Your Money - History shows us things have been a lot worse than this
Falling share prices, banks in trouble, cash-strapped governments... it can seem as though the sky is falling in on the global economy.
At such a time, it pays to have a sense of history. Understanding what has gone before can help put today’s problems in perspective.
Looking back at the past is a strangely reassuring exercise. The mightiest economy on earth, the US, suffered no less than 21 recessions in the last century, according to the National Bureau of Economic Research. Each time, it bounced back - even from the Wall Street Crash of 1929, and the latter sparked a depression in which GDP fell 46 per cent in just four years.
That’s a much greater drop than anything being experienced now - even Greece’s GDP has fallen by ‘only’ 17 per cent since its crisis began in 2008.
Indeed recessions and financial crises are par for the course everywhere in the world. Low oil prices caused two recessions in the UAE in the 1980s, and then in 1998 forecasts of doom were commonplace as oil dipped below 10 dollars a barrel. But look at the country now.
Towards the end of the last century alone, we had the Mexican economic crisis, the Asian crisis, the Russian crisis... the list is endless. Each time, somehow recovery was achieved.
One lesson to draw from all this is that selling shares and other investments in a panic may not be the wisest move. It’s worth bearing in mind what’s unique about the latest crisis:
THIS ONE REALLY IS GLOBAL
Rising trade and financial flows ensure that every part of the world is affected by every other as never before. This may be a good thing. Without China’s resilience over the last few years, Western economies would be in much worse shape than they are.
BANKS HAVE MORE INFLUENCE
It is often said that bankers have become greedy. This is not true. They have always been greedy. There is no change on that score. What has changed is that in the last 10 or 15 years they have invented new instruments to trade with fancy names which have played a part in the global turmoil. Regulators are trying to bring these under control.
WE HAVE MORE KNOWLEDGE
Every previous financial crisis has been minutely examined by economists - from the collapse of ancient Rome to the Black Death in the 14th century (when plague killed a third of the population of Europe, which suddenly pushed up wages for the lucky survivors) and, of course, the Great Depression itself. Many experts believe that history shows governments should avoid austerity. So what have they been doing in Europe recently? Imposing austerity... Knowledge is only useful if you use it.
Bob Parker is managing director of Holborn Assets. If you have a question for Bob, email him at firstname.lastname@example.org