Latest / Merryn Talks Money / Are We Repeating the Biggest Mistake of 1873?

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Are We Repeating the Biggest Mistake of 1873? · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Hello Marrin Dogs Money listeners,
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Speaker 1: it is that time of year. The Edinburgh Festival Fringe
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Speaker 1: is almost here and I will once again be recording
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Speaker 1: podcast episodes in front of a live audience from Panmea House,
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Speaker 1: the final home of Adam Smith. This year's shows will
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Speaker 1: take place on August twenty seventh, twenty eighth, and twenty
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Speaker 1: ninth at two pm. Get your tickets before it sells out.
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Speaker 1: The link is in the show notes. Welcome to Maren
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Speaker 1: Doggs Money, the podcasting with people who know the markets
0:44
Speaker 1: Explain the markets. I'm Maren's sumset Web. This week I'm
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Speaker 1: speaking with pull at the prize winning author Leo kat
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Speaker 1: Aarbad about his new book eighteen seventy three, The First
0:52
Speaker 1: Great Depression and the Making of the Modern World. It's
0:56
Speaker 1: a great read. You can take it to the beach.
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Speaker 1: I promise you you'll like it just as much as
1:00
Speaker 1: all the romances as you were planning to read there.
1:02
Speaker 1: It covers the eighteen seventy three crash, which is particularly
1:05
Speaker 1: interesting because it was the first global crash across bond
1:09
Speaker 1: markets and stock markets. It also had extraordinary amount of
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Speaker 1: fallout some of which you could argue is still with
1:16
Speaker 1: us today. In our conversation, we reflect on the parallels
1:20
Speaker 1: between then and now and the lessons that we can
1:22
Speaker 1: take from those early crashes. I loved this book, do
1:26
Speaker 1: you know? I love this book basically property porn, right.
1:32
Speaker 2: You know. I did an event in Newport, Rhode Island,
1:39
Speaker 2: and they wanted to compare the Vanderbilt mansions with Rothschild's mansions,
1:45
Speaker 2: and basically the Rothschild's mansions beat them.
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Speaker 1: You know, I mean, this is this is the best
1:54
Speaker 1: bit about it. You know, I start off when I'm
1:56
Speaker 1: looking at no money supply and gold droughts and market crashes, evaluations, railways, capas,
2:02
Speaker 1: comparing Cavic summers. But actually I'm frantically turning the pages
2:05
Speaker 1: so I can find out about the next guy's great house.
2:08
Speaker 1: You know what happens. You know, Jim Fiskin and Jay
2:10
Speaker 1: Gold they put an opera house. What was their actual
2:12
Speaker 1: house like? So that's that's really what I enjoyed most
2:16
Speaker 1: about the But I know that's not the point.
2:19
Speaker 2: So why don't we Why don't we know? It is
2:22
Speaker 2: hardly the point, because I think livens.
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Speaker 1: It up absolutely A lot of it reads like like fiction,
2:30
Speaker 1: you know, reads like it reads like a great novel
2:31
Speaker 1: in it and gallops along as you move from from
2:34
Speaker 1: grand party to grand party to grand party. And also
2:37
Speaker 1: I tell you what it's missing. Tell you what it's missing,
2:40
Speaker 1: like more pictures. I want to see the dresses at
2:44
Speaker 1: the exhibition with all the mudge, and I want to
2:46
Speaker 1: see what everyone's wearing when three thousand people go to
2:49
Speaker 1: the ball for the opening of the Swiss Canal, and
2:52
Speaker 1: what the Emperor's daughter is wearing when she gets married
2:55
Speaker 1: in Vienna's the stock market crashes.
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Speaker 2: Right, Okay, that's actually great advice. I will push that.
3:03
Speaker 1: All right, brilliant, Thanks you. So that's all to look
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Speaker 1: forward to. So most of you should immediately go out
3:08
Speaker 1: and buy the hard the hard copy of this a
3:11
Speaker 1: wonderful book, and the clue of what it's about is
3:13
Speaker 1: in the title eighteen seventy three. But if you want
3:16
Speaker 1: pictures of people in ball gowns, wave for the paperback.
3:19
Speaker 1: Is that the Yeah, that's brilliant, got promise. So let's
3:26
Speaker 1: talk about what this is actually about. Eighteen seventy three.
3:28
Speaker 1: It's called eighteen seventy three the First Great Depression and
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Speaker 1: the making of the modern world. I mean, it is
3:33
Speaker 1: fascinating because you make the case in the book that
3:37
Speaker 1: pretty much everything that happened in the following one hundred
3:40
Speaker 1: years came from this one crash, the first global crash.
