Martin, Money

I can’t remember ever reading a book in which John Locke was a villain, nay perhaps the villain. But in Felix Martin’s Money: The Unauthorized Biography (Knopf, 2014) Locke is described as a “physician, philosopher, and, fatefully, monetary theorist.” (p. 116) “The old” and, for the author, the only defensible “understanding had been that money is credit, and coinage is just a physical representation of that credit. The new understanding was that money is coinage, and that credit is just a representation of that coinage. Lowndes and his ilk [the good guys] had believed that the Earth went round the Sun. Locke had explained that the Sun in fact revolves around the Earth.” (p. 131)

Martin’s work, written for the layman, is primarily a historical/geographical/philosophical account of the notion of money. He begins with the monetary system of the Pacific island of Yap whose coinage, as documented in 1903, consisted of fei, “stone wheels ranging in diameter from a foot to twelve feet.” (p. 8) He describes the accounting technology used in England from the twelfth to the late eighteenth century—the Exchequer tally, a wooden stick on which were inscribed details of payments made to or from the Exchequer. (In the nineteenth century the vast archive of tallies remaining in the Exchequer were incinerated in an “overgorged” stove in the House of Lords in an act that managed to reduce not only the sticks but both Houses of Parliament to ashes.)

Throughout Martin advances his view that money is a social technology, “a set of ideas and practices which organize what we produce and consume, and the way we live together.” (p. 30) This stands in stark contrast to Locke’s view that “economic value is a natural property, rather than a historically contingent idea.” (p. 193)

The author introduces us to the Aegean invention of economic value as well as to the sophisticated monetary theories developed at the Jixia academy in China during its heyday in the late fourth and early third centuries B.C. The Jixia scholars argued that “money’s value was directly proportional to how much of it was in circulation compared to the quantity of goods available. They wrote: “[i]f nine-tenths of the kingdom’s currency remains in the hands of the ruler and only one-tenth circulates among the people, the value of money will rise and prices of the myriad goods will fall.” If, on the other hand, the ruler chooses an inflationary policy, “[h]e transfers money to the public domain, while accumulating goods in his own hands, thus causing the prices of the myriad goods to increase ten-fold.” (p. 72)

Walter Bagehot, editor of The Economist and author of the 1873 classic Lombard Street, is one of the author’s heroes. He argued against the abstract, mechanical theories of Locke, Adam Smith, and John Stuart Mill. Instead, he focused on the empirical realities of money, banking, and finance where the social properties of trust and confidence reigned supreme. As he wrote, “Credit is an opinion generated by circumstances and varying with those circumstances”; “no abstract argument, and no mathematical computation will teach it to us.” (p. 185)

The “biography” part of Money, by far the longest, is also the strongest. When Martin turns to policy recommendations in his closing chapters, the argument flags. (Or perhaps we’ve just heard so much about how to fix our banking system that everything begins to sound banal.) But for anyone with even a passing interest in the history of money and banking, Martin’s book is a treat.

Michael Lewis interview

Michael Lewis will be on 60 Minutes tonight talking about his most recent book on high frequency trading, Flash Boys: A Wall Street Revolt, due out tomorrow. I haven't read the book, but CBS offers a glimpse into it in its tease of the segment. Also appearing will be Brad Katsuyama, founder of the new exchange IEX that is designed to thwart high frequency traders, and David Einhorn, who has invested in the exchange.

Lewis wrote a lengthy piece last fall for Vanity Fair that reinvestigated the case of Sergey Aleynikov, the programmer who was sentenced to eight years for stealing code from Goldman Sachs. In a discussion with New York Times contributing writer Diana Henriques on Friday Lewis said: “It was curious to me that in the aftermath of the greatest financial crisis of modern times” — in which Goldman Sachs played a key role — “the only time someone ends up in jail is when it’s someone that Goldman Sachs wants to put in jail.”

