– 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.
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. –
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Not only does ‘free trade’ need to be ended, but also it and its advocacy must needs be made a felony punishable by life imprisonment or death with no appeal and no parole. Do like the New Zealanders do with their new legal system…they just passed changes to their legal system to require guilt by accusation. That meaans all it takes is your neighbor to accuse you of witchcraft and you will be straightaway taken to a gallows and burnt at the stake. Or whatever. Seriously free traders are economic saboteurs. So are NIMBY pathoskeptics about energy development, especially nuclear power; except energy development opponents are probably Muslim terrorists or their dupe, enemy agents, or just plain traitors. Given their history of evil over the last half century, they will not change and will have to be executed. Maybe these policies will not come to pass now as not enough citizens are suffering and dying yet. Picture this not as 1932! We are Americans. Think larger countries where this happened! Think 1789 France or 1917 Russia or 1930 Germany. When unemployment is admitted to be over 16 percent by liars that know that is is over thirty percent; when starving masses repeatedly riot for food; when television censorship is enforced by the upcoming ‘digital conversion’ (who do they think they are kidding?); when thousands and thousands die of exposure, hunger, cold, and disease…what will we do then? Our government is completely penetrated by various traitors, nut jobs, fellow travelers, Chinese collaborators and other Quisling types not to mention home grown crooks on foreign payrolls, and as such is unable to reform itself. It will take a few new elections and a revolutionary political party. Alons Enfant de la Patria, le Jour del Gloire est Arrive…..Aux Armes, les Citoyens!
We in USA need not worry as long as Dollar remains the world currency, for oil.
Iraq tried to take that away and was punished. Yes we did accomplish the mission when our president said so. Iran has started accepting yen and euro for oil, they need to be punished and will be punished soon. For now, we just need to wait for an opportunity. I guess they will fall into the trap of current gaza war.
Those who speak against \”Free Trade\” as job sell off unfortunately see only one effect. Jobs would have gone to Asia anyway - as they relate to North America jobs have been repositioned rather than lost. It is necessary to look at NA as a border less state when economics are concerned. The faster we get Mexico and the South American countries in th fold the better for the Americas - yes including the USA.
The auto industry is a prime example of a dinosaur US/ Canada business that saw some of the writing on the wall. The big 3 management invested in Asian auto companies. But the NA workers ignored the obvious and kept pumping the well. It is now dry.
Bailouts? Waste of money and delaying the inevitable bankruptcies. Free trade may well be the saviour of the NA economy if expanded quickly enough.
I’m not blaming corrosive USG trade policy on foreigners (Chinese or otherwise). I lay the blame strictly at the doodstep of the United States Government. “Free Trade” has ruined this country and it’s time it was stopped.
We pay outrageous retail prices for imported red-chinese products in the USA - products manufactured by coolies, paid coolie wages exploited by their government and US corporations.
Of course,I’m not a NZ Economist dreaming up theories in the white towers of academia or government. I’m just a well educated US citizen with wide ranging business experience who has seen first hand what “Free Trade” has wrought on America.
There is one mega trend of history that is as certain as can be - we are entering the Fourth Turning. See: http://www.fourthturning.com
This bubble crisis will continue because we (leaders, pundits and the general population), are still deep into bubble psychology and expectations. Money and credits were created like mad to fill infinite expectations for a long time. Far beyond the real value generated. So now things get ‘de-leveraged’ back to real value. But that is painful and spoiled population can’t handle that. So the same bubble psychology now demands stimulation to relieve the pain, by yes, creating yet more money and credits. This will trigger another round of blow ups in a few years. That blow up can be economic, or military conflict. Until the bubble psychology is no more.
Is my pessimism a fiction? No, just read The Fourth Turning. (find it in amazon.com)
“Free trade provides cheap goods, and enables international division of labour = efficiency.”
At what cost and to whom?
Your point/s has been used as justification for “Free Trade” for decades and it has brought financial ruin to the USA. Our congress can’t even discuss trade legislation that affects the Red Chinese without having them threaten to dump US debt on the market. The USA has become a slave to Red China because of incompetence on our government’s part excused up by the mantra of “Free Trade”.
To be sure the Chi-Comms are financing the USG. Perhaps the time has come to let the USG go bankrupt so we can force reformation: “A better and stronger company (USG) will emerge on the other side of bankruptcy”.