3:45
Speaker 1: So what I would like to do, if you don't mind,
3:48
Speaker 1: is to start with a run up to how we
3:51
Speaker 1: got to eighteen seventy three the great In fact, not
3:54
Speaker 1: as far as eighteen seventy three. It's kind of up
3:56
Speaker 1: to eighteen seventy before it turns into a speculator boom,
3:58
Speaker 1: isn't it up until there? And it's really really strong
4:02
Speaker 1: economic growth, globalization, lots of really fantastic things happening, amazing
4:07
Speaker 1: revolutions in transportation, in communication, it's the railway booms. So
4:12
Speaker 1: many exciting things happened. And of course back to how
4:15
Speaker 1: amazingly you write and you bring out all these wonderful
4:17
Speaker 1: little things. We're talking about the railways, we're talking about
4:20
Speaker 1: the series canal, and then you remind us that this
4:23
Speaker 1: is where Jewels wen't got the idea for around the
4:25
Speaker 1: world in eighty days, right, Exactly where do we get
4:27
Speaker 1: to the point where we were having, you know, eighty
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Speaker 1: ten percent GDP growth across across the world.
4:33
Speaker 2: What started it was the gold rush, because Europe, which
4:38
Speaker 2: was the center of the world, went through a terrible
4:41
Speaker 2: depression in the eighteen forties, fueled by bad harvests and
4:46
Speaker 2: by revolution, I mean they actually thought every government in
4:50
Speaker 2: Europe was going to fall and you know, we'd have
4:54
Speaker 2: the equivalent of the Russian Revolution across Europe. And that
4:58
Speaker 2: didn't happen. But at the same time, they discovered gold
5:04
Speaker 2: in the United States and that provided the fuel to
5:09
Speaker 2: get the global economy going. And you had bankers like
5:15
Speaker 2: the Rothschild who had made a ton of money in
5:19
Speaker 2: the early part of the nineteenth century lending to governments
5:24
Speaker 2: who jumped on the bandwagon and started lending for infrastructure
5:30
Speaker 2: and particularly the railroads, to the private sector, and you
5:34
Speaker 2: got a massive boom in lending. And it was a
5:39
Speaker 2: boom based on the bond market. Now everyone thinks the
5:43
Speaker 2: bond market is a sleepy place where who don't want
5:47
Speaker 2: to take risk put their money, but it was essentially
5:51
Speaker 2: that which provided the impetus to the growth. So the
5:58
Speaker 2: bond market grew by five times in the two decades
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Speaker 2: from eighteen fifty to eighteen seventy, and all of it
6:07
Speaker 2: went into big projects like the railroads, like the Sewers Canal,
6:15
Speaker 2: like the trans across India rail link, which set the
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Speaker 2: scene for that wonderful article which a French newspaper wrote
6:28
Speaker 2: in eighteen seventy saying now you can go across the
6:32
Speaker 2: world in eighty days. And Jules Verne, who was a
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Speaker 2: young adventure novelist based in France, stumbled across this article
6:43
Speaker 2: because the article even gave an itinery for what a
6:46
Speaker 2: journey like this would look like, so.
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Speaker 1: He didn't even think of any of this himself. Nick
6:50
Speaker 1: did all over the newspaper articles.
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Speaker 2: He probably didn't realize it would make a great movie
6:55
Speaker 2: as well, and.
6:57
Speaker 1: That we'd still be having, you know, television shows based
6:59
Speaker 1: on today. Fascinating, right, And one of the interesting things
7:03
Speaker 1: about this great bond boom was that a lot of
7:06
Speaker 1: this was retail money. So this is one of the
7:08
Speaker 1: first times we suddenly were gathering the savings of ordinary
7:11
Speaker 1: people across the world and shoveling it through middleman vehicles
7:14
Speaker 1: into huge infrastructure projects. I mean, that's a huge chance.
7:18
Speaker 1: And of course the basis of the investment trust industry
7:20
Speaker 1: in the UK, which we come back to another time.
7:22
Speaker 2: But fascinating, Yeah, not so much ordinary people, but upper
7:26
Speaker 2: middle class people sort of. We were people high network individuals.
7:31
Speaker 2: The average man in the street wasn't buying bonds, which
7:35
Speaker 2: actually would prove to be part of the savior when
7:38
Speaker 2: the whole thing went went south, because the people who
7:43
Speaker 2: lost money could actually afford to lose money. But yes,
7:47
Speaker 2: you're right, I mean it was retail. It was not institutional,
7:51
Speaker 2: and the institutional came later as you as you mentioned
7:55
Speaker 2: with investment trusts.
7:58
Speaker 1: I mean, it wasn't seen this all the way through
8:01
Speaker 1: the early part of the nineteenth century. Of course, there
8:03
Speaker 1: were two other crashes, one in the thirties one in
8:05
Speaker 1: the fifties, right, but they were quickly dealt with, or
8:08
Speaker 1: not really dealt with. They fixed themselves.
8:11
Speaker 2: Yeah, and they were to some degree more localized and
8:16
Speaker 2: they were less global. I mean, in the eighteen thirties,
8:19
Speaker 2: the Canal boom ended in the US and that caused
8:23
Speaker 2: a whole lot of repercussions in the UK. Most of
8:26
Speaker 2: Europe wasn't involved, so it was primarily an Anglo Saxon thing.