On big data and behavioral finance

Two links for your weekend reading pleasure. First, a piece by Tim Harford in the FT about the pitfalls of big data. And, from edge.org, reflections on the influence of Daniel Kahneman's research.

Potter, How You Can Trade Like a Pro

I don’t think I’ve ever started a review by highlighting the book’s cartoons, but the “trader tips” in this book, illustrated by Noble Rains, are great. Two examples (sorry, in this "teaser" captions only, no graphics): “Entering a trade is like attending a party. You don’t want to be the first person to arrive or the last one to leave.” And “It might be tempting to trade in the shadow of another trader, but a shadow will never see the light.”

Sarah Potter’s How You Can Trade Like a Pro: Breaking into Options, Futures, Stocks, and ETFs (McGraw-Hill, 2014) may sound like an overreach, but it is in fact a good introduction to active derivatives trading.

In the first third of the book Potter, creator of the blog SheCanTrade.com, covers the basics of chart reading over multiple time frames as well as the use of market internals and correlated markets to inform trading decisions. The next third (actually, a bit more) of the book is devoted to options and futures. Finally, she presents her trading plan template and delves into trading psychology.

In the options and futures chapters she starts by explaining the language specific to each of these markets—terms as basic as calls and puts, weekly and monthly contracts. She shares the three option trading setups she uses most often—selling credit spreads that are at or out of the money and buying single-legged directionals—and explains when each of these trades is most appropriate and how to set them up.

As for futures, she writes: “I pull up the ES every morning. Looking at the ES chart helps me to decide what markets I will focus my attention on during the day. … Generally, … I look for a market that is correlated with the ES and does not have resistance in the direction of the move. I look through the ES, YM, and TF and make my decision about which one I will focus on. Whichever market has cleaner charts will be my market of choice for that day. If I look at all three and I can’t see a nice trend, then I will focus all my attention that day on options instead of futures.” (p. 210)

Potter is not simply a trend trader, however. Her three futures trading setups include “the Coffee-Break trade (after the morning rush), the In-Fashion trade (trading with the trend), and the Va-Va-voom trade (momentum scalp [into support or resistance])."(p. 227)

Like many authors of trading books, Potter offers a subscription trading idea service. If you read her book, however, and believe the cartoon caption about trading in the shadow of another trader, you might be more inclined to sit down and do the hard work that is necessary to start learning how to do it on your own.

Piketty, Capital in the Twenty-First Century

Thomas Piketty’s Capital in the Twenty-First Century (translated from the French by Arthur Goldhammer, Belknap Press of Harvard University Press, 2014) was published on March 10 if you believe Amazon, or will appear on April 15 if you believe the Harvard press release. It is already beginning to cause a stir. Admittedly, some responses, for instance Paul Krugman’s, have only been promised, not yet delivered. And the reviewer for The Economist, who is “live-blogging” the book, has just finished chapter 2. The delay is understandable. Capital is a nearly 700-page book, rich in data as well as social policy recommendations. Both will be controversial.

For fifteen years Piketty’s research centered on the historical dynamics of wealth (a notion he uses interchangeably with capital) and income. His goal was to understand what drives inequality. The short answer: Inequality happens when the return on capital exceeds the overall growth rate of the economy. His solution: a worldwide progressive tax on capital.

Critics in the popular press will seize on these bullet points and denounce Piketty for what he is, a French socialist, or what he’s not, a Marxist. Case closed—and the book can remain unread. But the case isn’t closed—and the book should definitely not remain unread.

If, more nuanced critics may argue, Piketty’s policy prescription is not only unworkable (which the author pretty well admits) but fundamentally misguided (as many in the investment community would contend), does this taint his research findings? That is, did he either skew or misinterpret the data to reach the conclusion that inequality rises dramatically when countries experience the lethal combination of rising returns on capital and falling or negative economic growth?

