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What history can teach us about today’s economic environment

By SEC Newgate team
17 February 2022
Financial Communications

By Max Richardson

In almost every aspect of society, events of the past are used as a reference to help shape the future. If something goes wrong, lessons are learned and not repeated, hence why no one is walking around wearing Google Glass and why McDonald’s has thankfully never tried to resurrect the McPizza.

In all industries but one, the appreciation and acceptance of history helps to prevent the repeat of prior failures. Yet, the financial industry seems to have a much shorter memory.

One of the first people to publicly voice this was the late Canadian economist, John Kenneth Galbraith. In his book, ‘A Short History of Financial Euphoria’, Galbraith successfully teaches the reader about speculative bubbles in an economy, using historical examples and their common denominators to highlight that the same circumstances happen over and over again but each time with a complete disregard for previous events, with the public instead leaning towards the view that ‘this time it’ll be different’.

The book, written in 1990, almost step by step describes the events that occurred during the 2008 global financial crisis. Galbraith himself admitted that he did not know when the next crisis would come but starting in the 1630s with Tulipmania and ending with the 1987 US stock crash, he highlights that leverage, a new craze and a crowd mentality causing unsustainable growth, were all present in each crash, as they were in 2008. Galbraith wasn’t alive to see the 2008 GFC, but if he was, he would have said ‘I told you so’.

What the book puts forward is a primitive version of what we now know as behavioural economics, where economic agents do not always act rationally, as economic models dictate they should, and although during each crash the crowd included different people, the mentality never changed. Crowds follow ‘experts’, but unfortunately, in society money seems to have a direct link to perceived intelligence, hence why millions of people with no knowledge of the subject are putting their money into NFT’s and Crypto, because they see others gaining from it.

So, what is the point of rambling on about a book written 30 years ago? Because if nothing else, it proves that history has a place in the financial sector and that acknowledging it, as we do in other areas of society, could be beneficial on an individual level, especially in the coming months.

The impacts of the pandemic seem to be slowly catching up with the economy; the value of banknotes in circulation went up by 14 percent in 2021 alone and the Bank of England predicts the inflation rate to reach north of 7 percent this Spring, indicating that we are at the tipping point for an economy that has been thriving since the pandemic started.

Whether the financial sector learns from prior crashes, realising that each one isn’t a fluke, remains to be seen, but anyone looking to join the next craze in the coming months should take a second to look at the signs and remember the events of the past - it might just save them from their own financial disaster.