– 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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Extremely interesting comments.Have any of you heard of a country called Sri Lanka. The economies of all developed countries have been effected by the credit tsunami, and the eventual after effects.Sri Lanka has been an exception, it has a war, and nearly 20% are on welfare,the highest tax rates,indirect and direct, almost 55%, the most corrupt politicians, who rob 80% of the taxes, along with the tax officials pocketing the tax.Sri Lanka has ben able to match the mighty USA dollar, when every currency aroung the world have lost nearly 25 - 35% against the USA $. Can I recomend our Central Bank Governor to help out Paulson
To cite the Victorian era as one of great prosperity is
certainly valid in so much that a number of people did
prosper . But the price for that prosperity was very
high. Child labor, slavery in the Americas, intolerable
working conditions; excessive use of gin and opiates
and a host of diseases, such as black lung, associated
with those intolerable working conditions. Moreoever,most
of the world’s population lived in Asia, and conditions
for most people in that part of the world during the
glorious rule of Great Britain, defy description. The
wealthy of England did not hesitate to take advantage of
those conditions either. Economic history is very illusive and more power to those who can nail it down.
International trade on a level and fair basis is one thing, however the giveaways perpetrated by the USG is another. “Free Trade” as practiced by the USG has done nothing but depress US wages and realign management/labor relationships in this country. One hundred years ago we had the robber barons; today we have “Free Trade”. There is no difference.
I will trade my briefcase for hardhat and pair of workgloves. Also butter churn for axe. Call BR-549.
With a CFD debt almost 80% to the GPD of the western economies and the poorest countries all together. There is no lender of last resort left. And with the Pareto distribution of wealth stating that 10% of the world holds 90% of all riches the top10 richest people are by definition the same ones who are holding the debts. Since their credit has run out: they fail.
Most of the media commentary on the economic crisis assumes that we are experiencing some sort of cyclical phenomenon. But a more reasonable view is that we are experiencing a unique event, brought on by America’s choice to dismantle our manufacturing base, coupled with the reality of finite and dwindling fossil fuel supplies. Stimulus packages and tax cuts will not fix those things.
Sorry sir:
I do not know what you are trying to say? Is it a psychological problem with the human race or is it just plane economics? I buy, you sell? Economics is rather simple, I buy and you sell or vice versa? I work, adjust my debt to asset ratio and rely on the “State”, to take care of my social needs, correct? You give me examples of simple social anthropology but without the correct analysis.
Human emotions have more to do with economics,then the theory of economics, hence human psychology determines economics? Now I sound like you,confused? However, to bring in ancient economic patterns is absurd! But keep trying, because I will not buy a new car today, eventhough, I can afford one simply because I will make my present car last another two years, simple?
Fischer seems to have ‘borrowed’ much material from Elliott. While I haven’t read Fischer’s work, I wonder if Elliott was appropriately credited?
“Again, history doesn’t repeat, it rhymes”: Mr. Saft, if you’re going to quote or paraphrase Mark Twain, perhaps you should credit him, as well.
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)
Sigh, It’s all Shenanigans I say. It seems that we as Americans have a problem with not wanting to hear the bad information. And even if we do, most of us are too ignorant to look into it or even consider it a problem. We as a people have too much of a comfortable separation from those who are shit-out-of-luck because of our over-lending and creation of money out of thin air causing massive inflation. Looks to get worse thanks to the stimulus package…it has to be repaid somehow. Unless of course you are one of the 2.6 million who are now jobless…but it’s only a figure, a statistic. It seems that is what our reality of life boils down to, statistics, where if 2.6 million of 260 million people are jobless, that’s only 1% and is negligible (U.S is somewhere around 300 million I think…). whatever I guess…maybe we can wish the debt to other countries and the Federal Reserve away if we try hard enough?
[...] know what’s ahead. The media prophets and economic seers are telling me it’s probably not gonna get any better- even with the almighty Obama taking office in two short weeks. So what’s a guy to do? The [...]
As we count the suicides caused by Bernie Madoff, perhaps we should also start a list of those depressed beyond rescue by reading too much James Saft.
For those of you truly unfamiliar with the American psyche (or what passes for it after 30 years of Conservative brainwashing), I want to point out that most of my fellow citizens are sleep-walking into, through and around this crisis. Ours is not the European or Chinese reaction. Here, if you lose your job, your house, your retirement, your stock portfolio, it is still believed to be a personal failing. There’ll be no riots, no simmering outrage, no electoral revolts (though there was that Obama thing — I’m still reeling). Historical cycles or no, we Americans have a way of muddling through. That’s not to say that’s a virtue, personally I think it is the opposite. The problem is one of history. We’ve always been able to run from our failures here in the USA. Screw up in New Jersey? Move to California. Go bankrupt? Wait seven years and start over. Contrary to the prevailing mythology, it was the Indians who were a settled people, and the white newcomers who moved around like gypsies. We still do. We never admit a mistake. And even if the world tumbles into a depression because of our foolishness, we’ll never accept the blame. Will lessons be learned from this recent debacle? I doubt it. We’ll keep juking and feinting until we find another bubble to blow up. So, watch out world. In a few years when you hear Americans say they’ve got a great new investment vehicle for you, Run!
Yep, free trade agreements have got to go. The US has been sponging off the labour of others for too long.
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.
- Posted by Walter Amos
That’s a great idea, but we can’t stop there — countries should also be encouraged to add tariffs to counteract subsidies other countries give to products. Because let’s face it, not even Obama has the political strength to end subsidies.
