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A 25 Year Recession?

Matthew Lyons draws a rather sobering historical parallel in his latest Marketwatch column:

In retrospect, it wasn’t hard to see that the markets were becoming dangerously unstable. Germany had just adopted a new monetary system, and Europe was being flooded with cheap German money. Greece had just signed up to a monetary union with Italy and France but was struggling to hold it together. Financial markets had been deregulated. New technologies were transforming production and communications, allowing money to move across borders at lightening speed. And a massive new industrial power was flooding the world with cheap manufactured goods, blowing apart old industries. When it all fell apart in an almighty crash, it was only to be expected.

A prophesy for London, New York or Berlin in 2012? Not exactly. It is a description of Vienna in 1873. In that year, in one of the great crashes of all time, the Austrian markets triggered collapses across Europe, swiftly followed by an equally spectacular collapse in New York. It was the start of what economic historians call The Long Depression: a prolonged period of volatility, unemployment and slumps that lasted an epic twenty-three years, only finally coming to an end in 1896.

I have been researching that episode for my new e-book “The Long Depression: The Slump of 2008 to 2031.” The parallels with our own time are fascinating. German unification, and the adoption of the gold standard, had led to a boom in that country, and cheap German money had flooded Europe. Greece had just joined the Latin Currency Union, an ill-fated attempt to merge currencies across Europe. Banking had been deregulated, which was partly why so much German money was invested on the Vienna bourse. The telegraph created instant communications, allowing the European crash to spread to New York. The U.S. was industrializing, transforming the global economy as much as China has in the last decade.

All those factors came together to create an almighty bubble, followed by an even worse crash. The slump that followed — although it is hard to measure these things precisely — lasted more than two decades. If the slump that follows the crash of 2008 is anything like that one, then this one is going to last until 2031.

As Lyons concedes, historical parallels are never precise, but the similarities are very interesting and the factors that he cites in the rest of the article make a persuasive case for the proposition that we’re looking at a prolonged period of economic upheaval ahead that may be far beyond the ability of any government or Central Bank to control. Go give it a read if you’re in the mood to panic a little.

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Moosebreath says:

    Interesting read. And of course, the Long Depression came during the closest we have seen to the Libertarian ideal of government, so that the ruling ideology worked against the Long Depression being any shorter or less painful. Hopefully, we won’t have to repeat that.

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  2. Nice try, Moosebreath but the Long Depression was far more severe in Europe than it was in the United States and driven as much by worldwide phenomenon as national policy. 1870s German was far from the “libertarian ideal” you seek to smear with responsibility for the downturn but, you know, nice try at misdirection.

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  3. Moosebreath says:

    Doug,

    “the Long Depression was far more severe in Europe than it was in the United States”

    Not really.

    “Recovery from the crash was much quicker in Europe than in the United States. Moreover, German businesses managed to avoid the sort of deep wage cuts that embittered American labor relations at the time.”

    “During the depression of 1873–96, most European countries experienced a drastic fall in prices. Still, many corporations were able to reduce production costs and achieve better productivity rates, and, as a result, industrial production increased by 40% in Britain and by over 100% in Germany”

    source of quotes

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  4. Xenos says:

    The real reason the European recession of the 1870s dragged on for so long was the introduction of Obismarkcare in the 1880s. Created a whole nation of looters and moochers who went on to withhold the surplus value of their labor.

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  5. legion says:

    Well, for the past 30+ years, average US worker salary has actually declined slightly in real terms. The only reason our general standard of living has gone up is because of the availability of easy credit, and a generational shift in the social acceptability of carrying a debt around. But that too has hit its limits. Things are costing more, but people aren’t making any more money – it’s all going into profits/dividends/executive compensation, and no small chunk of that stays out of the US economy by being invested either overseas or in other ‘paper products’ that don’t generate jobs here.

    As a result, people have no money. They have no believable prospects for getting money anytime in the foreseeable future – corporations aren’t likely to change the policies that have made them record profits for the last generation or so. If they don’t, demand will continue to stay low because – guess what? You can’t sell things to people who have no money. Corporations will use that as an excuse to cut production, jobs, and salaries, exacerbating the problem. They will continue to blame lazy workers.

    My biggest concern is that this will not be fixed without a literal revolution. The revolution will not happen until people realize they have nothing left to lose by refusing to play by someone else’s rules, or until the plutocrats get to the point where there is literally no more money left to make.

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  6. Ben Wolf says:

    @ Doug Mataconis

    As Lyons concedes, historical parallels are never precise, but the similarities are very interesting and the factors that he cites in the rest of the article make a persuasive case for the proposition that we’re looking at a prolonged period of economic upheaval ahead that may be far beyond the ability of any government or Central Bank to control.

    No. He presents nothing resembling a persuasive argument that were are in an unavoidable slump, and despite your assertion there’s a tremendous amount governments can do to solve our current problems.

    I suggest studying economics from someone besides Walter Williams. You’re too easily impressed.

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  7. john personna says:

    Wait, how can we have a 25 year recession if Obama’s term is only 8?

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