History is Only Interesting Because Nothing is Inevitable
Another brilliantly researched piece by Morgan Housel bringing out a simple yet hard to believe reality – “hindsight makes most people look dumber than they actually were.” In this blog, Housel shows that the depression seemed nowhere close to being inevitable even days prior to the bust just as much as the preceeding boom years were barely foreseen prior to that. He does that by referring to numerous press articles/headlines from those times which fascinatingly showed an absolute lack of anticipation of what was likely to follow.
Just last month, Bob Prince who runs one of the largest hedge funds at Bridgewater Associates suggested that the boom-bust cycle might be over given the central banks’ approach to monetary policy. Apparently, Irving Fisher, the famous Yale economist is known to have made a similar remark, just days before the beginning of the Great Depression – Housel attaches a newspaper cutting of that now infamous pronouncement. And Housel’s point is that we might attribute this to irrational exuberance in hindsight but back then in real time the idea could have seemed perfectly rational.
“The notion that recessions had been eliminated is easy to laugh at. But you have to consider three things about the 1920s that made the idea seem feasible.
One is that the four inventions that transformed the 1920s – electricity, cars, the airplane, and the radio, and – seemed indistinguishable from magic to most Americans. They were more transformational to the economy than anything since the steam engine, and changed the way the average American lived day to day than perhaps any other technology before or since. Technology that spreads so far, so fast, and deeply tends to create an era of optimism, and a belief that humans can solve any problem no matter how difficult it looks. When you go from a horse to an airplane in one generation, taming the business cycle doesn’t sound outrageous, does it?
A second factor that made the end of recessions seem feasible was the idea that World War I was the “war to end all wars.” The documentary How to Live Forever asks a group of centenarians what the happiest day of their life was. “Armistice Day” one woman says, referring to the 1918 agreement that ended World War I. “Why?” the producer asks. “Because we knew there would be no more wars ever again,” she says. When you believe the world has entered an era of permanent peace, assuming permanent prosperity will follow isn’t a big stretch.
A third argument for why prosperity would be permanent was the diversification of the global economy. Manufacturing was to the 1920s what technology was to the 2000s – a new industry with big wages and seemingly endless growth. But unlike technology today, manufacturing was incredibly labor-intensive, providing good jobs for tens of millions of Americans. A new and powerful industry can create a sense that past rules of boom and bust no longer apply, because the economy has a new quiver in its belt.”
Whilst there were some who reckoned that the stock market was ‘overpriced’, what transpired soon after was beyond anyone’s imagination:
“Over the next three years the Great Depression put 12 million Americans out of work.
The stock market fell 89%, reverting to levels last seen 36 years prior.
GDP fell 27%.
Prices fell 10% per year.
Nine thousand banks failed, erasing $150 billion in American checking and savings accounts.
Births declined 17%.
Divorce rose by a third.
Suicides rose by half.
The depression gave rise to Adolf Hitler in Germany, setting the course for a world war that would go on to impact nearly every aspect of life we know today.
It was, without question, one of the most consequential events of modern history. And when we look back at what people were thinking before it began, the question remains:
Did they know?
Did they have any clue?
Were they blind to the inevitable?
Or did they just suffer a terrible fate that wasn’t inevitable?”
In the same vein, no on couldn’t predict the boom periods that followed World War II, or the 1987 crash or the global financial crisis in 2009.