I am not an economist, so I will have to defer to their expertise. I can say, however, that I found the historical data, quite independently of the overall thrust of the book and some of the causal links Piketty suggests, revelatory, even shocking. I realized, reading this book, how short-sighted I have become or perhaps always was. And I suspect I have a lot of company.

To take but a single example, consider the “new normal.” In a recent piece in Business Insider, Mohamed el-Erian described the concept as signaling “the likelihood that western economies would not reset in a typical cyclical manner,” that “economic activity would remain persistently sluggish and unemployment unusually high.” Piketty views the so-called new normal as a replay of the old normal in the sense that “there is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5 percent over a lengthy period of time.” But, he points out, “a per capita output growth rate on the order of 1 percent is in fact extremely rapid, much more rapid than many people think.” (pp. 93, 95) Over a generation (30 years) growth would be more than 35%.

In this book Piketty eschews most technical economic terms, links faceless data to English and French novels (especially those of Austen and Balzac), and sets his arguments against the backdrop of political history. I assume that Piketty takes this tack not so much to appeal to a broader audience as to illustrate his belief that economics is not a science whose doctrines can be captured in mathematical formulas. In fact, he prefers the expression “political economy” because, to his mind, it “conveys the only thing that sets economics apart from the other social sciences: its political, normative, and moral purpose.” (p. 574)

Capital is not light reading; I spent many days in its company and suspect I haven’t seen the last of it. But I consider my time to have been exceedingly well spent. The book challenges commonplace beliefs and almost compels the reader to engage in a running dialogue. I would put it on my very short “must read” list.

Williams, Coach Wooden’s Greatest Secret

The subtitle tells all: “the power of a lot of little things done well.” In Coach Wooden’s Greatest Secret (Revell, 2014) Pat Williams develops the theme that John Wooden, famed basketball coach at UCLA, claimed was the formula for success: “It’s the little details that are vital. Little things make big things happen.” As Williams rephrases it (in one of many iterations), “If you would focus on the little things that escaped the notice of your opponents and competitors, you would have a slight edge over them—and that would be your winning edge.” (p. 10)

Wooden was a stickler for fundamentals, from such seemingly trivial matters as double tying shoelaces to executing “at high speed and without conscious thought” what we think of as the basics of basketball—“quick, timely, and accurate passing; aggressive receiving; sharp cutting; proper pivoting; skilled dribbling; and quick shooting (with passing and receiving being the two most important fundamentals).” (p. 39) Wooden ran fast-paced, well-disciplined practices with an aim “to transform a learned skill into an instinctive habit.” (p. 41)

Wooden may have paid attention to a lot of little things, but that didn’t mean that he made things complicated for his players. On the contrary, as he said, “Keep things as simple as you can and you have a chance to do them better. I’d always rather do a few things well.” (p. 62)

The author offers up examples of Wooden’s secret from the worlds of sports, business, and the military. For example, Ted Williams focused on the tiniest aspects of his special-order, hand-crafted bats. He sent back any bat that didn’t meet his exact specifications—for example, that it “had to have eight to ten grain lines per inch.” (p. 70) And when the Red Sox toured the Louisville factory where the bats were made, “Williams paused to talk to an older gentleman who was turning bats at the lathe. ‘Anytime you find any little pin knots in wood,’ Williams told him, handing him a twenty-dollar bill, ‘put ’em in my bat.’ Those little pin knots formed hard spots in the wood, giving the bat just a little extra kick, a tiny percentage of added power.” (p. 71)

Success is not just a matter of paying attention to the little details; it’s also a matter of investing a little more effort. The author quotes Sam Parker, who observed: “At 211 degrees, water is hot. At 212 degrees, it boils. And with boiling water, comes steam. And with steam, you can power a city. One degree.” That is, “with just a little bit more effort, a little bit more attentiveness, a little bit more focus on the little things, we can reap exponentially greater rewards.” (p. 89)

Williams’s work may be derivative, but it’s a worthwhile read—and a nudge in the right direction.

