Updated: Aug 6, 2019
Global financial markets, not nuclear bombs, are the most powerful force ever invented.
Properly guided, financial markets are the single most powerful force that can be summoned to improve the human condition, eliminate poverty and save the environment. Misused, financial markets can be many times more destructive than nuclear bombs.
The inept management of financial markets in the US in 2008 alone cost the US as much as all the foreign wars the US ever fought, combined ($22 trillion); and more lives lost than due to the nuclear bombs unleashed on Hiroshima and Nagasaki (staggering, yet virtually unknown).
Conversely, China's skillful introduction of financial markets, and other market positive decisions, resulted in what JP Morgan termed the fastest and more successful economic development story in the history of the world. Hundreds of millions raised out of poverty in less than 20 years. Amazing. I know it is true, I was there.
Likewise positive is the fact that we have the technology and means to save the planet using financial markets to marshal investments.
While nuclear power is now well understood, the true nature and awesome power of markets is still misunderstood by most. This first issue of Lawton on Markets highlights the power of markets and why we are focused on this most important of topics.
So, what is the most powerful force ever invented, a nuclear bomb?
Estimates of the number who died due to the nuclear bombs dropped on Hiroshima and Nagasaki range from 129,000 to 226,000 people with billions of dollars in property damage.
By comparison, how much did the 2008 Financial Crisis cost?
Around $22 trillion according to the US General Accountability Office.
How do you put $22 trillion into perspective? Compare it to the cost of a war.
The cost of all foreign wars ever fought from the Revolutionary War to the Iraq War up to 2010 in current dollars was around the same $22 trillion according to the Congressional Research Service. This is rather astounding to know that one incidence of financial mismanagement caused as much financial loss as all foreign wars combined that the US ever fought!
This comparison result is startling because almost no one would predict that the financial crisis cost anywhere near as much as even "a neat little war" much less the cost of all foreign wars combined. This demonstrates that the power of financial markets is greatly underappreciated by just about everyone.
Well you may say, that is fine, but it is difficult to put a price on human life. OK.
The Lancet, England’s top medical journal, estimated that the 2008 financial crisis caused over 500,000 cancer deaths alone due to reduced availability of funds for medical care. Researchers from the University of Oxford estimated more than 10,000 "economic suicides" were due to the 2008 financial crisis. A comprehensive analysis of all deaths due to the 2008 financial crisis would undoubtedly be many times higher than just those two focusing on cancer and suicide.
Based on the fact that the financial crisis cost as much as the cost of all US foreign wars combined and was responsible for more deaths than those caused by the Hiroshima and Nagasaki nuclear bombs, my conclusion is that the financial markets are the most powerful force ever invented.
Still not convinced? How about as a force for good?
China under Chairman Mao rejected capitalism and the power of markets, and people had to struggle to survive on $1-$2 per day. Then as the market friendly views of Deng Xiaoping took root and China started to build its financial system in the early 1990’s average per capita GDP started to take off as can be seen in this graph:
And, China’s gross domestic product likewise began to explode up:
By adopting freer markets and establishing a modern financial system China has created well over $100 trillion in additional economic value than it would have absent financial markets.
JP Morgan labelled China the most successful economic development in the history of the world. Hundreds of millions of people have been lifted out of poverty.
This phenomenon has been witnessed not just in China, but around the world wherever markets are freed up and financial markets modernized such as in East Germany, Vietnam, South Korea, Singapore and elsewhere. Conversely, wherever the financial system is severely controlled; such as Cuba, Venezuela or North Korea; peoples' economic well being suffers.
One of the most optimistic and little reported facts is that the number of people living in extreme poverty is dramatically dropping, despite the increase in population as seen in this graph:
This drop in global poverty and expansion of prosperity can be partially attributed to the efficiencies of modern financial markets.
As global population increases and poverty rates go down, the next challenge is to make the global economy sustainable and the environment clean. While many are pessimistic about the future, some even predicting the end of the world in 12 years, I am optimistic. These are the most exciting times in the history of the world with unlimited opportunities. We can provide the basic needs for every human on earth in a clean and sustainable way if we use the most powerful force available, financial markets, to help.
For those genuinely concerned with how to deal with climate change and the environment, the single most effective thing that can be done is to encourage and support free and open financial markets. This will lead to more wealth creation which in turn can partially be used to directly reduce pollution, and also support more technological innovation to improve the environment.
Personally I am working to demonstrate these ideas using global financial markets to produce affordable housing, clean alternative energy and reduce the cost of basic goods for the bottom 40%. So far the results are very encouraging. We have produced stable double digit returns with low volatility on investment grade government credit risk.
So, financial markets have already greatly helped increase global wealth, reduce global poverty and are hard at work channeling investment into alternative energy and other environmentally important areas to save the planet.
Yet, if asked few people would be able to name this most powerful force ever invented. Because of this ignorance, financial markets do not get the proper care and attention they deserve.
Like nuclear reactions, the power of financial markets can be positive if properly applied as in China recently, and can likewise be as destructive if mismanaged as was done in 2008.
Unlike nuclear power, the modern financial system has become so complex that few understand it, including those responsible for managing it.
Take this quote from Alan Greenspan:
“Most analysts and forecasters, both public and private, agreed with the view expressed by the Economist in December 2006 that ‘market capitalism, the engine that runs most of the world economy, seems to be doing its job well.’ As late as the day before the crash, September 14, 2008, the outlook was still sufficiently equivocal that I was asked on ABC’s Sunday morning show This Week if ‘the chances of escaping a recession were greater than fifty percent.’ With the crisis less than twenty-four hours away, conventional wisdom had not yet coalesced around even the possibility of a typical recession, to say nothing of the worst economic crisis in eight decades.”
Greenspan and many others’ confusion and misinformation of saying that no one saw the crisis coming and refusing to accept responsibility for properly identifying and managing it is disingenuous, and contrary to what the Congressional Financial Crisis Inquiry Commission concluded:
“ We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us.”
So, let’s recap. Financial markets are the most powerful force ever invented. Financial markets are central to creating a world where all basic human needs are taken care of and the environment is clean and sustainable. The power of financial markets, for good or ill, is vastly underappreciated and misunderstood, even by those charged with their oversight and management. This lack of understanding of the power and importance of markets helped crash the system in 2008. By focusing on how financial markets actually work can give investors an edge in order to produce stable long term returns with low risk in strategies that help people and improve the planet, such as producing affordable housing or cleaning up the environment.
 US Government General Accountability Office (GAO), Financial Regulatory Reform, “Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act,” Report to Congressional Requesters, January 2013
 Congressional Research Service, “Costs of Major U.S. Wars,” Stephen Daggett, Specialist in Defense Policy and Budgets, June 29, 2010
 The Telegraph, “Financial crisis caused 500,000 extra cancer deaths,” May 26, 2016
 Alan Greenspan, The Map and the Territory 2.0, Penguin Books, NYC, 2013, page 7