The last decade saw a stock market boom, but rekindled memories of the 1930's

It was not a good decade, not from an economic point of view, but from a stock market perspective it was an outstanding decade. Does the latter foretell a change in fortunes for the former, or is it the other way round?

Article updated: 31 December 2019 1:00pm Author: Michael Baxter

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It’s an overused quotation, but I am afraid I am going to join the legions of scribblers who cite it; 'It was the best of times, it was the worst of times.' Dickens was referring to London and Paris during the French Revolution when he penned those words. But a Tale of two Cities could be tweaked and turned into a Tale of two Worlds.

In a funny kind of way, the decade of the 2010s began in the autumn of 2008, just as the 1930s began in October 1929. The 2010s were defined by the banking and financial crisis which hit a kind of Minsky Moment in 2008. (Named after the one economist who had provided a theoretical framework to explain what happened.) The 1930’s were defined by the infamous Wall Street Crash of 1929.

The two disasters were comparable. Both were on an enormous scale, both followed a period of rising inequality, and in both cases, prior to the crash, corporate profits to GDP were sky high, meaning, of course, that wages to GDP were exceptionally low.

Maybe, the difference can be pinned down to the reaction of central banks.

Post 1929, there was a collapse in the US banking system, banks went bust, many people lost their money. Andrew Mellon, the then Treasury Secretary is supposed to have said: “Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate.” As a consequence of the banking collapse, the money supply suffered severe contraction. The Great Depression followed. In 1930, US Congress passed the ‘Smoot–Hawley Tariff Act’ which imposed tariffs on 20,000 imported goods. As a result, an era of protectionism followed. In the UK, a lousy Chancellor, going by the name of Winston Churchill, ignored the advice of his advisor, a certain John Maynard Keynes, and took Britain back into a gold standard. He once said: 'If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.' The fact is, perhaps the greatest orator this country ever produced ignored one of the finest minds this country ever produced, and things got worse.

Did the Great Depression lead to the Second World War? At a superficial level you can lay the blame for the War at the Treaty of Versailles, but it is clear that fascism was in ascendance across much of the world before the war, the German Nazi ideal had enormous support in both Britain and the US, and the economic hardship, worsened by protectionism, provided the foundations. Protectionism has another, possibly more serious, consequence. As a general rule, countries that trade with each other don’t declare war on each other. It’s the point that supporters of tariffs overlook, trade is a bringer of peace.

Compare with the 2010s. The banks were bailed out (Gordon Brown’s role in this was critical), as a result millions of citizens worldwide didn’t lose their money. Central banks cut interest rates to record lows and in a further attempt to boost the money supply, introduced quantitative easing, or QE.

The rationale behind the banking bailout, low interest rates and QE, was poorly communicated. Governments from Germany, to Britain to the US, imposed austerity, partially cancelling out the benefits of low interest rates. In combination, this sowed the seeds of social discontent.

In the UK and US, employment hit new all-time highs, yet growth in real wages saw an appalling performance. Asset prices soared while real wages stagnated. Corporate profits boomed, but investment waned. Productivity drifted in a very low gear, sometimes in reverse. It was the best of times, it was the worst of times.

The FTSE 100 has increased by around a half since 2010. Factor in dividends, and an investor who tracked the FTSE 100 from the beginning of the decade and reinvested dividends would have roughly doubled their money.

The S&P 500 grew almost five-fold. The FTSE 250 saw a comparable performance, the NASDAQ composite, increased seven-fold. Shares in Apple increased 10-fold, at Amazon they were up around 18-fold. Shares in NVidia (up 15-fold), Tesla (more than 20-fold since the 2010 IPO) and Netflix (up 30-fold) all saw an extraordinary performance. But then smart phones (Apple), online shopping and the cloud (Amazon), neural networks (NVidia), EV and lithium ion batteries (Tesla) and video streaming (Netflix) were surely the products of the decade.

But as the decade matured, we saw the rise of political extremes, protectionism began to rear its ugly head and fascism now threatens to return. A deeply polarised media leaves us with little balance; yet in such a climate, the BBC comes under criticism from the left and right; I doubt it will survive the 2020s, leaving the door even wider open to the dark forces of fascism.

In the 2019 election, the so called metropolitan elite, alarmed by the spectre of rising inequality, voted in their droves for a party that promised higher taxes, while in the Labour headlands, life-long Labour supporters voted for a party that truly did represent the elite.
The lessons of 1929 that were recalled post 2008 are slowly being forgotten.

The best of times sees booming asset prices; the worst of times sees the rise of political extremism.

Climate change threatens to exacerbate divisions, but you only need to observe the hate aimed at Greta Thunberg, to see what a daunting task lies ahead of us in the battle to save the eco system that defines the modern planet. All but the deluded accept that human made climate change isn't real, but the deluded are vocal and maintain influence.

As the fourth industrial revolution gathers momentum, the challenges will grow. Jobs will be lost to automation, people will rage against the machine, the Luddites may return, inequality may grow, and climate change threatens to reach a tipping point from which there is no return.

But the fourth industrial revolution could herald an age of prosperity, automation promises to remove the tedium from work and even if it achieves nothing else of macro significance, the convergence of the IoT, data and AI could eliminate waste — food that goes uneaten, energy that is generated in optimal conditions by renewables that is currently unused, cars that spend 95 per cent of their time parked.

If we play it right, we could party like it was VE Day in 1945, investors and workers could become one and the same, and the good times begin. Or we could descend into the kind of madness that defined 1914 and 1939.

And we can all play a role and that role lies in us all creating better understanding for ourselves. Fact-check what we read or hear, especially if what we read or hear confirms our pre-held beliefs, and remember the words of Stephen Hawking; 'The greatest enemy of knowledge is not ignorance; it is the illusion of knowledge.'


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

 

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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