Scheier, Pivots, Patterns, and Intraday Swing Trades

You can buy M. William Scheier’s book Pivots, Patterns, and Intraday Swing Trades: Derivatives Analysis with the E-mini and Russell Futures Contracts (Wiley, 2014) for a little north of $50 or, if you have money burning a hole in your pocket, can take his ten-lesson e-mini trading course for about $3,000 or buy his indicator package software (included in the price of the course) for $250. Let’s look at the cheapest alternative.

The book is divided into four parts: time frame concepts, day model patterns, repetitive chart patterns, and confluence and execution.

Scheier’s methodology combines “old school” technical analysis with a “new school” proprietary algorithm for what he calls the Serial Sequent Wave Method. In the book he focuses exclusively on the former.

Under a somewhat expanded notion of “old school” technical analysis Scheier stresses time divisions; for instance, the trading day can be divided into three separate, distinct sessions in which, on most days, at least when the market isn’t persistently trending, “consolidation shifts to trend, volatility shifts back to drift, action is countered by reaction.” (p. 151) The opening range bar is also critically important to his methodology; “its relevance to trade entries, exits, Day Models, and overall trend direction remains active throughout the rest of the day.” (p. 14)

Scheier introduces the reader to a set of trademarked support/ resistance notions, beginning with the Break-away Pivot. This pivot “does not occur at a nearby high or low. It occurs at the shoulder of the pattern formation where a sudden price movement is steeply accelerated. In the wake of this break-away pattern, a ledge is left behind that will be the basis of significant future support/resistance. The Pivot Ledge defines the focal point of a Break-away Pivot where future support/resistance will be the most insurmountable should price return there. The Pivot Ledge is often death to the current trend….” (p. 27)

Another concept, more frequently noted but useful only as “an assist to an entry model or an exit target” (p. 54), is what Scheier calls the Dough Bar-Die Bar bookends. The Dough Bar, which often marks the beginning of a trend, is “the widest range bar among its peers, and as a candlestick pattern, it often forms with very small wicks, or none at all.” (p. 49) The similar-looking Die Bar often marks the end of a trend.

Scheier devotes four chapters to describing the three broad categories of trading day behavior patterns and their sequence cycle: the persistent trend day, test-and-reject day, and split-open day. “Within each of these categories, separate trade strategies are best employed for each model.” (p. 81)

This book is not written for the seat-of-the-pants discretionary trader. Scheier stresses the necessity of a trading plan and the usefulness of a daily journal’s feedback loop. The plan is necessary because it demands that the trader “take trades he might not agree with emotionally at that moment, and prevents him from taking trades based simply on which way it appears the market is trying to go. There are no gut feelings about the market. There is no tape reading. Intuition is not permitted as an element of decision support, and is not a filter to a qualified Trade Entry Model.” (p. 175) Put another way, “The Trader’s job is not to predict but to position, and then manage the position until either it is stopped out by a signal that did not work, reaches the target of Work-Done trend business, or arrives at another set of confluent technical aspects of disparate but simultaneous tasks.” (p. 161)

Knight, Panic, Prosperity, and Progress

Timothy Knight, best known as the founder of Prophet Financial Systems (now part of the TD Ameritrade stable) and the blog Slope of Hope, has cast himself in a new role, that of economic/market historian.

Panic, Prosperity, and Progress: Five Centuries of History and the Markets (Wiley, 2014) recounts twenty-four economic events that were historical forces, from the tulip madness of the seventeenth century to the great recession. All of these events have been well documented; each has been the subject of multiple books, both popular and academic. Knight’s contribution is to bring them together into a single narrative, manifesting “how in spite of extraordinary technological, political, and legal changes, the templates that govern humanity’s relationship with both opportunity and fear are surprisingly steady.” (pp. 446-47)

Most of the chapters deal with negative financial disruptions—for example, the panics of 1837, 1893 and 1907, Weimar hyperinflation, the Latin American debt crisis, the savings and loan debacle, the Asian contagion, and the Internet bubble. (Knight offers a personal perspective on the dot-com days, interspersing an account of the ups and downs of his own startup, Prophet Financial Systems, with a broader-based history of the era.)