For all you anti-free trade fans, protectionism will only make things worse. It happened in the Great Depression and caused a lot of pain.
What protectionism gets you
http://tinyurl.com/7gqccn
Free trade provides cheap goods, and enables international division of labour = efficiency. China has bought U.S. bonds etc with its gains from trade, so its nice (but predictable) for Americans to blame the consequences of their misuse of that capital on foreigners. A strong move away from free trade by the U.S. will (1)push prices up in real terms - you will have to work longer to get the same amount of stuff; (2) reduce world trade, furthering the global economic contraction, which will feed right back to the U.S.; (3)push foreigners to dump their U.S. holdings, potentially leading to default by the U.S. government.
Manufacturing is a “value added” activity. Developing natural resources,i.e. mining, farming are the only means to create wealth.
To be sure, 78 millions baby boomers are 60 or older.
Demographics will play a big role. See Harry Dent’s “The Great Depression Ahead.”
The resolution to this crisis is astonishing in its simplicity - end “Free Trade”. Until “Free Trade” is ended and manufacturing returned to the USA the crisis will continue. Remember; Obama is a “Free Trader”.
Manufacturing is the ONLY creator of real wealth.
Yes, but, on the other hand. Isn’t it true that
a) such fancy stuff as CDSs, CDOs did not exist in previous crises;
b)Nor was any of the previous crises global - not even the 1929 one;
c)Nor have national economies ever been interlinked to such a degree as they are today;
d)Nor was there a scarcity of resources in previous crises, high yields were always a possibility. Not so today; and
e)Nor was the environment at its breaking point, as it very possibly may be today. And if it is, the environmental cost of producing the growth necessary to come out of this hole might take the environment over the cliff.
So, do we really have a previous crisis that could even remotely be likened to this one? I think not.
I try to read as widely as I can on the current crisis. The number of different interpretations by informed commentators are so numerous as to be totally confusing not to mention contradictory. This is probably a function of vested interests
Having said this, there seems to be increasing consensus that the USA / Fed are making too many mistakes in their responses to the crisis. This is cause for outright alarm because just as the crisis spread from the USA so will any mistakes they make.
What to do? Create a think tank working group manned by the top commentator/s from each of G8 / BRIC countries (eg Roubini from the USA, but no bankers please). Lock them in room until they reach consensus on cause, effect and what needs to be done. Implement the resultant plan.
If this crisis comes down to every man (State) for himself then the world will need a very big fan to deal with the results
About all I have to say is AMEN, RFL! “Free trade,” the great con game to shunt riches to the upper classes around the world. All on the backs of labor that produces real assets instead of worthless layers of gambling paper with no intrinsic value.
As, e.g., the rule for semiconductor generational advances has reduced greatly in time over the years of its evolution, so perhaps has the time for great societies to exist. Perhaps we are nearing our end in less than 250 years, and that time span may well relate to the Egyptians(many more years), the Greeks( fewer years than the Egyptians), and the Romans(even fewer years) which ended long ago after much more time in existence than ours. Perhaps this advanced pace of societal failure is the price we pay for our progress?
With progress, everything in life has speeded up drastically; perhaps even the great American experiment has nearly burned itself out as a result?
Place input tariffs on goods from countries that pollute willy-nilly and treat their workers like beasts of burden. That would make for a “level playing field.” I’m willing to pay more for all this junk I don’t really need.
The United States, financially, has been out of control for years. We are starting to see the unstable nature of this now. I don’t understand how you can solve the problem of easy money with more easy money. (printing press money) I agree with another poster that free trade is also part of the big picture. As my father used to say, “there is nothing for free in this world”.
We are witnessing the collapse of that swindle known as “Free Trade”. The USG scam known as “Free Trade” has done nothing but squander our economic sovereignty, ruin our manufacturing and allow US corporations to buy coolie labor in Asia. The balance of payments (BOP) for the past ten years have been negative every year to a total of almost $5 trillion! The BOP has come due. If Prez Obama wants to “fix the economy” all he has to do is end “Free Trade”. Moreover, any of these so-called economic experts who continue to advocate for “Free Trade” are delusional fools. The BOP proves that sad fact.
See Robert Prechters “Conquer The Crash”.