Of boom, bust but maybe not the Black Death
As the crisis has deepened we’ve had to search farther back in history for precedents, and with deflation at hand much of the debate now centers on how similar the next while will be to the Great Depression.
But what if, rather than the 1930s, we ought to be thinking about the revolutionary crisis of the 18th century, or even further back to the 14th century lending and spending spree that ended with the Black Death?
A reading of The Great Wave: Price Revolutions and the Rhythm of History, by Brandeis University historian David Hackett Fischer will ring a lot of bells.
Fischer’s book, published in 1996, looks at price data back to the time of Babylonian king Hammurabi, and actual series of prices back to Europe in the 13th century.
As the title implies, Fischer finds in the data a succession of waves, often lasting more than 100 years, of first inflation punctuated by violent crises and then very long periods in which prices are basically stable. The most recent “Great Wave” of inflation began in 1896 and may or may not have broken on the shore of the current debacle.
“It looks as if the long inflation has come to an end but we can’t be sure,” Fischer said in an interview.
He makes no claims for the predictive value of his work, unlike those who study cycles, and cautions that the wild swings that characterize the end of waves make it impossible to judge until well after the fact.
The period that perhaps ended in the summer of 2007 fits in some broad and telling ways with his characterization of the latter stages of an inflationary wave: wealth inequality increased; returns to labor fell but returns to capital increased; debt was built up, both public and private; and there were severe commodity price shocks.
There are also some real similarities in how a crisis usually plays out, according to Fischer, and our own current state: a rapid fall in prices, rents and interest followed by a very sharp deflation.
So, will the near future feature scenes of 14th century-style devastation?
Almost certainly not. While each of the huge busts following long periods of inflation have featured violence, disorder, financial markets upheaval and the toppling of old orthodoxies, each crisis has been successively less severe than the last.
That’s likely because people have become better at managing the effects of financial disorder, and even though hopes of a great moderation in the global economy now look silly and the old certainties about markets and economics are under attack, there is good reason to hope that this time will be less severe.
A SOVEREIGN CRISIS?
Another possibility, not as grim as the Black Death although hardly appealing, is that we are about to enter into a last climax of inflation, courtesy of desperate deficit spending.
The latter stages of inflationary periods in the past featured effective bankruptcies on the back of fiscal stress by France in the 18th century and Spain in the 16th century, the economic and military giants of their times.
“It is conceivable that with the way the printing presses are going to have to be running to pay for all of the stimulus that is going to be happening all over the world we could well see another huge wave of inflation,” Fischer said. “And now there is a real potential for the greatest power in our own time heading towards some sort of a crisis of sovereign credit.”
Again, history doesn’t repeat, it rhymes, and there are good reasons to think this won’t happen.
At any rate, I think it’s fair to say that our current framework and discussion are actually based on an analysis of a relatively short period of history, one which because we have good data about it rewards debate and analysis but which can lead to an overly narrow vision of what is possible. Talking about depression and deflation would get you jeered out of court two years ago, and there was an unnaturally broad consensus about the benefits of financialisation.
And of course there is also the possibility that we will pass into a true period of equilibrium, without notable inflation and with narrowing differentials between wealth and poverty and higher returns to labor.
In the past, such periods have included the Renaissance, the Enlightenment and the prosperity of the Victorian period.
Regardless of where we are in the wave, it seems that the forces in alignment — deflation, regulation, an expanded role for government in the economy and a structurally smaller share of GDP for finance — will not favour returns to capital. The stock market may be a bit early in rallying, even if we are still surfing the wave.
— At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click here. —