19th April 2014
Everyone has heard about the “economic cycle”, but few people really understand the history behind it. As the old saying goes “what goes up, must come down” is as true to global economics as anything else. Everyone has heard about The Wall Street Crash in 1929 which started the Great Depression. More recently, there have been crashes in 1987 (“Black Wednesday”) and the dot-com bubble in 2000. These crashes have always had some kind of catalyst.
The first financial crash in the Western world can be dated back to 1622 when the Holy Roman Empire debased its coins, triggering the equivalent of a modern banking panic. That was followed by the 1637 tulip boom-and-bust in Holland and the 1720 South Sea bubble.
Eight more crashes then occurred in the 18th century, culminating in the Hamburg commodities bubble of 1799. Then in the 19th century, the pace of financial disasters sped up with 18 financial storms erupting in Europe, and increasingly in the US too. These included bank crises that hit the US in 1819, 1837, 1847, 1857, 1873, 1884, 1890. A financial crisis even struck Australia in 1893.
The 20th century saw an incredible 33 market storms with the best known being the stock market crashes of 1929 and 1987.
What lessons are to be learned from this? Every time, there have been people saying that the old fundamentals of economics no longer apply, only to find that of course they do! Remember all the dot-com millionaires who kept saying that it was a brand new economic model, so old rules don’t apply (like Cashflow and profit?). Gordon Brown even claimed to have “abolished the cycle of boom and bust” when Chancellor. The commodities may have changed over time, but the fundamental rules of economics never do!
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.