8:32
Speaker 2: There were many crashes during the eighteen sixties. The first
8:37
Speaker 2: was when Jay Gould tried to corner the gold supply
8:41
Speaker 2: of the United States.
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Speaker 1: I enjoyed that very much. Indeed, this is just after
8:45
Speaker 1: we bought the opera house right.
8:47
Speaker 2: Right, and bribe the president's brother in law, So.
8:52
Speaker 1: Which is when it will go crashing down? That was
8:54
Speaker 1: his mistake, overreach, right.
8:57
Speaker 2: And there was another crash in Britain when a discount house,
9:02
Speaker 2: the first one of the big discount houses, went under.
9:06
Speaker 2: But they were all localized and there were even wars.
9:09
Speaker 2: There was Civil War in the United States, there was
9:12
Speaker 2: the Crimean War, there was Prussia versus Austria. The economy
9:18
Speaker 2: was surprisingly resilient despite these little hiccups.
9:23
Speaker 1: Yeah, and that's interesting. We will come on to that
9:26
Speaker 1: about whether economies are incredibly resilient and maybe the best
9:29
Speaker 1: things you do is just leave them alone, because when
9:32
Speaker 1: we get to eighteen seventy three, of course, we find
9:34
Speaker 1: out that everyone decided to just not leave it alone.
9:37
Speaker 1: They succumbed, didn't they to what we call something must
9:40
Speaker 1: be done ism, and that's when things started to get nasty.
9:43
Speaker 1: But the pivotal bit is there war between Prussia and
9:47
Speaker 1: France that starts nineteen seventy right, I don't know, it's
9:50
Speaker 1: a short war. Yeah, sorry, eighteen seventy it's a short war,
9:55
Speaker 1: but it has enormous repercussions because France is obliged to
10:00
Speaker 1: pay enormous reparations to Germany, to the tune of how
10:05
Speaker 1: much around billion dollars.
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Speaker 2: Billion dollars, which would be equivalent to one point two
10:11
Speaker 2: to one point three trillion dollars today.
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Speaker 1: Yeah, and so pressure thought that this is fine, because
10:17
Speaker 1: that's so much money is going to take France like
10:19
Speaker 1: forever to pay that officer. This is going to keep
10:21
Speaker 1: them down, down, down, out of our way. We've dealt
10:24
Speaker 1: with his enemy indefinitely. Instead of which, they now managed
10:28
Speaker 1: to go out and get the bond markets to give
10:30
Speaker 1: them a billion bugs over two years.
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Speaker 2: And it was the Rothschilds who were the centerpiece of
10:36
Speaker 2: that because they had an incredible reach. They raised two
10:41
Speaker 2: bond issues which raised a billion dollars. But the most
10:46
Speaker 2: important thing was they were in one case three times
10:51
Speaker 2: oversubscribed and the other case twelve times over subscribe.
10:55
Speaker 1: And where was that money coming from?
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Speaker 2: Well that was the astounding thing. People suddenly realized that
11:02
Speaker 2: there's all this money that's been in the woodwork and
11:06
Speaker 2: is just looking for if you can only provide it
11:10
Speaker 2: with a return, will come out of the woodwork, because
11:14
Speaker 2: until then government bond deals had gone down to three
11:18
Speaker 2: percent in the UK, four percent in France. The sort
11:23
Speaker 2: of revelation that you could raise twelve billion dollars from
11:29
Speaker 2: the bondsuit, Yeah, just got everyone so excited. The London
11:34
Speaker 2: Stock Exchange went crazy.
11:37
Speaker 1: And well because everyone who didn't get into this bond issue,
11:39
Speaker 1: the money is still out.
11:40
Speaker 2: There, exactly. And also in the US railroads were it
11:46
Speaker 2: was a perfectly rational boom until then, and then suddenly
11:50
Speaker 2: railroad bond asstudents doubled, so we suddenly went up to
11:54
Speaker 2: five hundred million dollars a year in an economy that's
11:58
Speaker 2: roughly five percent of their GDP, which you know today
12:03
Speaker 2: would be one point five trillion dollars in the US.
12:07
Speaker 2: So at one point five trillion dollars that went into
12:11
Speaker 2: SpaceX is what went into the railroads.
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Speaker 1: Yeah, fascinating. And then of course that billion dollars went
12:20
Speaker 1: to Germany in a two year period. Yes, and they
12:25
Speaker 1: then had twenty five percent of GDP to play within cash.
