th century was that Britain was the "balancer"—the superpower that retained the option to intervene in Europe to preserve balance. The problem with the current U.S. geopolitical taper is that President Obama is not willing to play that role in the Middle East today. In his ignominious call to inaction on Syria in September, he explicitly said it: "America is not the world's policeman."
But balance without an enforcer is almost inconceivable. Iran remains a revolutionary power; it has no serious intention of giving up its nuclear-arms program; the talks in Vienna are a sham. Both sides in the escalating regional "Clash of Sects"—Shiite and Sunni—have an incentive to increase their aggression because they see hegemony in a post-American Middle East as an attainable goal.
The geopolitical taper is a multifaceted phenomenon. For domestic political as well as fiscal reasons, this administration is presiding over deep cuts in military spending. No doubt the Pentagon's budget is in many respects bloated. But, as Philip Zelikow has recently argued, the cuts are taking place without any clear agreement on what the country's future military needs are.
Thus far, the U.S. "pivot" from the Middle East to the Asia Pacific region, announced in 2012, is the nearest this administration has come to a grand strategy. But such a shift of resources makes no sense if it leaves the former region ablaze and merely adds to tension in the latter. A serious strategy would surely make some attempt to establish linkage between the Far East and the Middle East. It is the Chinese, not the Americans, who are becoming increasingly dependent on Middle Eastern oil. Yet all the pivot achieved was to arouse suspicion in Beijing that some kind of "containment" of China is being contemplated.
Maybe, on reflection, it is not a Kennan that Mr. Obama needs, but a Kissinger. "The attainment of peace is not as easy as the desire for it," Dr. Kissinger once observed. "Those ages which in retrospect seem most peaceful were least in search of peace. Those whose quest for it seems unending appear least able to achieve tranquillity. Whenever peace—conceived as the avoidance of war—has been the primary objective . . . the international system has been at the mercy of [its] most ruthless member."
Those are words this president, at a time when there is much ruthlessness abroad in the world, would do well to ponder.
Mr. Ferguson is a history professor at Harvard and a senior fellow at Stanford University's Hoover Institution. His most recent book is "The Great Degeneration" (Penguin Press, 2013).