Models Behaving Badly has nothing to do with TMZ or a Harlequin novel. The models at the heart of this book are not beautiful people that fashion designers drape their creations over, but financial models that financiers and money managers try to drape reality over in order to make predictions about the market—and, of course, gobs of money.

The author, Emanuel Derman, is a former theoretical physicist and used to be the head quant (quantitative analyst) at Goldman Sachs, so this is not cheap or easy entertainment. You have to work for it, and your brain is going to hurt at times. I’m not even sure that I fully understood everything in the book (For instance, did you know that there’s a resemblance between the Law of One Price in finance and Einstein’s principle of relativity? Don’t worry, he’ll explain.), but I do think I came out of it with a better understanding of the world. In the first 45 pages, he delves into Spinoza, Goethe, the nature of good and evil, the luminosity of stars, and much, much more. But why? Well, to discuss the nature of reality versus the illusion of reality, of course—a discussion he uses to delve into an exploration of metaphors, models and theories that runs throughout the book.

I first came across Emanuel Derman in Scott Patterson’s The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. He mentions him as the coauthor of The Financial Modelers’ Manifesto, which was “an ethical declaration for scientists applying their skills to finance,” and which is excerpted at the end of the book.

Our experience in the financial arena has taught us to be very humble in applying mathematics to markets, and to be extremely wary of ambitious theories, which are in the end trying to model human behavior. We like simplicity, but we like to remember that it is our models that are simple, not the world.

Many, including Patterson, laid much of the blame for the financial crisis on the quants of Wall Street. That seems a bit unfair to me. Firms were giving the best and brightest minds absurd amounts of money to come to Wall Street and devise these models, and they used those models recklessly and irresponsibly to ignore the real world of risk around them, over-leverage their positions, and nearly bring down the entire financial system they themselves built. It would be akin to Zeus, the god of sky and thunder, hiring meteorologists to come up with weather models, using those models to devise the storm of a century, and then blaming the meteorologists when the storm nearly destroys the world. After all, Zeus knows way more about how to control the weather than a meteorologist. Like the big firms on Wall Street, he literally creates the climate!

As Derman writes of economic and weather models, “An economic model aims to do for the economy what the weather model does for the weather. … But an economy is an even more abstract concept than the weather.” Derman loves his metaphors, and so do I. He begins Chapter 2 with this doozy:

Sleep is the interest we have to pay on the capital which is called in at death; and the higher the rate of interest and the more regularly it is paid, the further the date of redemption is postpones.

So wrote Shopenhauer, comparing life to finance in a universe that must keep its books balanced.

If you want a straightforward business book to solve a particular problem, this is not the book for you. But if you’re looking to go on a metaphysical journey to explore the nature of reality and modern finance, this is going to be a fun trip.

Our economic lives could literally stop on a dime. All it would take is an agreement redefining what a dime is, or is worth, backed by or tied to. It’s happened before, and The Economist‘s “Buttonwood” columnist Philip Coggan believes it will inevitably happen again as the great international play of creditors and debtors enters its next act.

Coggan, in his new book Paper Promises: Debt, Money, and the New World Order (released today by PublicAffairs), identifies turning points in the history of economies, nations and international affairs by examining the relationships between creditors and debtors. And to do this, it is important for him to identify exactly what money is and has been, something that has changed throughout history as economies rise and fall. This makes for a fascinating story that clears the cobwebs of the past and brings us up to the present day. As he writes: “Given that mankind has been using money for thousands of years, it is perhaps surprising that money is still such a nebulous concept. … Over time, money has been everything from precious metals through paper to entries on a computer screen. One writer defined it quite neatly: ‘Money is the belief that someone will pay you back.’”

What constitutes money and how it is exchanged coincides neatly with the rise and fall of powers. Quoting John Kenneth Galbraith, the author notes that “If the history of commercial banking belongs to the Italians and of central banking to the British, that of paper money issued by a government belongs indubitably to the Americans.” But regardless of what form money takes, it is when that “belief that someone will pay you back” is challenged that matters become especially delicate between debtors and their creditors, and the rules get rewritten. And it is a situation that looks increasingly likely today.

