History as a Guide for Current Financial Climate?

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History as a Guide for Current Financial Climate?

Postby Fat-Tailed Contagion » Wed Feb 06, 2013 12:50 pm

Hi Bogleheads:

Are there any examples in history that can help guide us in the current financial climate?

- No political opinion, I am looking to find global historical examples of what has happened when a government has intervened with stimulus after a near collapse and what the eventual consequences were.

Thank you all for the great insights in advance!

- Fatty
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Re: History as a Guide for Current Financial Climate?

Postby Grt2bOutdoors » Wed Feb 06, 2013 1:32 pm

Fat-Tailed Contagion wrote:Hi Bogleheads:

Are there any examples in history that can help guide us in the current financial climate?

- No political opinion, I am looking to find global historical examples of what has happened when a government has intervened with stimulus after a near collapse and what the eventual consequences were.

Thank you all for the great insights in advance!

- Fatty


Google "German Weimar" era. The picture with the wheelbarrow full of Deutschemarks needed to purchase a loaf of bread will astound you!
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Re: History as a Guide for Current Financial Climate?

Postby Fat-Tailed Contagion » Sat Feb 09, 2013 4:31 am

Thanks for the reply.

I read the wiki on that period.

Did you find many similarities to that period and what is going on now in the US?
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Re: History as a Guide for Current Financial Climate?

Postby alec » Sat Feb 09, 2013 9:20 am

The U.S. in the late 1930s and Japan in the 1990s. Also the southern Asian countries in the late 1990s.
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Re: History as a Guide for Current Financial Climate?

Postby Valuethinker » Sat Feb 09, 2013 11:38 am

Grt2bOutdoors wrote:
Fat-Tailed Contagion wrote:Hi Bogleheads:

Are there any examples in history that can help guide us in the current financial climate?

- No political opinion, I am looking to find global historical examples of what has happened when a government has intervened with stimulus after a near collapse and what the eventual consequences were.

Thank you all for the great insights in advance!

- Fatty


Google "German Weimar" era. The picture with the wheelbarrow full of Deutschemarks needed to purchase a loaf of bread will astound you!


There is a compression here between 1924 and the Weimar inflation, and the Great Depression of 1929, and the election of Hitler to power in 1933 (appointment actually, he was never the majority party leader). In the period 1924-1929 the Weimar economy recovered and even prospered.


The French Army occupied the Rhineland, the industrial core of Germany, because Germany fell behind on payments for war reparations for the huge damage France suffered in WW1.

The Germans responded by going on strike, and the German government financed its deficit by printing money. Not quantitative easing which is sloppily called the same thing by people who do not understand the difference, but actual printing money and cancellation of the offsetting government debt.

Hence hyperinflation.

Following an international agreement brokered by the largest war creditor, the USA, the German debts were rescheduled and the Reichsmark currency was floated, restoring economic stability. Despite political instability, late Weimar Germany was a time of prosperity and also extraordinary artistic and social developments (Bauhaus movement in particular).

Then came the 1929 Crash, 5 years later, and the world economic Depression. And then the 1931 collapse of Creditanstalt, leading to a collapse of world trade.

At which point, with over 30% unemployment, far right nationalist parties surged in German elections. But the time Adolph Hitler was appointed Chancellor in 1933, the Nazi Party had actually fallen in the electoral polls, but the coalition feared a communist takeover so Hindenberg chose Hitler as leader.

Hitler *did* respond to the economic crisis with a form of military Keynesianiasm. Tough monetary controls and huge spending on the military, plus confiscation of assets of 'state enemies' like the Jews. For a long time it worked: full employment resulted and the German economy grew, with tight restrictions on imports and a 'trading bloc' of East European nations that provided them with raw materials. However the Germany economy (see Adam Tooze's recent masterful book) became dangerously lopsided, and by 1938 was in serious trouble.

The rest is history, as they say.

In no way is the current US or UK situation similar to the occupation of the entire exporting and productive economy by a foreign power demanding repayment of war debts.
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Re: History as a Guide for Current Financial Climate?

Postby Valuethinker » Sat Feb 09, 2013 11:44 am

alec wrote:The U.S. in the late 1930s and Japan in the 1990s. Also the southern Asian countries in the late 1990s.




The US sharply cut government spending, raised taxes, and increased interest rates in 1937-38. There was a brutal economic recession which resulted.