Your point/s has been used as justification for “Free Trade” for decades and it has brought financial ruin to the USA.
- Posted by RFL
Actually, what brought financial ruin the USA was that when Americans were offered cheaper goods they didn’t say “great, I’ll take that $200 I saved on a TV and invest it wisely, or help my brother start a business, or do something else that’s useful with it”, they said “great, now I can have 2 cheap TVs!” So there was no benefit. Economists argued there was a benefit because someone with 2 TVs is better off than someone with 1 TV, but obviously that’s codswallop.
The Chinese have exploited the US by letting themselves be exploited. Now they will turn their factories to producing things for the Chinese. The dollor will be worth less than the Zimbabwean dollar in a year.
Free trade is not the problem. Ross Perot talked about ‘the great sucking sound’ of all the jobs going to Mexico. About three years later with Clinton at the helm, the U.S. hit what was considered negative unemployment (a rate so low that even Burger King was running literacy programs to find anyone to work for them). Any organization takes its lead from the top. The U.S. has endured eight years of incompetent thieves running the show, and it is a miracle that the country still exists. When Clinton left, the U.S. was on track to having zero debt, a situation that would have made it relatively easy to fix any weaknesses in the system (social security, medicare, etc).
The problem isn’t necessarily a ‘free trade’ issue, but is a ‘fair trade’ issue. The Asians support their industries with non-tariff barriers; whereas, the U.S. markets are mostly open to foreign goods. For example, the South Korean auto market is over 95% domestic (Korean), and it isn’t because their industry is that competitive; at the same time, Korean automakers shipped hundreds of thousands of cars into the U.S. The U.S. serves as the consumer of the world’s goods. When the U.S. economy goes down, the rest of the world goes down. If the U.S. can’t turn it around quickly, or if the Chinese doesn’t open up their markets, then this downturn will last a long time.
The answer is to go back - let vendors make a 35% profit like in the old days — BEFORE lunatic Ronnie Raygun and his despicable global villainess, Iron Lady Margaret Thatcher put us in this global mess.
Before Raygun, the business world’s principal was ‘you mark it up, I mark it up, we all make a buck…” NOW after Raygun killed local economies in a game of King of the Hill, the mantra is, “you skim it down to the bone, I prices down to bone and hope we sell a lot of ‘em.”
It ain’t working and never did.
In fields such as medicine and astronomy, reality is now understood to be more complex than earlier reductionism and “essence”. With scientific methods of empiricism, practical knowlege advances and benefits follow.
The politics of economonics - who starves, who gloats - seems to ensure that understanding and debate is at the level of butchers practicing medicine, or astronomers reading the entrails of goats.
David Hackett Fischer sounds like a student of the French Economic Historian Fernand Braudel. I think Braudel founded the discipline of historical economic analysis. He died at least ten years ago but his popular series – “The History of Capitalism” is still in print.
Braudel mentions that there are many frequencies of economic “wave”. He noted one called a “Kondratiev” after the Russian economist - a Marxist by the way - that means a cycle of about one hundred years. It’s been a long time since I read Braudel’s History of Capitalism but the “Kondradiev” stays in my mind because Braudel used the term to refer to a late Middleages period of economic decline that lasted about 100 years. There was no reason for the decline. The Spanish bankruptcies (three in a row) Braudel attributed to the massive amounts of gold being imported from the new world and the enormous cost to the treasury of maintaining the largest empire on the globe. There was just too much of gold in circulation. Can’t be sure about the dates because it has been a long time since I read the series.
An irony, Braudel also mentioned, about the plagues in Europe was that they were generally followed by a wave of prosperity. Perhaps old societies, rather like our own now, tend to stratify with wealth being locked up in a few powerful hands. The plagues seemed to loosen their grip on resources and the money and resources start to move again. The European economies had miserably inefficient ways of tax collection. It wasn’t just the French Ancien Regime that used Tax Farmers and evidently the wealthy then knew how to pass the burden to the lower classes such that it guaranteed that the taxes fell heaviest on those least capable of paying them. That has a familiar sound to it doesn’t it? It is a very effective way for the wealthy to kill off the up and comers and insure their own inherited wealth and social status. Those old aristocrats loved their restricted gene pools.
But Braudel noted something else about societies that undergo dramatic shifts of power. At one time in the early Renaissance (again I can’t remember the exact period) the Venetian state lost most of it’s aristocratic families due to war and/or plague (can’t quite recall the reason either) which allowed the second tier below them - the affluent merchant class to fill their places very quickly. In spite of that mass replacement, the new “grandees” tended to act and vote identically like the former aristocracy. Braudel also noted that every society – no matter the economic or political model – tends to maintain an elite class of roughly five percent of the population.
I think the people screaming for an end to free trade are talking a little too late. If we don’t trade openly we will probably bring back the days of warfare to acquire and preserve resources and colonies. But isn’t that Iraq? No economy seems ever in history to have been able to go it alone and feed only their own needs and consumption. For one thing they never control all the resources they need to make a high standard of living. Geography has a say in the development of an economy. There is no rapidly growing economy unless there is substantial foreign trade. The US is somewhat stagnant in population growth. The developing world is growing people very rapidly. High trade barriers here will be met with high barriers over there. And actually there are many developing countries that would like the US and the rest of the developed countries to back off. How many times has the developed world complained about the US agricultural industry tending to destroy their own means of production and its attempts to control the seed stock as well through patent protection for genetically modified seeds?
If there is no free trade than what would be the point of trying to recreate a manufacturing base in this country? Not even 1.3 billion Chinese can consume everything they produce.