Throughout history, the most popular political reactions to unmanageable debt have been deflation and default—diluting the purity of coinage and devaluing currency to lessen the burden of debt, or simply refusing to pay it back. One great example of the former is Henry VIII, “known as ‘old copper nose’ because of his habit of adulterating silver coins, the base metal underneath showing through the wear.” Similar tactics diluted the silver content of Roman coinage by “96 percent over the course of two centuries.” But repaying debts in debased currency is probably preferable to the outright defaults of some monarchs, such as Philip IV of France:

Philip IV, who ruled from 1285 to 1314, borrowed heavily but forced his bankers into exile rather than repay them. Just to put icing on the gâteau, he then decreed that the principal on all other debts must be repaid to the crown. The result was the ruin of his main creditor, the Order of the Knights Templar.

Of course, exiling your bankers is not an option when debt becomes international. Resolving debt is now a political issue dependent on international agreements. The gold standard was one such (and as the author explains, accidental) agreement, and worked quite well until it was abandoned in the attrition of the First World War. The Bretton Woods system—an agreement in the wake of World War II under which currencies were tied to the dollar and, because the US held 60 percent of the world’s gold bullion, to gold through the dollar—was another. That system was the norm until 1971, when facing a crisis of confidence in the dollar the United States abandoned that agreement and decoupled the value of the dollar from gold.

Since then, currency exchange rates have “floated” on the foreign exchange market. This has increased capital flow, and the financial sector has exploded in size and wealth since. It has also allowed governments to run greater deficits because they can manipulate their currencies more easily. This is the story told in the second half of the book, a story of easy credit and asset bubbles. It is the story of modern finance and the brink of disaster it brought us to that’s been covered so well in so many books of late, here told through the lens of the entire history of money and debt documented in the book’s first half. It is a perspective that makes our current crisis look less unique, even as the author references research done in another recent book entitled This Time Is Different:

Carmen Reinhart and Kenneth Rogoff recount that sovereign default has occurred in a number of waves, starting with the Napoleonic Wars. In the 1840s cycle, nearly half the countries in the developed world were in default. There was a 1870s to 1890s wave, associated with falling commodity prices, and a 1930s to 1950s wave, linked to the Great Depression and the war.

Between the Second World War and the current crisis, sovereign debt was almost always associated with the developing world, and the debate largely focused on how much of that debt should be forgiven for historical reasons or on humanitarian grounds. Today it is the developing world, largely China and the resource-rich nations of the Middle East, that acts as the creditor to developed, debtor nations—the United States the largest among them. But, as we’re seeing in the news everyday now, it is Europe where the real worry is. (Just yesterday the Prime Minister of Romania resigned amidst growing protests over austerity measures there, and his was but the latest government to fall across Europe since the debt crisis began.) Essentially, the current relationship ultimately relies on faith in governments, which is wearing thin across the Western World.

Coggan brings us to this present moment in history with great skill and scholarship, and a steady, masterful hand. He explores the various aspects, implications and possible outcomes of this new paradigm, and believes that “the debt is unlikely to be repaid in real terms.” “The Unholy Trinity” he sees coming down the road is inflation, stagnation, and default, with some sovereign defaults incredibly likely in the Eurozone, and countries that still control their own currencies like America and Britain “partially defaulting” in the sense that they depreciate the value of their currency to make their debts more manageable.

The ultimate solution, however, is where the “New World Order” in the book’s subtitle comes in. This is “where the buck stops,” or at least where it stops floating as it has since 1971. He believes the current arrangement of “floating exchange rates in the developed world and managed rates in the developing world” will come to an end. He sees the most likely outcome being a new agreement between China and the United Stated—the world’s largest creditor and its largest debtor—in which the West agrees to a new system of capital controls as China allows it’s currency to appreciate and America reigns in its national debt.

Nassim Nicholas Talb, the well-known author of The Black Swan, is quoted on the cover saying “This book stands way above anything written on the present economic crisis.” I think there’s a whole library’s worth of brilliant books on the present crisis, and I wouldn’t want to judge a peopled narrative like Andrew Ross Sorkin’s Too Big to Fail against a history of currency and debt like Coggan’s, or put up what I read as a character study (of both people and nations) like Michael Lewis’s Boomerang against a modern financial history like Bethany Mclean and Joe Nocera’s All the Devils Are Here. Coming from a company with a bookseller background, I have a firm belief in matching up the right reader with the right book, and would recommend different books to different people for different reasons. (And if you like this book, I would recommend picking up Menzie Chinn and Jeffry Frieden’s Lost Decades, James Rickards’ Currency Wars and Keith Roberts’ Origins of Business, Money, and Markets to go along with it.)

