Some tomes on financial crises blame the introduction of modern banking in the 17th century for subsequent financial crises. The truth is not as simple, and more deep-seated.
American economist 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? This is Rome, AD 33.
The debt bubble popped of course (as would the stock market if there had been one in those far off times). There was a credit crunch (even the credit worthy were unworthy), debtors went to the wall, and 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.
It is not unreasonable to make the point that globalisation has benefitted Western banks and emerging market workers at the expense of workers and voters in Western nations, who saw their prosperity fade. As such, the argument goes, globalisation sowed the seeds of its own destruction, 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 we first started quoting more than 15 years ago, “it is easy to agitate a man with an empty stomach” – a paraphrasing of William Cobbett in the early 19th century. The election of Trump is just the latest example of this phenomenon – it was not an isolated global case, and this trend is far from over.
Yet, fading prosperity at the time of great globalisation might be as much coincidence as causation. Indeed, why would so many immigrants from emerging economies be converging on the Western world if globalisation had been such a success?
Other obvious reasons for waning prosperity are also well understood. Western economies not growing to their potential due to too much debt; poor demographics; and new technology. Though these factors have long been in place, for decades, their consequences have been exacerbated in recent years by the negligence of central banks and clueless politicians – on which see this blog from Greenspan and The Age Of Ignorance way back in 2018.
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. So, you must deal with the overwhelming level of debt. This doesn’t just mean reducing the level of existing debt, but also that countries start living within their means, or the debt will just begin re-accumulating.
And if action isn’t taken on both counts, something big will go pop. Sadly, most fundamental (revolutionary?) change is born of ugly crises.
Do you feel a longing for Mesopotamia?