Of boom, bust but maybe not the Black Death

By J Saft
January 9, 2009

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

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.


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. –


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“I believe that banking institutions are more dangerous to our liberties than standing armies.
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will
deprive the people of all property until their children wake-up homeless on the continent their fathers
conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802), 3rd president of US
(1743 – 1826)”

I have always been a great admirer of Thomas Jefferson. Where is he when we so desperately need him. It is clear how W financed the War In Iraq.

Posted by RFL | Report as abusive

History still awaits a successful Non-Capitalist system having witnessed the dismail failures of tribalism and socialism.

As Churchill stated – It’s a terrible system, but it is the best systeam humanity has developed so far.

Given the state of Thomas Jefferson’s own personal economic disaster, (not even free slave labor could save him), accept his brilliance in politics and science but don’t look for macroeconomic help. Additionally, our currency is controlled by a Treasury Secretary and Federal Reserve – all selected and voted on by our elected representatives – Congress.

Posted by m. plunkett | Report as abusive

Well the proven monetary cycle I know about is, Printing Press – Inflation assured in three years.

To many treasury bonds will make the milk watery in value and a two trillion deficit reached easily doesn’t help the leverage either.

Foreigners can not longer lend cause they are getting into financial dangers waters themselves now.

The problem now is on the demand side where credit is dry. A devaluation war is eminent.

Posted by Youri Carma | Report as abusive

If Mr. Saft thinks there is the remotest possibility that we can escape hyperinflation at this point in history, he hasn’t studied his history very well.

“And of course there is also the possibility that we will pass into a true period of equilibrium…

In the past, such periods have included the Renaissance, the Enlightenment and the prosperity of the Victorian period.”

Indeed, in each case also accompanied by an increase in the speed of communication.

At today’s rate of international communication, we’ll either reach the equilibrium of the turbulence of a high-pressure water faucet or the resonance of fine Austrian crystal.

Note, however, both equlibrium states are quite different in their effects.

Posted by mlee | Report as abusive

What planet do you live on?? Hope ia NOT a plan! When you print money – tons of money….inflation will follow..That you can depend on!

Posted by paul kalsbeek | Report as abusive

Oh Lordy, Negative Jim is in rolling in dead fish heaven now! “Black Death!” My God man, your negativity is astounding, even while you keep some of your personal funds in the markets. If things are really this bad then we should all just short every stock and fund we can find and we’ll all be billionaires within the year if Saft is right! Why isn’t Saft shorting all his personal finances? Hmmm. Doesn’t beleive his own negative spewing? Happy new year Jim!

Posted by Greg | Report as abusive

the monetary system itself is whats wrong
a fractional reserve system is what we run on and is
completely ridiculous. the federal reserve is a private entity no one is elected. money is backed by nothing and is created out of nothing the idea of legal tender is perpetual debt. so enjoy and see you in hell

What’s funny is that my wife and I have given back almost $1300.00 per month in wage cuts.We are fortunate enough to still have decent paying jobs.But we have accumilated some c/c debt.Even if we wanted to apply for some kind of loan,we would probably be turned down.Why doesn’t the government or some bank with my tax money give us an immeadiate very low intrest consolidation loan to improve our balance sheet and in the long run improve are spending power. I’m sure there are alot like us,still able to pay but unable to borrow.

Posted by ArthurPina | Report as abusive

Additionally, our currency is controlled by a Treasury Secretary and Federal Reserve – all selected and voted on by our elected representatives – Congress.
Posted by m. plunkett

Sorry to inform you Mr. Plunkett the Fed is not controlled by Congress . The Fed is not part of the government or cotrolled by the government. For more info go to : http://www.rense.com/politics6/fedres.ht m If this site is no help Google it and find out the ugly truth.

Posted by Tom Swartz | Report as abusive

No… it is about what we believe. We either believe that the government will manage to claw back on the deficit within an acceptable time frame, or like James we believe that the world is at an end and now the skies are gray, the flowers are dead and the birds have flown South. And like James, we can then drag out this tome and study it while we listen to La Traviata and drink cups of bitter wine.

As confidence flags, investors, brokers run around wanting guarantees. Well, I’m sorry James (and every other investor, broker and columnist in this space)… but is doesn’t work that way. If you want a guarantee, buy a toaster. Otherwise, play the game… after all, it is only money.

Posted by Quintin | Report as abusive

When facing a financial crisis, would your advisor recommend taking on more debt to get out of debt? You or I would consider that option to be ludicrous, yet the forthcoming administration believes this is sound financial policy; take on more debt, spend more, tax more, and print more money. Inflation and lower returns for investors are looming, dark and foreboding, upon the horizon. It is a scary thought that America may be heading for its first default. What happens when we can no longer boast a platinum credit rating?

Posted by Matthew | Report as abusive