12:30
Speaker 2: Right, and that was totally mismanaged. They could have feded
12:34
Speaker 2: into the economy at a slower pace, but injecting twenty
12:40
Speaker 2: five percent of GDP in liquid cash into an economy
12:46
Speaker 2: that was relatively unsophisticated, where everyone who owned government bonds
12:53
Speaker 2: found their government bonds paid off, paid off, meaning redeemed
12:57
Speaker 2: suddenly looked around and said what do I do with
13:01
Speaker 2: this money? And was looking around for opportunities and learned behold,
13:06
Speaker 2: a whole lot of Charlatan's appeared on the seat to
13:11
Speaker 2: try to liberate them with their money. It was not
13:15
Speaker 2: only a snock market boom, but it was a giant
13:18
Speaker 2: ipo boom, and the stock market, which had maybe thirty
13:23
Speaker 2: or forty companies listed, suddenly ballooned to five hundred, six
13:29
Speaker 2: hundred companies. And these companies, a lot of them were banks,
13:33
Speaker 2: a lot of them were real estate, a lot of
13:35
Speaker 2: them were railroad companies. But they were also all sorts
13:40
Speaker 2: of things, you know, setting up companies to explore the
13:44
Speaker 2: northern regions of Europe, companies to you know, I don't know,
13:49
Speaker 2: bill of look for banana plantations in West Africa. So
13:56
Speaker 2: it was a crazy time.
13:58
Speaker 1: And a lot of fraud in this around the same
14:00
Speaker 1: time might be getting my timing room, but around the
14:02
Speaker 1: same time as the diving bell bubble in the UK.
14:05
Speaker 1: But there were loads of small companies were set up
14:07
Speaker 1: to invest in diving bell technology to go and explore
14:12
Speaker 1: for shipwrecks. Oh, okay, in course the same thing, lots
14:15
Speaker 1: of points of shells and endless fraud. So in these
14:18
Speaker 1: last years eighteen seventy two seventy three were moving into
14:22
Speaker 1: broths called the bezel bit. When there's lots of fraud
14:25
Speaker 1: and the fraudsters are riding high and the investors haven't
14:29
Speaker 1: yet yet realized that it's a fraud, so it's a
14:31
Speaker 1: great time. It's a wonderful time.
14:33
Speaker 2: Everyone's happy, they're richer. Everyone thinks they're richer, both the
14:37
Speaker 2: fraudsters and the people who've had their money in bezzeled.
14:40
Speaker 2: So yes, it is a great time. And then well,
14:45
Speaker 2: and then, like all great times, it comes to an end.
14:48
Speaker 2: The first sign is in Vienna, which was an ancillary
14:55
Speaker 2: of the German stock market, and that had gone up
14:58
Speaker 2: three hundred percent, and suddenly in the beginning of eighteen
15:04
Speaker 2: seventy three, investors began to question whether all these new
15:10
Speaker 2: companies had a business plan. And for a while the
15:15
Speaker 2: markets stayed up at the highs and didn't realize a
15:21
Speaker 2: little bit like these road runner cartoons that didn't realize
15:25
Speaker 2: the floor had been taken away from it. And then
15:29
Speaker 2: in May of eighteen seventy three crashes and bank stocks
15:35
Speaker 2: fell by forty five percent in one day. And you
15:40
Speaker 2: had this serial scene where the emperor's daughter was getting married,
15:46
Speaker 2: and every major royal family from Europe had collected in Vienna,
15:53
Speaker 2: so the Prince of Wales and all of the major princes,
15:58
Speaker 2: the crown Prince of and they were all having these
16:03
Speaker 2: magnificent balls and dancing to the music of Johann Strauss.
16:09
Speaker 1: Is what we need pictures of.
16:11
Speaker 2: Well. But meanwhile, just down the road, because the stock
16:16
Speaker 2: market was next to the palace, the stock market was crashing.
16:21
Speaker 2: You got the first wave of people committing suicide because
16:25
Speaker 2: they'd lost money, although even those suicides were frauds because
16:30
Speaker 2: people had bought equities on margin and realized that the
16:36
Speaker 2: way to escape their creditors was to go to the canal,
16:41
Speaker 2: pile their clothes at the side of the canal, jump
16:44
Speaker 2: into the canal, swim to the other side, and disappear.
16:48
Speaker 1: That really is a fitting end to the buzzer, isn't it. Yeah,
16:52
Speaker 1: And this was the same time it did I read
16:54
Speaker 1: in the right order the Enner exhibition was at the
16:56
Speaker 1: same time.
16:57
Speaker 2: Yeah, and the exhibition was going on, and that prove
17:00
Speaker 2: to be a total failure. So they'd expected nineteen million
17:05
Speaker 2: people to turn up.
17:06
Speaker 1: Nineteen million.
17:07
Speaker 2: Oh, these great exhibitions were giant affairs. I mean they
17:12
Speaker 2: started you know, it started out with the UK in
17:15
Speaker 2: the eighteen fifties, but there had been one in Paris
17:18
Speaker 2: and then another one in the UK. And this was
17:21
Speaker 2: Vienna's attempt to say we're a sirous country and we're
17:24
Speaker 2: a serrous city. They'd expected nineteen million. They'd torn down
17:31
Speaker 2: off the palace gardens and established pavilions, and only seven
17:36
Speaker 2: million people turned up. So it was not a people.
17:39
Speaker 2: It was a series of little minor disasters, a cholera
17:44
Speaker 2: outbreak and the cab drivers of Vienna decided to go
17:48
Speaker 2: out on strike.
17:49
Speaker 1: Of course, they did standard stuff. Nothing ever changes, does it.