Even events that benefited some people handsomely and that eventually had a significant positive impact on the course of history, such as the California gold rush, were injurious to many. Thousands of Chinese immigrants who came to California in pursuit of “the mountain of gold” were chased away from gold mining, “through both threats of physical violence and punitive legislation.” (p. 69) An act passed by California’s new legislature “expressly allowed for the white settlers to capture and enslave the Indians as workers. … During the gold rush years, about 4,500 Native Americans died at the hands of whites.” (p. 70)

Knight’s book prompts a range of emotional responses—Schadenfreude at the dramatic fall of the Hunt brothers, disgust at the machinations of Charles Keating, mixed feelings, at least initially, about the Germans in the hyperinflationary Weimar Republic who “began to lose their moral grounding as they became more desperate.” (p. 138)

Fear and greed. They’re always with us and often bring out the worst in us. Sometimes it seems positively miraculous that economies can not only survive but actually thrive and make people’s lives better.

Updegrove, The Alexandria Project

If you want a really cheap page-turning break from stress, drudgery, you name it, look no farther than Andrew Updegrove’s The Alexandria Project: A Tale of Treachery and Technology. Reading it is also, as I quickly discovered, a great way to procrastinate. I should confess that I knew Andy when he was a Yale undergraduate, so my opinion may be a tad biased.

Andy is by profession a lawyer, not a novelist, and, no, The Alexandria Project would not win a National Book Award. But it’s a fast-paced cyber-security thriller with an overlay of biting satire, directed especially cleverly against venture capitalists who, in the words of the protagonist, “were like French farmers—force-feeding the goose until its liver turns to pure fat, then selling off the bird before it dies of the farmer’s own absurd excess.”

I read the book in one sitting, unable to put it down until I reached the final plot twist. Time well spent!

Sincere, Understanding Options, 2d ed.

Michael Sincere, a full-time writer with several investing and trading books to his credit, has updated and expanded Understanding Options, originally published in 2006 (McGraw-Hill). Its intended audience is the novice, although for this second edition he went beyond the basics, including a section on intermediate and advanced strategies and an interview with Sheldon Natenberg.

Sincere works hard to make options accessible and “entertaining.” In introducing the concept of an option he gives not only the standard example of an option on a house but adds the case of buying options on snow shovels. (Admittedly, as I'm writing the draft of this review I can’t consider anything having to do with snow shovels even remotely entertaining, but some day it will warm up, my endlessly long, steep driveway that I spent two days hand shoveling and that is now a treacherous sheet of ice will clear, and the oil truck will be able to come down since I suspect I’m currently heating the house on fumes. [Update for those who feared that some poor soul would find me frozen solid with a book clutched in my hands: Success!])

Sincere starts with five chapters on selling covered calls and continues with six chapters on buying calls and four on buying puts. He clearly explains issues that tend to trip up beginning option traders, such as exercise and assignment.

The intermediate and advanced section of the book is rather sketchy. In about eighty pages he describes credit and debit spreads, buying straddles and strangles, selling cash-secured and naked puts, delta and the other Greeks, advanced strategies (iron condors, calendars, and butterflies), and trading options with ETFs, indexes, weeklys, and mini-options.

The merit of Sincere’s book is that it provides a clear introduction to the mechanics of opening and managing straightforward options positions. This is information that every option trader should understand thoroughly. Understanding Options should not be the last book that he reads, but it’s a good first one.

Harmon, Trading Options

Greg Harmon’s Trading Options Using Technical Analysis to Design Winning Trades (Wiley, 2014) is a useful intermediate-level book. Although the author spends more than half the book on a survey of technical analysis, with special emphasis on price patterns, and a chapter on option basics, he assumes a modicum of familiarity with both, even if some readers may need a bit of remedial education.

