This worked but, as the authors say, the risk is to underestimate the power of the deflationary dynamic that was unleashed by the crisis, which is exactly what happened in the 1930s.
Europe is particularly at risk since eurozone rules have much in common with the gold standard, but with no possibility of resignation.
The more successful economies of the 1930s were those that left the gold standard early, while, this time around, the Mediterranean periphery of the eurozone suffered years of GDP decline before the ECB was willing to ease policy to offset these deflationary effects.
Stagnation and reflation
The study finds, “Great financial shocks in the end beget not secular stagnation, but secular reflation. By secular reflation, we mean at least a decade in which short- and long-term interest rates stay habitually below nominal GDP growth, and high-grade bonds are not really bonds anymore, delivering trend returns that are close to zero or even negative.
Reflation is essentially a structural subsidy from savers to borrowers, and [it] normally favours equities over bonds.
Looking forward, we think zero real returns for bonds and 4 to 6 per cent for equities would be a good working assumption, with trend returns on a typical mixed portfolio of bonds and shares down to only 1 to 3 per cent pa from around 10 per cent pa over the last seven years.”
If there is one lesson for successful investment, it is that you should buy when markets are cheap. Currently, there is no possibility of that.
Quantitative easing has flooded markets with money and low yields have driven investors to take on more risk.
Bond and equity prices are at all-time highs. Therefore, investors need to remind themselves of another fundamental lesson: that investment is about the purchase of an income.
Symbolism of money
Bankers and brokers became rich because they understood the symbolism of money
and acted as the middlemen [for a commission] between the rich who need an income from their cash, and other rich people who have a need for liquidity, loans or investors for their assets.
Initially, assets were held in either bullion, property and land, but later through the debts of merchants and governments, and then much later still, the shares of businesses.
Naturally, some of those middlemen, and particularly those with sharper-than-usual trading instincts, saw opportunities for trading whatever paper constituted the assets of stock markets.
The prospects of such profits appealed to the greedy, and with the emergence of well-off middle-class consumers during the 19th century, the modern version of stock market capitalism developed.