Director MBMG Investment Advisory
Reflecting on our past can help improve our future
November is a time of year when many Europeans and
Americans reflect on Armistice Day, a commemoration of the end of the First
World War. Having grown up in the UK, I have a childhood memory of the
autumn turning to winter and putting on my overcoat on a frosty morning,
poppy firmly attached to the lapel.
2014 is of course especially poignant as we commemorate the centenary of the
outbreak of that dreadful war. It seems that every modern historian has
his/her own theory as to why it all began, what the implicated governments’
motives were. That debate will never be resolved, yet a few times since the
centenary commemorations began in July, it has crossed my mind what the
world was like before war broke in 1914, and how the future would have
looked if the peace had been kept.
One interesting theory, from Scottish-born Harvard professor Niall
Ferguson,1 is that if the British government had said no to war, at that
fateful cabinet meeting on 4th August 1914, the outcome would have been
different - even if all the other powers had mobilized troops.
Ferguson points out that Britain was not obliged to declare war on Germany
and without its intervention, the Germans could have quickly won the war and
created a European union, without the catastrophic loss of life on all
sides. Whilst this may seem like mere speculation, it’s worth considering
that part of the German government’s war aims was to create a European
economic association, dominated by Germany of course.2
Had that become a reality, there may not have been the level of resentment,
which pulled the delegates at the resulting Paris Peace Conference away from
the task of creating a new peaceful world, back to the demons of the recent
past. In his excellent eyewitness account of the peace talks John Maynard
Keynes’ observed that the French delegation was out for revenge for defeats
in 1871 and 1914 - led by the crusty Tigre, Prime Minister Georges
Keynes became dismayed about the future, commenting: “The proceedings of
Paris all had this air of extraordinary importance and unimportance at the
same time. The decisions seemed charged with consequences to the future of
human society; yet the air whispered that the word was not flesh, that it
was futile, insignificant, of no effect, dissociated from events; and one
felt most strongly the impression, described by Tolstoy in War and Peace or
by Hardy in The Dynasts, of events marching on to their fated conclusion
uninfluenced and unaffected by the cerebrations of Statesmen in Council.”
It makes you realize how tragic the two world wars really were when
considering where we are today. Just like in the summer of 1914, the global
economy is struggling - a look at US trade, employment and the number of
people requiring food stamps shows the current situation.
Source: FRED and US Department
Source: FRED and US Department
of Labor: Bureau of Labor Statistics
Back in 1914, the Austrian ultimatum to Serbia caused
global financial panic and a liquidity crisis on, amongst others, the London
Stock Exchange as investors rushed to turn cash into gold.4 As for the US,
the economy was in recession.5 Just as in 1939, economic woe relieved demand
for American goods after the outbreak of war.
A century later, we find ourselves in a global economic downturn with no end
in sight. Not only that, Europe is relying heavily on Germany to help out6,
while analysts call for it to reduce its intervention.7 Not only that but
today, as in 1919, policy leaders appear to be carrying on regardless of the
reality in front of their eyes, with a dismissive air of inevitability. In
spite of finally abandoning its Quantitative Easing money-printing
programme, the Federal Reserve is yet to come up with a credible solution
to, or even recognition of, the debt crisis. Like Keynes in 1919, there are
some highly credible economists shouting from the rooftops that this is an
opportunity and a necessity to start a fresh approach to the world before we
hit another crisis. Among them are Steve Keene, Ann Pettifor, James K.
Galbraith and Michael Hudson who are part of IDEA Economics8, an institute
of which I am an advisory board member.
Given that economics failed to predict the Global Financial Crisis - the
biggest economic event in generations, failed to repair the damage and still
fails to provide relief to real businesses and real people in the aftermath,
IDEA has based its approach on three basic principles: debt matters, money
matters and the economy is dynamic.
‘Debt matters’ means that stagnation and decline will continue until we
actually deal with the debt. ‘Money matters’ is the point that credit
creates money, not a central bank: continued unmanaged money creation by
banks (e.g. when lending) will continue crises and instability. ‘The economy
is dynamic’ principle is the observation that the economic theory of
equilibrium (i.e. the automatic return to normal) is not supported by either
logic or evidence.
We cannot rely on equilibrium or a third world war to solve the next
economic crisis. It’s time to change our perspective and use 2008 as a
lesson of how not to structure our modern economy. We can’t afford to let
the opportunity slip through our fingers this time.
There’s a cyclicality in debt and inequality that has tended to result in
war for as long as mankind has organized itself into competing societies - a
global conflict in the coming decades would be cyclically consistent with
this. We therefore need to break this cycle if war is to be avoided - the
proliferation implications of nuclear holocaust by themselves probably only
amount to a limited not an absolute deterrent. For the deterrent to be
absolute we need to combine a version of nuclear horror with a healthy
respect and remembrance for all those who put their lives on the line in the
belief that they were fighting wars to end all wars.
1 N. Ferguson, Virtual History: Alternatives and Counterfactuals (1997).
2 B. Tuchman, The Guns of August (1962), p.315
3 J M Keynes, The Economic Consequences of the Peace (1919)
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