The East Asian Crash was very very different and again the response was massive IMF instituted austerity, except for a couple of countries like Malaysia which broke with orthodoxy and came out of it rather well. Ditto China itself.


What you are thinking of, I presume, is the US economy 1939-1941, where huge orders for raw materials, food and munitions from the Allied Powers (chiefly France and Great Britain) caused the US to lurch towards full employment. Once reelected in 1940, FDR was able to get Congress, over Isolationist opposition, to pass huge rearmament acts (in particular, virtually every major new US warship in WW2 was funded by the Two Ocean Navy Act of 1941) and to enact conscription, which in turn significantly shrunk the labour force (an early 1920s baby boom meant there were a lot of 18 year old men coming into the labour market, who were sucked straight off into military service).

The story on the latter is instructive. Republican isolationists in the midwest, led by Senator Taft, were strongly opposed to conscription, and presidential candidate Wendel Wilkie was advised to go to the country on an anti-conscription platform (it was not popular with the public).

Wilkie refused, saying that the US needed conscription in a time of international crisis, and he and FDR agreed on this point.

It was, and is, a very moving example of a political candidate forswearing political advantage to do what is right for his country. Wilkie is a footnote in history but deserves to be remembered for more than his affair with Madame Chiang Kai Shek!

On Japan, yes they tried fiscal stimulus and on big scale.

A few observations:

- the nature of Japanese political economy means fiscal stimulus tends to be badly misspent. Basically the ruling LDP (the government of Japan almost every year since democracy was restored in the 1940s) are heavily in bed with the construction industry which is heavily in bed with the Yakuza. Bribes in the billions. Rural constituencies got huge amounts of concrete poured in 'bridges to nowhere'. Construction was 10% of Japanese GDP ie twice the level of the average western economy

- Japan has peculiarly bad demographics-- a shrinking workforce and almost zero legal immigration, hence a rapidly aging population, also very little public support of the unemployed or retired, so that makes people extremely conservative about spending money. Japan's government is still relatively small compared to the whole economy (along with that of the USA) vs. other developed nations

- structurally no other country has faced such a big challenge in its traditional markets from the rise of China in manufacturing (manufacturing exports of consumer goods are a relatively large part of Japanese economy and look at the problems of the likes of Sony against the Chinese and Koreans). Note how Hyundai is clobbering Honda and Toyota in the US car market, etc.

- Japanese monetary policy was never sufficiently accomodating. Bank of Japan was never literally prepared to 'print money' (ie buy government bonds with printed currency, then cancel the bonds). So no one has ever believed (UNTIL NOW) that they might actually target a level of inflation like 2, 3%, say

I think we could say fairly that Japan has probed the size limits of (non wartime) fiscal stimulus, but a lot of the peculiarities of Japanese society and economy tended to damp the impact of policy measures.

Nonetheless Japan remains an interesting conundrum.
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Re: History as a Guide for Current Financial Climate?

Postby Valuethinker » Sat Feb 09, 2013 12:03 pm

Fat-Tailed Contagion wrote:Hi Bogleheads:

Are there any examples in history that can help guide us in the current financial climate?

- No political opinion, I am looking to find global historical examples of what has happened when a government has intervened with stimulus after a near collapse and what the eventual consequences were.

Thank you all for the great insights in advance!

- Fatty


OK we have the early 1930s when the reverse happened. There was an effective collapse, and governments cut back sharply on spending. France, Britain USA all had brutal depressions. The period 1929 to about 1932, with FDR assuming power in March of 1933 (inauguration was later then) stabilizing the bank panic by closing the banks, etc.

Then things changed. The first thing was to abandon the Gold Standard. As each country in turn abandoned the Gold Standard (first Britain, then the USA, then France last in 1935) its economic recovery began.

Roosevelt's early New Deal policies were small by modern standards, but they did alleviate some of the desparation of economic disaster. The Civilian Construction Corps gave meaningful work to hundreds of thousands of able bodied men, for example. Ditto Dust Bowl relief. You only have to read John Steinbeck to realize how thin these threads were, but they were real. The US economy began a gradual recovery from hitting bottom in 1930-31.

However in 1937-38, FDR, concerned about his standing in the polls and Congressional Elections, cut back spending sharply at the same time as the Fed raised interest rates. 1938 saw a return to a brutal recession, even Depression. What changed after that was global rearmament, which stimulated US export industries, and then post 1940, US domestic rearmament-- massive fiscal stimulus.