17:52
Speaker 1: One of the little tipbits in this bit that I
17:55
Speaker 1: really enjoyed was a little bit you wrote about Col
17:57
Speaker 1: Marx in the Crash and how he was actually the
18:00
Speaker 1: kind of person who predicts crushes all the time, and
18:02
Speaker 1: he'd been at it for ages and was finally right,
18:05
Speaker 1: and he'd just become famous because he'd finally got some
18:09
Speaker 1: traction with dust capital because first edition pretty much no
18:12
Speaker 1: one read it, and let him manage to get it
18:13
Speaker 1: printed in Russia and it can squeezed through the Tzarist
18:17
Speaker 1: sensors because they figured it was so long, so boring,
18:20
Speaker 1: and so complicated, no one ever read it. But they did,
18:23
Speaker 1: and suddenly he's quite famous predicts the crash, and now
18:25
Speaker 1: he's more famous.
18:27
Speaker 2: Yeah, And as you said, throughout the eighteen fifties and
18:32
Speaker 2: sixties he had been saying, oh, this is it, and
18:37
Speaker 2: I mean it got to a stage where even his
18:40
Speaker 2: friends started pulling his leg, which he didn't react well to.
18:45
Speaker 1: Better. This is it. Possibly the only area in which
18:49
Speaker 1: Marx's and I have something in common.
18:52
Speaker 2: That you're always predicting crash, instantly.
18:54
Speaker 1: Predicting crashes at the wrong time. Okay, so a crash
19:00
Speaker 1: in Vienna, but then because it has been a global
19:02
Speaker 1: boom and it has been a global bubble, it spreads
19:05
Speaker 1: there is contagion across the world.
19:07
Speaker 2: Right, yes, it Actually you get this sort of false
19:11
Speaker 2: period of car So it crashes in Vienna and everyone
19:16
Speaker 2: says there's going to be a global disaster, and then
19:18
Speaker 2: suddenly nothing happened, and you get a period of three
19:23
Speaker 2: four months where nothing happens. So they said, okay, maybe
19:27
Speaker 2: Vienna was just overpriced, and it was a you know,
19:31
Speaker 2: it was a local incident.
19:33
Speaker 1: And everywhere else the earnings will rise to match the price.
19:36
Speaker 1: It'll be fine.
19:37
Speaker 2: But meanwhile, Jay Cook, who is the premier investment banker,
19:42
Speaker 2: had raised two billion dollars for the Union government during
19:45
Speaker 2: the Civil War, suddenly finds that because of the disruptions
19:50
Speaker 2: in Europe, he is not able to raise capital, and
19:54
Speaker 2: he runs out of capital in the middle of constructing
19:58
Speaker 2: the second transcont railroad. And it was a little bit
20:03
Speaker 2: like the Lehman brother's story. He started injecting his own
20:07
Speaker 2: bank's money into the project, he's not able to complete it,
20:13
Speaker 2: and when he announces that I cannot raise the capital,
20:18
Speaker 2: there is total panic, the sort of psychological panic that
20:23
Speaker 2: happened after Lehman. People said, look, if Jake Cook, who's
20:27
Speaker 2: a friend of the president, is the most well connected
20:30
Speaker 2: banker in the United States, can't raise one hundred million dollars,
20:36
Speaker 2: then what hope do we have? And every railroad stops construction.
20:42
Speaker 2: So there were five hundred railroad companies in the United
20:45
Speaker 2: States by the end of the year. A third of
20:49
Speaker 2: them had stopped paying dividends. By the end of five years,
20:54
Speaker 2: half of them had defaulted.
20:55
Speaker 1: Everything comes crashing.
20:56
Speaker 2: Down, everything comes crashing down, and.
21:00
Speaker 1: At the same time everything's still going horribly in Europe
21:03
Speaker 1: seventy percent of the banks in Vienna, of Gombast, et cetera.
21:06
Speaker 1: It's global connage.
21:08
Speaker 2: Yes, okay, So.
21:09
Speaker 1: Then we get to the bit where things start to
21:11
Speaker 1: go wrong in a monetary sense. And one of the
21:14
Speaker 1: things that I think you you when you look at
21:16
Speaker 1: all the books you write, alled it. This is just
21:18
Speaker 1: like a book, I know. But is was there a
21:20
Speaker 1: big mistake? Was there a big mistake? Was there a
21:22
Speaker 1: pivotal point when everybody does something completely wrong? And this
21:26
Speaker 1: is the bit of that story.
21:28
Speaker 2: Yes. So in a crisis, everyone scrambles for a safe asset,
21:35
Speaker 2: and in those days the two safe assets were gold
21:38
Speaker 2: and silver. But in eighteen seventy three, Bismarck, having defeated
21:45
Speaker 2: France on the battlefield, decides to double down and try
21:51
Speaker 2: to destroy France financially. And he takes the billion dollars
21:56
Speaker 2: that he received from France and you uses it to
22:01
Speaker 2: convert all his silver, all the silver that he had
22:05
Speaker 2: in the central bank into gold. So silver prices plunge.
