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2008. Learning from (ancient) history.

Posted by: Brian Dennehy
Tags: greed, minsky
Membership level: Free
 
Last week I said you can’t blame greedy bankers for the 2008 debacle.  Others make the point more technically and blame the introduction of modern banking “in the early 17th century” for financial crises. The truth is not as simple, and more deep-seated.
 
Hyman Minsky highlighted that debt and financial crises go hand in hand. But this is not a recent phenomenon and doesn’t require the bogeymen, the greedy bankers, of modernity.
 
Ancient civilisations regularly got saddled with too much debt, but crises appear to have been mostly contained. The authorities did this by writing off the debt of citizens, the first examples being recorded as long ago as 2400 BC in Mesopotamia.
 
Such debt cancellations stopped the wealthy who granted such loans becoming too wealthy (so wealth inequality was contained), prevented civil unrest, and kept “the workers” working.
 
A bit more recently (378 BC) Athens and nine other Greek city states defaulted on their loans – Greek financial crises have a great pedigree.
 
Too much cheap money. Debt exploded.  Speculation rife.  Rich got richer, poor didn’t. Welfare spending rising. Sound familiar? 2008? 2018? No. Rome AD 33.
 
The debt bubble popped of course. There was a credit crunch, debtors went to the wall, prices collapsed.
 
The latter led to profound changes which do ring bells today, and for the years just ahead. The sprawling empire and free trade network began to break down, and slowly the walled cities of the Middle Ages began to emerge – increased localisation – in today’s terms smaller sovereign states.
 
This decentralisation eventually meant the Italian city-states of Milan, Venice and Florence ferociously competing with one another, and driving rapid progress, just as in the city-states of Ancient Greece centuries before.
 
When trust breaks down in a political structure, when people find there is no longer any benefit to them, they want to take back control – they want the centre of control closer to home, and more accountable.
 
Trust breaks down. Which brings us back to today. 
 
To paraphrase Leigh Skene of TS Lombard, globalisation has benefitted Western banks and emerging market workers at the expense of workers and voters in Western nations, who saw their prosperity fade at the same time. As such globalisation sowed the seeds of its own destruction says Leigh, as it eroded the role of democracy within Western nation states.
 
Fading prosperity also makes for less tolerant people, who become increasingly susceptible to demagoguery and simplistic explanations. Or, as I first starting quoting nearly 10 years ago, “It is easy to agitate a man with an empty stomach” – a paraphrasing of William Cobbett in the early 19th century.
 
But fading prosperity at the time of great globalisation is more likely coincidence, not causation. Indeed, why would so many immigrants be converging on the Western world if globalisation had been a wide-ranging success?
 
The reasons for Western economies not growing to their potential are too much debt; poor demographics; and new technology. Though the latter three causative factors have long been in place (and certainly were trends preceding 2008), their consequences have been exacerbated in recent years by the negligence of over-reaching central banks and clueless politicians – on which see last week’s Greenspan and The Age Of Ignorance.
 
You can’t alter demographics. And it will be difficult to control the march of the extraordinary technology which is emerging – though some will try e.g. Macron. So, you must deal with the overwhelming level of debt. (The latter also requiring that we start living within our means, but that’s another long story).

I sense a nostalgia for Mesopotamia.

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Topic: Market commentary


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