Time Machine

Imagine that we are now entering a Time Machine and being transported back in time to 1937, the mellow tunes of Once in a While by Tommy Dorsey fills the dance-halls as the youth are waltzing cheek to cheek on the dance floor. Already eight years have lapsed since the Stock Market crash and the Great Depression that then ensued. Despite massive fiscal stimulus, despair and long-term disappointment amongst the populace remains unabated. Consumer spending is also considerably lower compared to the previous decade of the roaring 20s. There's wide spread discontent in Europe, people are worried about their livelihoods, their security and the rise of political extremism. In this climate of great uncertainty consumption and investment have been put on hold.

The discontented populace have punished the mainstream political parties of the day and in protest, to their own detriment, the electorate has propelled charismatic despots to power. In Italy, leader of the National Fascist Party, Benito Mussolini governs. The German people, hit hardest by the Great Depression and where discontent runs extremely high, are misled by another demagogue who they wrongly believe will be their saviour. Consequently, the German electorate put the despot fascist leader Adolf Hitler in power.

We know how this all ends. The reality is that economic recovery came only during a period of unprecedented fiscal and monetary stimulus brought on during and immediately following the end of world war two. But it also came at an unprecedented human cost; 60 million lives were lost in the world's last conflict and much of Europe and Asia lay in ruins.

Robert J Shiller, professor of economics at Yale University and winner of the 2013 Nobel laureate in economics, believes that the current situation is not nearly so dire, however, he believes that there are some parallels, particularly to 1937. “Now, as then, people have been disappointed for a long time, and many are despairing”, according to Shiller, “They are becoming more fearful for their long-term economic future”.

Perhaps this may be the reason why loose monetary policy, is failing dismally to get the economies out of the quagmire. Fear and insecurity are the enemies of consumption and investment, irrespective of whether money is cheap. In a climate of job insecurity and uncertainties, those that have the capacity to spend tend to do the reverse and hoard cash. Economists say that the velocity of money, the rate at which money flows from one transaction to another is low. So when we have low velocity of money, aggregate demand is also likely to be feeble. This in turn results in excess inventory overhangs. Consequently, businesses scale down their operations, which results in a fall in investment, thereby putting more people out of work and we end up with a self-perpetuating cycle.

Shiller believes that long term economic insecurity not only puts the brakes on consumption and investment but it can also lead to something even more dire, war. “For example, the impact of the 2008 financial crisis on the Ukrainian and Russian economies might ultimately be behind the recent war there,” claims Shiller.

Certainly, economic data supports the view that both Russia and its bordering former colony, the Ukraine, enjoyed buoyant economies during the period from 2002 to 2007. During this five year period Shiller cites that real per capita Gross Domestic Product (GDP), which takes into account the average GDP per person in the economy, in Russia expanding by 46 percent and 52 percent in the Ukraine. “That is history now: real per capita GDP growth was only 0.2% last year in Ukraine, and only 1.3% in Russia,” said Shiller.

When you get spectacular economic growth followed by a sharp downturn, that generates widespread disappointment, which can then manifest itself into discontent, civil protest, anger, riots and civil wars. With respect to the Ukrainian crisis, Shiller believes that it was the deteriorating economies of Russia and the Ukraine that led to the discontent and protests, which descended into a civil war and Russia annexing the Crimea and supporting the separatists.

However, the despair that has been driving the discontent is not exclusive to Russia and the Ukraine since the financial 2008 crisis. This kind of despair that was prevalent in 1937 is also visible in many economies today. Bill Gross, a founder of bond giant PIMCO has coined this despair today as, “the new norm,” which is synonymous with economies in stagnation. Think of a swamp, stagnant water, it is a breeding ground for virulent dangers, warns Shiller. Indeed, just like in 1937 we have a discontented populace and the rise of political extremism, be it separatism, nationalism or anti-Semitism and the ultra right

But just like in 1937, are we truly years away from a major war? Might a ruthless leader, to save his skin, exteriorise mass anger onto a manufactured foreign enemy? Surely today the likelihood of that occurring is fairly remote due to the advent of trading blocs like the European Union (EU). The EU has triumphed trade, cooperation and peace amongst its member states over war. Moreover, international bodies and watchdogs have been incorporated to foster global trade, security and economic stability. Nevertheless, rather than applauding integration and cross border trade as a means of fostering peace there is a political movement away from it. Anti EU sentiment is rising, separatism movements are proliferating and even trade with Russia is being dismantled over the Ukrainian crisis. Perhaps we should be mindful of the lessons of history.