22:11
Speaker 2: That causes every bank in Europe to panic and dump
22:17
Speaker 2: their silver, which causes silver prices to go down even further.
22:22
Speaker 2: One of the two safe assets that everyone had relied on,
22:26
Speaker 2: which was silver, suddenly is plunging in price, so they
22:30
Speaker 2: all scrambled into gold. Now, if everyone in the world
22:35
Speaker 2: is scrambling into gold, what does it cause. It causes
22:40
Speaker 2: a giant shortage of liquidity. So the world might have
22:46
Speaker 2: been able to cope with a shift from a system
22:50
Speaker 2: based on both silver and gold into gold under normal circumstances,
22:55
Speaker 2: but trying to do it in the middle of a
22:56
Speaker 2: financial crisis just didn't work. So as a consequence, you
23:02
Speaker 2: got this tightening of credit prices. Wholesale prices in eighteen
23:07
Speaker 2: seventy three, over the following year declined by thirty percent.
23:12
Speaker 2: The worst thing was they kept going because there was
23:16
Speaker 2: a shortage of gold and no one wanted to Everyone
23:20
Speaker 2: wanted to get out of silver, and you got a
23:23
Speaker 2: twenty year period where prices declined relentlessly for twenty years,
23:31
Speaker 2: ending up forty to fifty percent below where they started.
23:36
Speaker 1: So long term deflation until there were more goldfinds, and
23:39
Speaker 1: suddenly they're right, highest love gold exactly.
23:43
Speaker 2: Yeah, central banks didn't really have discretion at the time,
23:47
Speaker 2: so the you know, the thing that determined what central
23:51
Speaker 2: banks could do was the amount of gold they could find. Ironically,
23:56
Speaker 2: when everyone moved to gold, there was a gold drought
23:59
Speaker 2: and there there have very few discoveries of gold from
24:02
Speaker 2: eighteen seventy until eighteen ninety. And the problem with deflation
24:11
Speaker 2: to a generation used to rising prices, it sounds pretty
24:16
Speaker 2: good if we could get calling prices, but it causes
24:21
Speaker 2: terrible problems for people who borrowed money.
24:25
Speaker 1: Yeah, if you owe money, you're in trouble.
24:27
Speaker 2: Yeah, if you have a mortgage, you suddenly discover that
24:32
Speaker 2: your house is worth less, but your mortgage just continues
24:36
Speaker 2: to weigh on you. And there's nothing that damages confidence
24:42
Speaker 2: more than having this overhang of debts that keeps on rising.
24:47
Speaker 1: And absolutely horrible for farmers and landowners, right because that
24:51
Speaker 1: hasn't effect on the price of land, and most farmers
24:53
Speaker 1: will have debt of some kind. So land press is
24:56
Speaker 1: all a lot we have a lot of trouble with
24:58
Speaker 1: in that area. And then of course back to property porn,
25:01
Speaker 1: then it leads directly into the trend in the UGA
25:07
Speaker 1: for I knew you were Spratish landowners to marry rich
25:11
Speaker 1: American heiresses, which of course us all the way up
25:15
Speaker 1: to Winston.
25:15
Speaker 2: Churchile, Yeah, and downtown Abbey exactly.
25:32
Speaker 1: There's a lot of things I could pick up on here,
25:34
Speaker 1: and a lot of things I'd like to talk about.
25:36
Speaker 1: And I do think that this deflationary impulse and the
25:39
Speaker 1: way that affects society is fascinating. But I think that
25:42
Speaker 1: what I'd like to do, and if I don't want
25:44
Speaker 1: to bring it back to where we are now, because
25:47
Speaker 1: there's so much that you talk about in the book
25:50
Speaker 1: that resonates with where we are now. We talk about,
25:52
Speaker 1: for example, the equivalent of five hundred billion dollars in
25:54
Speaker 1: CAPEX going into railways. We've surpassed that now with the
25:58
Speaker 1: kape Center, data centers and AI, etc. But nonetheless it's
26:02
Speaker 1: a similar dynamic. And certainly in stock markets in those
26:05
Speaker 1: early days before the speculative froth really kicked in seventy
26:09
Speaker 1: two seventy three, there was a perfectly reasonable justification for
26:13
Speaker 1: markets going up fifty percent, forty percent there, thirty percent
26:16
Speaker 1: a year because everything's going so well and the earnings
26:19
Speaker 1: will rise and you can pay for your growth in
26:21
Speaker 1: advance and you'll get it later. And this all makes
26:23
Speaker 1: perfect sense, which of course resonates very well with where
26:27
Speaker 1: we are in markets today.
26:29
Speaker 2: Great, and I think that's what everyone has latched onto.
