History shows the world could face a Long Depression that could last over 20 years.
The current global financial situation is similar to “The Long Depression” that paralyzed the economies of several countries in the late 19th Century, Dario Perkins the Global Managing Director at TS Lombard claims. Frighteningly, the Long Depression lasted from 1873 to 1896 in some nations.
In particular, Perkins’ believes deflation, globalization, new technologies, and economic disruption caused the Long Depression. Perkins thinks the world’s economy is repeating the same trends today.
Our Time Vs. The Long Depression
Great technological change and economic disruption characterized the 1873 to 1896 period.
Thomas Edison, for instance, invented the light bulb, the phonograph, movies, and many other disruptive technologies during the Long Depression. In addition, Alexander Graham Bell invented the telephone and Nikola Tesla invented alternating current in the same era.
In comparison our era has seen the rise of the internet and social media. Additionally, we face a variety of emerging disruptive technologies including robotics, artificial intelligence (AI), electric cars, and virtual realities. Frighteningly, we do not what the effects of these technologies will be.
However, some observers; including American presidential candidate Andrew Yang (D-New York) and Elon Musk, think new technologies will lead to mass unemployment. Disturbingly, AI expert Kai Fu Lee claims artificial intelligence could kill 40% of jobs, Forbes reports. Moreover, Yang thinks technological unemployment could lead to violence.
The Long Depression Then & Now
Furthermore, the collapse of an overheated stock market propped up by overpriced railroad stocks in the United States sparked the “Long Depression.”
In the United States, the Long Depression began with a recession that lasted from 1873 to 1873. Moreover, America’s economy did not recover until the early 1900s.
Our era began with the Great Recession of 2007-2009. Some economists; including Federal Reserve Governor Lael Brainard, believe the American middle class has not recovered from the Great Recession. Brainard thinks the middle class has less money today than it had in 2007, Reuters claims.
The Long Depression and Socialism
Effects of the Long Depression included labor violence in the United States, populist politics, panics, bank runs, and rioting in some countries.
Notably, the far-left Populist Party; and left-wing orator William Jennings Bryan, became major political forces in the United States during the Long Depression. Bryan shocked the political elite by becoming the Democratic presidential nominee in 1896.
Plus, both the American Socialist Party and the British Labour Party originated in the Long Depression period. They founded the Socialist Party in 1901 and they formed the Labour Representation Committee; the Labour Party’s predecessor, in 1900.
The last decade has seen leftward turn in American politics led by socialist U.S. Senator Bernie Sanders (I-Vermont) and the rise of far leftist Jeremy Corbyn in the United Kingdom.I think Sanders is the strongest and most popular candidate in the Democratic presidential primaries. In addition, the United States, France, Britain, and other countries have seen riots and street protests over the last decade.
Are we Entering a 21st Century Long Depression?
Today’s political and economic situation has some strong similarities to the Long Depression. For instance, populist politicians are popular, and American economists are worrying about deflation.
Moreover, today’s economic upheaval began with a stock market crash in 2007-2008 but the overheated stock market has returned. In addition, revelations of fraud as in 2007 triggered the stock market crash of 1873 that began the Long Depression.
In 1872, they caught the Union Pacific Railroad using a front company called the Credit Mobiler to use government subsidies to cover up its lack of cash. In 2007, widespread fraud in the mortgage and credit markets triggered the collapse.
Exposure of the Union Pacific’s fraud caused the collapsed of railroads and the giant Jay Cooke & Company investment bank that financed them. Exposure of the mortgage fraud caused the collapse of the Lehman Brothers investment bank and the near collapse of the massive insurance company AIG (NYSE: AIG) in 2007.
Additionally, large segments of the economy never recovered from the panic of 1873. American railroad construction; did not resume until the early 1880s, for instance. Similarly, in 2018, 52% of Americans said they were still feeling the effects of the Great Recession, Morning Consult estimates.
Is it another Long Depression?
In particular, Perkins thinks today’s low yields for securities; such as U.S. Treasury bonds, mirror returns from the Long-Recession era, CNBC notes.
On 6 December 2019, a two-year US Treasury bond paid 1.61% in interest. In addition, a 10 year US Treasury bond paid 1.78% in interest on the same day.