All that said, I think Paper Promises is not only a great book, it is a great accomplishment—a brilliant work of financial history, an clear examination of the present moment, and a journalistic masterpiece all wrapped into one.

From the authors of Where Does the Money Go?: Your Guided Tour to the Federal Budget Crisis and Who Turned Out the Lights?: Your Guided Tour to the Energy Crisis, comes a new book about an issue of grave national importance that has touched most of our lives recently, and will be central to the political debate this election year.

In Where Did the Jobs Go—And How Do We Get Them Back?: Your Guided Tour to America’s Employment Crisis, being released tomorrow by William Morrow & Company, Scott Bittle and Jean Johnson have provided a thoroughly researched, easy-to-read analysis of the jobs situation in America—minus the hyperbole, political posturing, and invective that’s been thrown around the public debates and airwaves recently and is certain to increase in the coming months. As the authors explain in the book’s preface, they wrote this book as “a guide for citizens, not offering advice for investors, entrepreneurs, or job hunters.” In that sense it’s not a proper business book per se, but it can help each of us see the overall jobs picture and business environment more clearly.

The situation is difficult in both its human cost and economic complexity, but Bittle and Johnson try to keep the mood light, cleverly peppering in anecdotes from popular culture sources such as TV shows Friends and Seinfeld, the 1950s movie Dragnet, the musical career of Elvis, and more to explain the economic theories and principles their book needs to address the jobs issue thoroughly. And so the book is able to tackle frightening statistics and daunting questions without losing the lay reader or terrifying the nightly news watcher. They’re also able to look at these issues without becoming embroiled in the partisan debate that so often dominates the discussion on the cable news networks, though they don’t shy away from the more complicated and complex issues. It is because the issues are complex and complicated and so rarely conform to either a conservative or liberal narrative that they’re able to do so. The fundamental and hotly debated issue of whether the employment crisis is cyclical or structural, for instance, in which the business and political implications are so huge, isn’t clear—or if it is, it’s clearly not one-sided.

Chapters 5 through 11, the section of the book entitled “Inquiring Minds Want to Know,” tackles the most contentious debate going—that of austerity versus stimulus. The authors rightly point out that stimulus has become unpopular, partly because most Americans tend to equate the word stimulus with the Troubled Asset Relief Program (or TARP) that bailed out the big banks and the auto companies. (TARP was not, in fact, part of the stimulus, but an emergency measure to recapitalize the banks in an effort to keep the crisis on Wall Street from spilling over into the larger, “real” economy. The stimulus actually included measures that are overwhelmingly popular—tax breaks, aid to state and local governments, and help for the unemployed. Conversely, cutting the deficit, or austerity, is more popular in theory but the measures it calls for—raising taxes and cutting popular programs like Social Security and Medicare—are wildly unpopular.)

The comments in parentheses above are my own. The authors don’t delve too deeply into political opinion, but stick instead to Dragnet Joe Friday’s “just the fact ma’am” approach. In the “Inquiring Minds Want to Know Section,” they ask seven questions: Would Balancing the Budget Create Jobs?; Would Cutting Taxes Help Create Jobs?; Would Cutting Bureaucracy Help Create Jobs?; Would Reviving Manufacturing Help Create Jobs?; Would Improving Education Help Create Jobs?; Would a Major Infrastructure Project Help Create Jobs? and; Would Closing the Gap Between Rich and Poor Help Create Jobs? You may think you know the “facts ma’am” answers to most of these questions. I know I did, and I know I was surprised by some of them and conclusions I came to afterward.

The book then moves on to the larger and longer-term effects of globalization, technology, immigration, and the aging of the baby-boomers. And sticking to it’s nonpartisan approach, the “Fourteen Big Ideas for Creating More and Better Jobs” at the end of the book are all over the partisan map, including everything from rolling back environmental regulations to keep energy costs low to supporting the union movement and getting business out of the health insurance business.

There was a really great book by Nicholas Wapshott put out late last year by W.W. Norton & Company entitled Keynes Hayek: The Clash That Defined Modern Economics (I plan on reviewing it here soon). In it, Wapshott details how the economic debate between intervention and unfettered markets that has become so rancorous in this country and around the Western world began. Where Did the Jobs Go—And How Do We Get Them Back?: Your Guided Tour to America’s Employment Crisis details how the various sides of that debate could conceivably find a compromise, at least in the near term and with regards to the single issue of job creation.