The Guest Blog

Will This Decade Be More Grim Than the 1930s?

Paul Gambles|Managing Partner, MBMG International    

The problem, from its neighbors' point of view, with a unified Germany is that its increased relative economic might and strategic importance casts a giant shadow across Europe, relatively diminishing the global status and economic competitiveness of all other European countries.

The issue from a German perspective is that a unified Germany has enormous latent potential simply waiting to be unleashed to increase the gap between what the Fatherland sees as its rightful place and the rest of Europe.

Peter Weber | Stone | Getty Images

In Imperial times, this conflict was expressed in terms of territorial ambitions, nationalistic fervor and military strength. WW I and WW II were the ultimate results of the failure to dress this in any form other than military combat.

British historian Alan John Percivale Taylor explained this better than anyone to my generation. Hopefully, we learned the diplomatic lessons and other than local conflicts (notwithstanding that some of which have seen appalling losses of life and acts of brutality), peace in most of Europe has prevailed since 1945.

Less clear is whether the economic lessons of the inter-war period (which certainly did so much to exacerbate the casus belli inherent in the Versailles Treaty) have been taken to heart.

The post-1918 global landscape abounded with economic imbalances. The "war to end all wars" concluded with a Soviet regime presiding over what had been the Russian Empire.

Germany came perilously close to a similar outcome following the Kaiser’s ignominious capitulation while the Austro-Hungarian and Ottoman Empires were being sliced and diced into nascent nations.

Both France and Britain were, like Germany, heavily indebted to the global provider of capital, America, whose main achievement until the latter part of the distant war had been the accumulation of enormous quantities of global gold reserves which allowed the U.S. dollar to call the shots to all other global currencies until 1971.

McKinsey’s study of the economic history of debt (serious students should absorb Rogoff and Reinhart’s “This time is different”) concludes that there are only four ways to deal with such an enormous build-up of debt:


This is the current U.S. strategy, based on the monetarist shibboleth that increasing money supply ultimately creates inflation. This theory has never succeeded (other than possibly one questionable instance in Chile) and has demonstrably failed.

The main monetarist theory apologist, Milton Friedman, (whose list of dangerous devotees is headed by Federal Reserve Chairman Ben Bernanke) has excused the failures of monetarist policy by saying that all previous adherents failed because they didn’t do it enough. In other words, if something isn’t working then you need to do it more. In all previous crises, the markets imposed a limit to how far monetarist solutions could be pursued.

America is getting close to this point now – every injection of stimulus having a smaller and shorter-lived effect than its predecessor with some estimates now indicating that each $1 of stimulatory input results in only 12 cents of additional output. That doesn’t mean that the current monetarist ideologues are ready to abandon their strategy (it’s the only one they have) but the realization that the naked emperors of monetarism are naked is as imminent now as it was in 1932 when Hoover was forced to abandon the strategy.

As, of course, was his successor, Roosevelt, who added the firepower of what seemed to be unlimited leverage in a currency system that abandoned gold. The term "double-dip" was coined to describe the situation where recession/depression recurs because of the inability of central banks to maintain the effects of stimulatory output because of the law of diminishing returns.

In the inter-war period, the Weimar’s famous experiments with pursuing currency expansion to the ultimate extreme (to try to repay its war debts and the Versailles reparations) led to the famous hyperinflation where Marks became worth less than the actual cost of printing them. Mr. Bernanke’s complacent claims to be able to easily create inflation by harnessing the twin technologies of printing presses could well become his epitaph.


This is the current German/ECB/euro zone core prescription for Greece and its fellow "GIPSIs" (Greece, Ireland, Portugal, Spain and Italy) as well as being the UK coalition’s self-prescribed foul-tasting medicine. It’s understandable that there are huge scars on the German psyche following the Weimar period.

However, like the monetarist inflationary theories, the tail-chasing dog on an ever-downward spiral of trying to reduce debt while GDP is being destroyed has rarely, if ever, proven successful in major debt episodes. Inevitably it isn’t able to be pursued to its logical conclusion as people prove unwilling or unable to put up with it to that point.

Social Tensions Building Globally

As the FT pointed out last year, we should never forget that while hyper-inflation destroyed Germany's last shreds of self-esteem, it was the austerity imposed by Germany's creditors through the mechanisms of the Bank of International Settlements that led to the election of Hitler and the Nazi Party.

Social tensions are building globally – from jasmine riots to Arab Springs and from Tottenham Court Road to the recent euro zone election results. The results provide the glimmers of hope that some pressures can be released before austerity inevitably results again in self-appointed extreme dictatorships or military regimes.

War Event/Subsequent Peace Dividend

Ultimately, WW II did lead to the resolution of the 1929-1949 debt crisis. In that sense austerity did lead to the solution of the problem. I’ve previously described angela Merkel as Alaric, the 5th Century leader of the Goths who  overthrew Athens and Rome by siege and starvation without a bullet needing to be fired in anger.

Globally, tensions between nations are on the rise again, as witnessed by the navies of China and the Philippines standing off over a tiny Pacific outcrop, Iran has raised stakes in the Straits of Hormuz over nuclear aspirations, Vladimir Putin's rhetoric and actions tend to be inflammatory, roguish nations continue to develop nuclear programs and the US has increased military presence in Asia Pacific.

Global nuclear conflagration ought to be totally unthinkable, but sadly it isn’t.


Nations default when they can’t pay. This happened in the 1930s and has started happening again today.

Heaped rubbish remains uncollected in Athens, Greece. Bin men have begun a strike with officials warning of a "health time bomb".
Laura Lezza | Getty Images

Default, whether outright (through debt repudiation) or de facto (currency/debt debasement) is rarely orderly (although Greece managed to live in default for over 50 percent of the last two centuries). It tends to happen when all other choices have been exhausted.

Whatever form it takes, if the conditions which led to the situation that caused it are changed, then it can be a base from which to achieve sustainable growth, cure dysfunctional banking and liquidate malinvestment, restoring social order at the same time.

This is what happened in South East Asia following the crises of 1997 and in Iceland after 2007.

What can we learn from our parents and grandparents? Answer given below in an economic formula:

(Santayana’s comments [those not learning the lessons of history are destined to repeat them] + Mark Twain’s "history doesn’t repeat, it rhymes" + Einstein’s definition of madness [doing the same thing over and over again and expecting different results] + Hyman Minsky’s observations that trying to cure debt bubbles with more debt only ends in eventual catastrophe) = [I’ve said many times before that Liaquat Ali’s “Lords of Finance” should be compulsory in schools everywhere].

If we don’t learn lessons from 1930s parallels, there’s a very good chance that the outcomes of this decade might be > (grim than that one was).
The author is Paul Gambles, managing partner and group chief investment Officer, MBMG International.