The point of identifying market trend, doing sector analysis, and reviewing individual charts using “classical technical analysis, Japanese candlestick techniques, derived and quantitative methods, and price derivatives” is to find “stock setups that can potentially return 5 to 10 percent or more in two weeks or less for the technical setup.” (p. 121) And then to structure directional option trades that can capture this return.

Harmon explains, succinctly but on balance quite well, some basic option combinations and guidelines for using them. For instance, he suggests buying a call spread “when there is strong defined resistance above a trigger or the cost of the desired long call is prohibitive.” He looks to “maintain the cost of the spread below one-third of the difference between the strikes” and does not “like to sell the upside call to create the spread if the premium from the sale does not give [him] at least 25 percent of the premium paid for the long call.” (p. 149)

In Harmon’s view, “most options combinations start with a directional bias on the underlying stock and with a simple long or short call or put. The rest are added to manipulate leverage and manage risk to the trader’s requirements.” (p. 171) Harmon calls the “simple long or short call or put” the driver and claims that “selecting the driver is the most important decision. It comes from your analysis of the chart and the potential for a move that got you interested in trading the stock in the first place.” The next task is to select the funding options, so called because “they fund or pay for the trade. They lower its cost.” (p. 172) Finally, once the driver and funding options have been chosen, “you must assess the risk remaining in the trade. If necessary, you may need to also select a risk limiter before you are ready to execute.” (p. 173)

Harmon devotes a chapter to detailed trading plans for seven stocks, including two earnings plays. He starts with a macro week in review/preview. His trend analysis of gold, the U.S. Dollar Index, treasuries, the Shanghai Composite and emerging markets, volatility, and the U.S. equity index “gives an upward bias to the market, so individual stock trades should all be biased higher as well.” (p. 191)

By way of example, let’s look at Deckers (a trade idea for the week of July 15, 2013). It “has been moving higher and is approaching resistance at 56.50. … It has support from a rising RSI and MACD for more upside. The short interest can also help at over 29 percent. There is resistance higher at 59 and 60.40 and then free air. Support lower is found at 52.50 and 50.55 followed by 48. There is also a large relative open interest (OI) at the July 57.50 call, which could lead to a pin there Friday. … If it really gets going, there is also large OI at the 65 call well above. … With all that short interest, you do not want to cap the upside on any option trade beyond this week. As an options trade, consider the July/August 57.5 call Calendar ($2.30) or the August 57.5 ($2.60) calls alone. Offset some cost by also selling the August 47.5 put (85 cents, or $1.75 net on the resulting bullish Risk Reversal). The July 56.5/57.5 1X2 ratio call spread (10 cents) is a good way to play for a pin at 57.5. Hedge that bet by also buying the July 58.5 call (20 cents) to turn it into a call Butterfly.” (p. 193)

Harmon’s directional technique is, of course, only one of many possible ways to trade options. But it’s a technique that all traders should understand before they decide on their own personal course.

Logan, Profiting from Market Trends

When the market accommodates, trend trading can be highly lucrative. The trick, of course, is to divine the market’s often fickle moods. Tina Logan sets out to help the trader identify and exploit the “good times” in Profiting from Market Trends: Simple Tools and Techniques for Mastering Trend Analysis (Wiley, 2014).

The book is divided into two parts. The first, trend development, has chapters on trend direction, trend duration, trend interruptions, early trend reversal warnings, and later trend reversal warnings. The second part, putting trend analysis to work, deals with the broad market, bull markets, bear markets, and monitoring the market trends; it also includes a case study of the current bull market. Throughout, the text is illustrated with TC2000 (Worden Brothers) charts.

Let’s look at the chapter on early trend reversal warnings to get a sense of the book as a whole. Logan summarizes the warnings in a table. In an uptrend they are: a bearish climax move such as a key reversal or an exhaustion gap, bearish divergence, failure to break a prior peak, change of slope—rising trendline, break of tight rising trendline, approaching a strong ceiling, and bearish candlestick reversal pattern. The warnings in a downtrend are the reverse.

