Back to the future with sluggish economic growth and low interest rates
The current low rate and low growth environment has striking similarities to the long depression of the late 1800’s.
They say those who fail to learn the lessons of history are doomed to repeat it.
And some interesting economic analysis is pointing to that happening at the moment as real global growth remains negative and short-term interest rates rise above long term rates in a yield curve inversion.
Looking back over historic economic periods, TS Lombard found that the current period of low rates and subdued growth has strong parallels to the long depression of the late 1800s.
During that period, Bank of England figures show that growth was effectively in a “secular real rate depression” – in other words, negative growth in real terms – with stagnating, low bond yields and negligible wage rises.
How did world economy escape last time?
What really provoked some interest was how the world economy escaped being in the subdued growth, low rate doldrums and the solution is quite different from the sort of deregulatory and privatised economy that most of us are used to.
TS Lombard Managing Director of Global Macro Dario Perkins said despite some recent small rises in bond yields, the current economy showed that yields are unlikely to rise materially without something “breaking” in global markets.
Perkins said the period with the closest parallels to the current situation “offers a less pessimistic way out: the long depression of the late-1800s.”
Long depression starts with a GFC-like panic
The Long Depression of the late 1880s began with a financial panic in 1873 which led to two decades of dire productivity, deflationary price dynamics, stagnant middle-class incomes and a surge in populism coupled with a backlash against globalisation.
The sluggish period eventually ended when productivity surged again in the 1890s due to an acceleration of what Perkins called “technological diffusion.”
He said that technology could offer a route out of the current slump as well, providing that the gains extend beyond the giant technology companies, although an acceleration of wages is also important.
Time for bigger government and return of unions?
“Populism played a role, especially as it led to the development of the welfare state and the organisation of workers into trade unions,” said Perkins.
“There was no Marxist revolution but worries about socialism did cause a powerful shift in the distribution of income.”
It is difficult to see what sort of reforms would help out this time around but it seems like increasing the size of the government sector and raising welfare payments while organising labour to ensure rising living standards and wages were both very important in breaking out of the deadlock of low rates and negative real growth.
As Perkins suggests, “the left might actually have history on its side” as some sort of opposite reaction to the privatisation of government assets and deregulation of wages and reduction of union power in labour markets that has been the hallmarks of our more recent economic history.