Perkins notes we see an inverted yield curve today, as 19th century investors did during the Long Depression. To explain, in an inverted yield curve short-term interest returns are higher than long-term interest payouts.
In another similarity, inflation fell during the Long Depression, Perkins notes British inflation rates fell by -1.4% between 1873 and 1888. In comparison, the US had an inflation rate of 1.8% in the 12 months ending on 31 October, 2019, the US Inflation Calculator estimates.
Therefore, Long Depression style deflation is not a problem yet. Moreover, stocks are still booming. The Dow Jones Industrial Average, for example, rose by 20.09% in the first 11 months of 2019. Meanwhile, the S&P 500’s value grew by 25.49% in the same period.
Based on stocks and inflation, I do not think we are in a Long Depression. However, there are some disturbing similarities between today’s world and the Long Depression era.
Will we Enter another Long Depression?
In the final analysis, there are frightening similarities between the 1870s; when the Long Depression began, and today’s world.
Notably, new technologies are severely disrupting societies and economies today. Railroads, steamships, and the telegraph severely disrupted the British, European, and American economies in the decades leading up to the 1870s.
Today, the internet, social media, and digitalization are disrupting economies all over the world. In addition, drones and artificial intelligence could spark a revolution in military technology similar to one during the Long Depression.
Disruptive military technologies that appeared during the Long Depression included machine guns, smokeless powder, better artillery, armored warships, repeating rifles, and better explosives. For example, Hiram Maxim invented the machine gun in 1884.
Moreover, there was a massive revolution in communications in the 1870s. Cheap new printing methods made mass-circulation newspapers and magazines and low-cost books available. For the first time in human history, anybody who could read had access to reading material.
Today, social media such as Facebook (NASDAQ: FB) can reach up to 2.5 billion people. For instance, Statista estimates Facebook had 2.5 billion users in 3rd Quarter 2019. Hence, for the first time we have media that almost every person on the planet can access.
During the Long Depression, the popular press, catalogs, mail delivery, and manufacturing triggered a consumer revolution that brought the industrial revolution into the home for the first time. Today, technology is bringing digitization, robots and artificial intelligence into the home and our pockets.
Jobs Creation in the Long Depression
The short-term result of the technological disruption was unemployment and disruption. Conversely, the long-term result of the 19th century disruption was massive jobs creation that ended the Long Depression.
However, the new jobs often dehumanized workers and stripped them of individuality. Workers went from craft work to regimented factory for example. That led to unionization and labor violence that fueled political unrest.
Additionally, the modern welfare state began in Germany during the Long Depression. That welfare state’s architect, Chancellor Otto von Bismark feared socialist and populist unrest. Bismark tried to head off such unrest by providing workers with benefits including single-payer health insurance, old-age pensions, unemployment insurance, workman’s compensation, and social security.
During the early 1900s the welfare state spread to the UK and the United States through the Socialist and Labour parties. Reformers such as the young Winston S. Churchill, Lloyd George, and former President Theodore Roosevelt (R-New York) hoped to head off unrest by creating American and British welfare states.
Similarly, today we hear many proposals for expanding the welfare state today. U.S. Presidential candidate Andrew Yang (D-New York) is even proposing a basic income. Meanwhile, Yang’s rival U.S. Senator Bernie Sanders (I-Vermont) proposes single-payer healthcare and taxpayer-funded college for all Americans.
Finally, populist politicians such as Boris Johnson, Jeremy Corbyn, and President Donald J. Trump (R-New York) are shaking up political systems and opening the door for radical ideas.
The Long Disruption
The world may not have entered a new Long Depression, but there are startling similarities between today’s situation and that 19th Century catastrophe.
Given the pace of today’s change, and the potential of technologies; such as Artificial Intelligence (AI), to change everything. I think today’s period of technological chaos could be longer and more destructive than the Long Depression.
A better name for today’s upheaval is the Long Disruption. I call it the Long Disruption because there is no evidence technological disruption is halting, and many signs disruption is speeding up.
Therefore, the 21st Century Long Disruption will create a new economy just as the 19th Century Long Depression did. The challenge for us today is to emulate the far-sighted leaders of the Long Depression; such as Bismark, and ease the Long Disruption’s effects.