For lack of a less trite phrase, market history rhymes often, if not repeatedly, because the events analyzed in these pages clarify. Similarities keep cropping up. Central banks print money, economies turn out to be financialized, fiat currencies hinder productivity growth, and government corruption sends fragile economies right into a doom loop. Cheap money results in financial abundance. Is nobody learning?
Throughout the narrative, Hughes regularly draws parallels between macroeconomic events, comparing and contrasting policy decisions and market outcomes, and emphasizing missteps and lessons learned. Some governments learn from their mistakes; others, not a lot. Chile’s experience within the Nineteen Eighties resulted from a scarcity of control and an excess of credit creation. The government’s lack of sufficient foreign exchange reserves and over-reliance on copper mining for export revenue led the economy into recession after the commodities boom faded. Similar circumstances prevailed in Iceland before the worldwide financial crisis (GFC) and in Indonesia within the late Nineties in the course of the Asian financial crisis. Market shocks reveal the issues of non-diversified economies. While Chile subsequently demonstrated fiscal probity and supported free trade, proper supervision and more prudent bank lending policies, which made its economy relatively stable in a region where other economies don’t, Iceland and Indonesia continues kind of on a path of economic fragility and volatility.
The book’s frequent cross-references connect the narrative and help reinforce critical concepts. While the chapters could be read in isolation, the discussion and evaluation ensure a smooth transition between them. Separated by time and region, the macroeconomic dislocations of economies and markets that make up the events on this volume share experiences and teachable moments. To paraphrase George Orwell, all markets and economies are equal – some more so than others.
Hughes’ approach to the subject is educational and well-organized, allowing for simple reference and understanding of the connections between concepts. With the exception of the chapters that examine market dislocations in later periods of history (18th-century France, Nineteenth-century America and Europe, and Ancient Rome), where a scarcity of information from the periods in query allows an assessment of the functioning of companies Each chapter explains the background and effects in the marketplace, the results on corporations and the results of the disruptions on the general economy. The final chapter provides useful, if familiar, guidance for applying financial history to on a regular basis investment decisions: Stay invested but prudent; Diversify across each asset classes and countries, avoid market timing, avoid investing in corporations that require leverage to generate good returns, put money into corporations that require little capital to operate and have pricing power. Thousands of years of history can improve investors’ understanding of possible outcomes and make their investment decisions more informed.
In addition to examining the historical record, Hughes discusses the implications of recurring themes at each macroeconomic and microeconomic levels. In his view, the Federal Reserve has strayed from its mission and has spent years creating low-cost money that has fueled inflation and fueled speculation and inflated real estate markets. Fractional reserve banking only makes the issue worse. In some ways, a return to the gold standard – the writer undertakes an informative and demanding examination of its history – together with a link between money supply and GDP growth and full-reserve banking that will higher align the goals of central banks and personal corporate banks with fiat -Reduce the risks related to currencies and create favorable conditions for a more stable economy that’s less vulnerable to inflation.
The European Monetary Union, which stems partly from the United States abandoning gold price pegs greater than twenty years earlier, presents an issue of mismatch between a standard currency and the economic and political circumstances of member countries. The different experiences of the Greek and German economy within the 2010s are revealing. The euro’s longer-term prospects appear questionable.
Hughes examines the present state of economic services. Banking has its rewards and risks, the latter of which in recent history has given rise to latest financial technologies that supply financial services with banking features – think Venmo, SoFi and Credit Karma – but which lack adequate oversight. Regtech continues to be catching up with financial innovation. The hidden risks that the emergence of shadow banking brings with it are usually not yet clear. Designed as an alternative choice to the risks of centralized finance, cryptocurrencies have similar flaws to industrial banks, because the fate of many cryptocurrency exchanges shows. Stablecoins appear to be anything but stable. Unless now we have learned otherwise, the longer term is uncertain. COVID-19 has exposed the shortcomings of the financial edifice created at Bretton Woods. Negligible rates of interest have led to inflation. Long after the U.S. economy recovered from the macroeconomic impact of the coronavirus, the Fed didn’t lower, if not close, the monetary policy spigot. The combination of demand-pull and cost-push variants of inflation, concepts the writer explores multiple times, only exacerbates an overheated global economy, together with the outbreak of war in Ukraine, which drove up oil and commodity prices has. The current and weird state of a decent labor market with wage inflation exemplifies that we’re in somewhat uncharted territory. The usual political maneuver of raising rates of interest, when applied to a ballooning federal deficit, would exponentially increase the price of servicing the debt. This and the worth of federal claims could well result in a devaluation of the dollar and threaten the U.S. dollar’s status as a reserve currency. Sanctions against the Russian economy and the United States’ strained relations with other state actors may lead certain economies to hunt alternative reserve currency options, potentially further weakening the dollar’s relevance.
Hughes’ outlook for the US economy and markets is decidedly bleak. The range of policy options for the United States, with extremely bloated government budgets, low GDP growth and falling birth rates, is unpleasant. It is not going to be possible to grow out of an enormous deficit. There could be tax increases, but they may decelerate growth. Spending cuts are politically unpopular. Printing money will only make the present situation worse. The current world order could give approach to a brand new one. As the writer makes clear, the past isn’t prologue.