26:32
Speaker 2: I mean they've latched onto the boom portion rather than
26:36
Speaker 2: what comes when the boom ends. Now, what caused the
26:40
Speaker 2: boom to end? I think two things. One is that
26:45
Speaker 2: everyone trying to build railroads at the same time. Just
26:51
Speaker 2: they started competing against each other and the profitability of
26:56
Speaker 2: the railroad started declining. So the equip today, if you know,
27:02
Speaker 2: all of the hyper scalers start trying to build AI
27:07
Speaker 2: infrastructure and the price of tokens starts collapsing, which by
27:13
Speaker 2: the way, is already started.
27:15
Speaker 1: Is already happening.
27:16
Speaker 2: Yeah, it changes sort of the economics of their investment.
27:23
Speaker 2: So that started happening at the same time because of
27:28
Speaker 2: the disruptions in Europe, because of the war, the price
27:32
Speaker 2: of a capital starts rising, and there's some signs that
27:36
Speaker 2: that's happening now. Until recently, we reassured ourselves that we
27:43
Speaker 2: could finance this boom from the profits of the giant
27:48
Speaker 2: technology companies, but that has even proved to be inadequate
27:53
Speaker 2: and they're now going out and borrowing. So the combination
27:57
Speaker 2: of declining profitability and rising cost of capital at some
28:03
Speaker 2: point causes a crunch. In the US case, when Jay
28:09
Speaker 2: Cook announced that he couldn't complete his railroad, that would
28:13
Speaker 2: be the equivalent of let's say Open AI declaring actually,
28:20
Speaker 2: I think we've miscalculated and we are not going to
28:24
Speaker 2: be able to complete our whole model, and we're going
28:29
Speaker 2: to have to sell to Microsoft. Can you imagine the
28:34
Speaker 2: panic that will occur in the market for AI infrastructure.
28:39
Speaker 1: Yes, yes it can. So it would all be fascinating.
28:47
Speaker 1: Everyone having to sell their houses and that kind of thing.
28:48
Speaker 1: We get to look at everyone else's houses and the
28:50
Speaker 1: brooches would be great, the silver lining anyway.
28:54
Speaker 2: Right, Yeah, So that's the relevance I think for to day.
29:00
Speaker 1: As this all came to an end the eighteen seventy
29:04
Speaker 1: three crash and the consequences in the late seventies, you
29:09
Speaker 1: talk about literally everyone setting up a committee, because you know,
29:12
Speaker 1: even in the eighteen hundreds, people were super keen on
29:14
Speaker 1: committees and working groups, et cetera. Everyone set up a
29:17
Speaker 1: committee to look at it and try and find the
29:20
Speaker 1: cause of what had happened, and the US committee came
29:25
Speaker 1: up with one hundred and eighty different reasons, which I
29:28
Speaker 1: enjoyed a lot, one of which was people drinking too much.
29:31
Speaker 1: That was mainly that it came from the temperance movement.
29:33
Speaker 1: But the main cause was too much money.
29:36
Speaker 2: Yeah, the cause of.
29:37
Speaker 1: The boom was too much money, and the cause of
29:39
Speaker 1: the crash was not enough money because of the depression afterwards,
29:42
Speaker 1: was not enough money.
29:43
Speaker 2: It is that simple, Yes, it is. But unfortunately these
29:51
Speaker 2: booms and bus cycles are not simply driven by sort
29:57
Speaker 2: of getting the dials right in the s Central Bank.
30:00
Speaker 2: They are driven by human psychology and that in the
30:05
Speaker 2: boom you have too much money. But it's driven by
30:09
Speaker 2: over optimism, which then causes bankers to lend too much,
30:17
Speaker 2: which then provides the fuel for a boom, and in
30:21
Speaker 2: a bust it's not enough money as people suddenly hunkered
30:26
Speaker 2: down start boarding, bankers cut their lending, and you get
30:32
Speaker 2: the whole thing going into reverse. Yeah.
30:35
Speaker 1: The one thing we haven't talked about, and I would
30:37
Speaker 1: love to very briefly is the way that this change
30:40
Speaker 1: things politically in that you get, as a direct result
30:43
Speaker 1: of all of this, this sense of injustice, this sense
30:46
Speaker 1: of people being done by and that led to a
30:49
Speaker 1: shift in politics in the US. The Democrats back on top,
30:53
Speaker 1: quite on top, but you know, better than they had
30:55
Speaker 1: been previously. So it's a return to the kind of
30:57
Speaker 1: ideals of socialism and also the rise of antisemitism.
31:02
Speaker 2: Yeah, I mean, look, when you have a financial cataclysm,
31:08
Speaker 2: people look around for someone to blame. Think back upon
31:12
Speaker 2: two thousand and eight. The Obama administration probably did the
31:16
Speaker 2: right thing in trying to save the financial system, but
31:20
Speaker 2: they didn't bail out homeowners homeowners. You got a wave
31:26
Speaker 2: of defaults on mortgages, and homeowners looked around and said,
31:31
Speaker 2: this system does not work. That if you're an insider
31:35
Speaker 2: and you're a banker, you get bailed out. If you're
31:38
Speaker 2: just an average person, you don't, And you get a
31:42
Speaker 2: wave of populism and a sense of the injustice of
31:46
Speaker 2: the system. And that's what you had in the eighteen seventies.