Since these warnings may occur at the end of an intermediate trend, Logan watches for them on a daily chart and regularly “takes a glance” at the weekly chart as well. By the way, something I did not know, a weekly chart on the TC2000 platform is actually a rolling five-day chart.

Although no single warning is a guarantee that a significant trend reversal will occur, each should put traders on alert. Multiple technical warnings (“more than one early warning, or more than one later sign, or a combination of multiple early and later warnings”) suggest “a higher likelihood of a change in trend direction” (p. 132) and may prompt traders to take defensive action. Such action includes closing the position, taking partial profits, tightening the protective stop, and (less frequently) stop and reverse.

If all this sounds familiar, you probably have read your fair share of technical analysis books and won’t profit much from Logan’s “simple tools and techniques.” Profiting from Market Trends is a meat and potatoes book—nothing fancy, nothing “nouvelle.” But generations thrived on meat and potatoes, and the relatively new trader/investor may similarly thrive on Logan’s analysis.

Coyle, GDP

I recently reviewed Zachary Karabell’s short history of economic indicators. Diane Coyle, a British economist, zeroes in on perhaps the best known of these indicators, the gross domestic product. Expanding on a talk she gave in 2011, she offers, in the words of the subtitle, a brief but affectionate history of GDP (Princeton University Press, 2014). “Affectionate,” it should be noted, does not, in Coyle’s logic, imply “uncritical” although it does imply “defensible”—at least until a better measure of the economy comes along.

GDP is “an abstract statistic derived in extremely complicated ways” that is nonetheless critically important; it even tends to dictate governments’ fortunes. Its critics (environmentalists, “happiness” advocates, and social activists) “see it as the primary symbol of what’s gone wrong with the capitalist market economy.” But, Coyle argues, despite its flaws “GDP is … an important measure of the freedom and human capability created by the capitalist market economy.” (p. 5)

Coyle traces the development of the GDP construct from the eighteenth century to the present. Let me, for purposes of this “really brief” post, fast forward to the financial crisis since it “raised some profound questions about what finance is for and specifically how it is counted in GDP.” (p. 98)

As it turns out (and why should we be surprised?), finance is not properly accounted for in economic statistics. A case in point: in the disastrous fourth quarter of 2008, “the statistics showed the fastest growth in the United Kingdom’s financial sector on record” and a contribution to the economy roughly equal to that of manufacturing even as the state was “propping up the sector through subsidized funding and direct state ownership.” (p. 99) One major problem with measuring the value of financial services to the economy is that “increased risk-taking is recorded as increased real growth in financial services.” The higher the leverage, the greater the contribution to the economy. We know only too well that’s not so. As a result of this mistaken methodology, “the size of the financial sector in recent years has been overstated by at least one-fifth, maybe even by as much as one-half.” (p. 101) And so, perhaps, has its importance to national economies.

In many ways, GDP is an outdated statistic, designed for an era of mass production with its many countable units. Even though Coyle maintains that “we should not be in a rush to ditch” it, she recognizes “three issues that suggest we might move toward a different approach in time.” (p. 121) They are: “the complexity of the economy now, reflected in innovation, the pace of introduction of new products and services, and also in globalization and the way goods are made in complicated global production chains; the increasing share of advanced economies made up of services and ‘intangibles,’ including online activities with no price, rather than physical products, which makes it impossible to separate quality and quantity or even think about quantities at all; and the urgency of questions of sustainability, requiring more attention to be paid to the depletion of resources and assets, which is undermining potential future GDP growth.” (p. 122)

Coyle’s book is a valuable addition to our understanding of GDP and the way governments have relied on it to make decisions about war, welfare, and political influence. Reading it is a wonderful way to while away at least part of a weekend afternoon.