One of the weekly pod casts that I subscribe to is called, “Harvard Business IdeaCast.”Last week’s pod cast was worth blogging about, as it featured an interview with Niall Ferguson, Harvard Business School Professor and Oxford Economic Historian.

Niall Ferguson, an expert in international financial markets, discussed an article he wrote, that also appeared in the July/August Edition of the ‘Harvard Business Review’ called The Descent of Finance.  It’s no wonder I found the interview fascinating.  After I dug around on the web to find out more information about Ferguson, I discovered that “TIME” magazine had named him one of the ’100 Most Influential People in the World.’

Ferguson is the author of, The Ascent of Money: A Financial History of the World and, The House of Rothschild: Volume 1: Money’s Prophets: 1798-1848, a fascinating account of a legendary banking dynasty’s rise to power.

Ferguson believes that a “descent of finance” began back in 2007.  In the interview, he gave both optimistic and pessimistic views on the current financial crisis.  He remarked that the Obama Administration’s response to the crisis is a combination of “Milton Friedman’s approach to monetary policy combined with John Maynard Keynes approach to fiscal policy.”

On an optimistic note, Ferguson said that the U.S. is not in another Great Depression but instead compares this “deep” recession with another time in U.S. History which followed the financial crisis of 1873.

The most fascinating part of the interview was when Ferguson observed that the Dollar Currency Crisis may not show up in exchange rates, but rather, in commodity prices. His reason for this observation is based on the co-dependent relationship between the U.S. and China.

“The Chinese don’t like where they are, as holders of massive amounts of Dollar-denominated debt.  But they’re not sure quite where to go.  In other words, they don’t have an immediate alternative to the dollar.”

But what about trading dollars for Euros? Ferguson believes that switching to the Euro is not an attractive option because the banking crisis is as bad in Europe as it is in the U.S.

“And, even if they did switch right now in a big way, it would then cause a Dollar Crisis which would hurt them severely, as they are sitting on $2 trillion dollars worth of predominately dollar-denominated reserves.  Meanwhile, the Federal Reserve is printing dollars nearly without limit, in an attempt to re-flate the U.S. economy .”

They are “kind of trapped,” Ferguson said.

Another fear for China lies in their dependency on exports.  If their currency appreciates against the dollar, this will certainly hurt exports.

From here, Ferguson suggests that the price of commodities seem to be a better measure of the “declining global confidence” in the dollar. He goes on to say that China would be better off accumulating piles of copper or barrels of oil rather than Dollars or Euros.

Please post any comments you may have on these ideas posed by Ferguson. I strongly encourage you to check out Ferguson’s article in the  “Harvard Business Review” or listen to the interview on the pod cast, “Harvard Business IdeaCast.”

I am definitely an advocate of using the history of financial markets as a lens through which to view current financial events.  Any additional thoughts or commentary on these specific topics? Check out Niall Ferguson.

Posted by Corey Curwick on July 11, 2009