31:50
Speaker 1: Yeah, in some ways, you know, there was a catastrophic
31:53
Speaker 1: mistake after eighteen seventy three with going to Golden leaving
31:56
Speaker 1: someone behind the end of bimetallism, and that caused us
31:59
Speaker 1: the horrible depression, which again had winners and losers. So
32:03
Speaker 1: maybe we could look at it, and we could say, well,
32:05
Speaker 1: the q period globally was in some ways a catastrophic
32:09
Speaker 1: mistake in the same way, perhaps in its length and
32:11
Speaker 1: duration and wealth redistribution impact, and that gave us this
32:15
Speaker 1: sense of injustice and on fairness that people still have
32:18
Speaker 1: to day.
32:19
Speaker 2: I think there's some truth to that that the Q
32:23
Speaker 2: TO period led to rising acid prices. So if you
32:28
Speaker 2: were wealthy and you owned something, you did very well,
32:33
Speaker 2: and if you didn't own something, you felt aggrieved. So
32:38
Speaker 2: how this comes to an end? I have in the
32:40
Speaker 2: clue what does central bankers do We now got a
32:45
Speaker 2: period where you've got rising inflation. Do they tighten if
32:51
Speaker 2: that causes a disruption in the equity market? Does that
32:56
Speaker 2: spook them? There are all sorts of questions you could
33:00
Speaker 2: you know, you can raise. I think the one thing
33:03
Speaker 2: that makes the current period really scary is the size
33:09
Speaker 2: of the equity market relative to the rest of the economy.
33:14
Speaker 2: The US equity market, if you take public and private equities,
33:20
Speaker 2: you're talking about something that is three of GDP. Yeah,
33:27
Speaker 2: so you know GDP is thirty trillion in the US
33:31
Speaker 2: public and private equities are ninety trillion. A minus stumble
33:36
Speaker 2: in the equity market could cause massive disruptions in spending,
33:43
Speaker 2: very very dangerous.
33:44
Speaker 1: So given that that risk is out there and the
33:47
Speaker 1: risk we've talked about in AI, should we just just
33:51
Speaker 1: do what they did back then and just go boored gold.
33:59
Speaker 2: Or maybe silver?
34:01
Speaker 1: Who?
34:02
Speaker 2: Silver?
34:02
Speaker 1: You think? What are you hoarding?
34:08
Speaker 2: Fixed income? Oh? You yeah, bonds are due for their turn.
34:13
Speaker 1: Okay, I'm hong the stick with hoarding gold, I think Okay, bitcoin,
34:18
Speaker 1: would you hoard bitcoin?
34:19
Speaker 2: No? We've had a rolling sequence of speculative bubbles. You know.
34:24
Speaker 2: We had n f T s or whatever they were called,
34:27
Speaker 2: the meme coins, then meme starks. Then we had crypto,
34:34
Speaker 2: which has come crashing down. So you get this rolling
34:39
Speaker 2: effect of one speculative asset after another. So I think equities,
34:45
Speaker 2: it's the turn of equities too to have their com have.
34:50
Speaker 1: They come up and end? In that environment we're worrying
34:53
Speaker 1: about inflation, will all be fleeing to fixed income?
34:56
Speaker 2: Right?
34:56
Speaker 1: Yeah? Okay, brilliant, Thank you so much. Can I ask
35:00
Speaker 1: you one final question? One final question. We are a
35:04
Speaker 1: great writer, As I said, I loved this book in
35:06
Speaker 1: so many ways. But what are you reading? What are
35:09
Speaker 1: you going to take the beach with you?
35:11
Speaker 2: I just finished. Whistler by Anne Patchett.
35:15
Speaker 1: Whistler by Anne Patchett okay, crime novel.
35:19
Speaker 2: It's a family saga of a woman meeting her stepfather
35:25
Speaker 2: accidentally from her stepfather from thirty forty years ago and
35:33
Speaker 2: the blossoming of a friendship between her ex stepfather and
35:38
Speaker 2: her and it's very touching.
35:40
Speaker 1: Is there a nice house?
35:44
Speaker 2: Not really, it's apartments in New York City. No.
35:47
Speaker 1: I like this too. Thank you so much for joining
35:49
Speaker 1: us today. This was great fun.
35:51
Speaker 2: Okay, thanks.
36:01
Speaker 1: Thanks for listening to this week's Marrin Dorgs Money. If
36:03
Speaker 1: you like our show, rate review and subscribe wherever you
36:06
Speaker 1: listen to your podcast and keep sending your questions or
36:08
Speaker 1: comments to Marrin Money at Bloomberg dot net. You can
36:10
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36:12
Speaker 1: at marinas w and John is John Underscore step Back.
36:15
Speaker 1: This episode was hosted by Me Marren summerset Web. It's
36:18
Speaker 1: produced by Samasadi and Moses and Special Things of course
36:22
Speaker 1: delaveaut Ahmed