The Children of a Long Inflation

If you’re invested in ‘sin’ stocks, here’s a thought: If history repeats, there might be a 50 year decline in the consumption of alcohol, not to mention a lower crime rate and the arrival of less bastard children.

That’s what happened during the ‘Victorian Equilibrium’ of 1815 to 1914 after all.

The Victorian Equilibrium is how author David Hackett Fischer describes the deflation in the 19th century after the major price rises that preceded it. He describes this in his 1996 book The Great Wave: Price Revolutions and the Rhythm of History.

Fischer’s contention, then and now, is that the world has experienced four ‘Great Waves’ of rising prices since the twelfth century. They range in length from 80 years to almost two centuries, depending on which one you pick. These Great Waves of price instability brought war and hardship as well as human degradation and disillusionment.

Here’s how he shows the Great Waves in his book:

The Price of Consumables in England

When the Great Wave finally breaks, however, the world enjoys periods of equilibrium that result in a cultural flowering or advance until the beginning of the next Wave. That’s what happened in Victorian England from 1815 to 1914.

I won’t dwell on the cultural advance. As this is The Markets and Money, I want to know what the period of equilibrium meant for the money. David Fischer describes it likes this: ‘Long-term inflation ceased. Prices stabilized, then declined further, and stabilized once more. Real wages began to rise, but returns to capital and land fell.’

The Victorian Equilibrium

click to enlarge

Source: The Great Wave

In England, as you can see, prices were cheaper in 1890 than they were in 1819. The post office, for example, etched prices in brass. That’s how little they expected prices to move. Queen Victoria’s government could issue gilts (bonds) paying 2% — and for investors, that was a healthy return.

What’s interesting is 1812–1914 covers the heyday of the classic gold standard. Sound money advocates attribute this relatively peaceful time and economic expansion in Europe partly or wholly to gold, with free trade and exchange flourishing.

Here’s a thought for you: Fischer’s argument could actually invert this interpretation. You could argue his ‘Victorian Equilibrium’ (or the absence of a Great Wave if you prefer) created the conditions for the classic gold standard to work, not the other way around. Hmm.

Because when the Great Wave of rising prices began in the early 20th century, the gold standard failed with it. And what a Wave it’s been over the last 100 years. Steady or even gently falling prices are almost inconceivable to our modern understanding of finance. For a hundred years, high inflation has been baked into the system.

From the long view of history, anyone born this century has been riding Fischer’s fourth Great Wave of the 20th Century. That’s why Fischer calls us in the book, ‘the children of a long inflation’. It’s shaped our entire worldview.

It’s also why there are those in the market that insist interest rates must rise and cause sovereign governments to finance the interest on their debts with an ever rising level of tax revenue.

But it’s possible interest rates won’t react and go higher as they did in the early 1980s. This is the position of our colleague Phillip J Anderson, who I’ve been working with to bring you the new service Cycles, Trends and Forecasts. It launched yesterday.

Phil’s made a lifetime’s study of history, and books like Fischer’s, to apply its lessons to today’s markets. Over the past year, I’ve been fascinated to discover Phil’s track record of success.

It’s even more amazing if you see the track record of your average economist.

After all, look at what Bill Bonner wrote yesterday in your Markets and Money:

‘Prakash Loungani, an economist working for the IMF, undertook a study, not so much to find out as to gawk and laugh. It was published in 2001 in the International Journal of Forecasting.

‘For those of us who have been following the story, there were no surprises in it. "The record of failure to predict recessions is virtually unblemished," he reported.

‘That was in 2001. Surely, by 2014, the experts had managed to stain their pathetic record with some success?

‘Nope. Loungani and a colleague, Hites Ahir, took another look. They examined 77 different national economies, of which 49 were in recession in 2009. In 2008, how many economic forecasters saw the recessions coming a year later?

Go ahead, dear reader, take a guess.

‘The answer is zero.’

One man did predict 2008 — and went on record with it. That was Phillip J Anderson. He wasn’t the only bear in 2008 to see that US housing was a giant bubble set to burst.

But he might have been the only one who called the following recovery in US stocks to the year. As I’ve said before, he didn’t do this down at the local golf club, either. He did it on the cover of the UK’s largest financial magazine, MoneyWeek.

Phillip Anderson predicting property will fall until 2011 then stocks will lead the way


Phil switched to the right side of the market for both sides of the trade. There’s not many in the world who can lay claim to that.


Callum Newman
for Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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