In France they staggered from political crisis to political crisis, and eventually Leon Blum's Alliance Populaire came to power and abandoned the Gold Standard (the Franc Fort policy). There were then crippling conflicts with trade unions over attempts to lengthen working hours and cut pay in this period. France's industrial base was left critically weakened, when it became clear by 1938 that another war with Germany was inevitable.

The rapid collapse of France in 1940 in 6 weeks against Hitler can be traced to the social and economic divisions of France in the 1930s, as well as to the dearth of young men-- the fathers of the 18 year olds of 1939 had died in the trenches of 1914-1918, a demographic effect which can still be seen to day in the population of France-- 3 million men, or something like half of those aged 18-35, died in that war.

In Britain the Labour Government fell and a National coalition government was founded. The first thing the government did in 1931 was abandon the Gold Standard. Relief for the unemployed was introduced but there were major cutbacks in government spending-- the Royal Navy fleet mutinied over pay that had not been paid.

What caused the British economic recovery was a change in mortgage lending laws, which allowed middle class people like teachers, civil servants and white collar office workers for the first time to buy houses. Moving out along the suburban electric railways and subways, ordinary Britons for the first time could buy their own homes. The results around prosperous southern cities like London was extraordinary- a physical doubling in size. Endless estates of semi detached houses, with separate garages and rounded bay windows. During the 1930s the British economy did better than most of its allies, however deep structural issues (the decline of textiles, steel, shipbuilding, coal) caused great poverty and suffering in northern industrial cities-- it really was a divided nation (and still is, in that way).

Salient statistic: in 1938 Britain built 300,000 houses. In 2007, during a property boom with a population c. 50% larger, they built around 220k. The firm of Taylor Woodrow, started in 1924 by a 17 year old (his uncle had to be the company's first director, as he was too young) has since then built over 2 million homes or about 1/15th of all the houses in Britain.

So in conclusion:

- the only country really to try a Keynesian fiscal stimulus was Nazi Germany, and it worked, but it seriously distorted the German economy- -Hitler in 1939 was in for serious domestic unrest if he had not gone to war

- the US and UK dabbled in it, but never on the scale that really would have changed the situation. UNTIL rearmament began in earnest.
Then the governments spent their money, raised taxes to get more, and borrowed even more. Full employment resulted


On Monetary Policy inflation was low or negative throughout the 1930s, essentially globally.
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Re: History as a Guide for Current Financial Climate?

Postby Valuethinker » Sat Feb 09, 2013 12:20 pm

Many will ask my sources.

History of the USA over that period-- good balanced treatment of politics, economy, society

Freedom from Fear by Paul Kennedy.

http://www.amazon.com/Freedom-Fear-Amer ... +from+fear

For political history of the 1930s (his economic explanations are botched).

The Dark Valley by Piers Brendan

http://www.amazon.com/Dark-Valley-Panor ... 0375708081

Between Two Fires by David Clay Lange

http://www.amazon.com/Between-Two-Fires ... clay+lange

fantastic for the flavour of the world crisis.

For economic history

The World Economy in Depression by Charles Kindleberger

http://www.amazon.com/World-Depression- ... ndleberger

The Return of Depression Era Economics by Paul Krugman (particularly good on the 1938 Asia Crash) and Krugman's excellent blog. However the pre 2008 edition of this book is actually *better* because it doesn't operate with the hindsight of the 2008 crash-- it's more purely about Asia and contagion of financial crashes.

http://www.amazon.com/Return-Depression ... +economics

On monetary factors, Barry Eichengreen is the doyen of economic historians

http://www.amazon.com/Golden-Fetters-De ... d+standard
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Re: History as a Guide for Current Financial Climate?

Postby nisiprius » Sat Feb 09, 2013 2:14 pm

I'd say Dickens was relevant:
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way— in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.
The "current" financial climate is always seen as unique, unprecedented in history, etc. Indeed, if you are trying to sell stuff to people and you want to break them lose from "staying the course," which isn't very lucrative for the financial industry, you want them to believe that something utterly new has happened that requires that they swap out all their old investments for the new ones appropriate to the times.

The chaos of today is always compared to some fantasized time in the past when things were "normal." They never were.
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Re: History as a Guide for Current Financial Climate?

Postby Fat-Tailed Contagion » Sat Feb 09, 2013 2:59 pm

Thanks for the thoughtful replies.

Most of the outcomes of similar past experiences seem to be fairly unfavorable, but maybe this time it's different?
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