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The very unpleasant echo from the 1930s

I am trying very hard not to become alarmist, but I must admit that I see very little positive news at the moment and I continue to see three elements – monetary policy failure/weak growth, the rise of extremist politics (Trump, Orban, Erdogan, Putin, ISIS etc) and sharply rising geopolitical tensions coming together to a very unpleasant cocktail that brings back memories of the 1930s and the run up to the second World War.

It has long been my hypothesis that the contraction in the global economy on the back of the Great Recession – which in my view mostly is a result of monetary policy failure – is causing a rise in political extremism both in Europe (Syriza, Golden Dawn, Orban etc) and the US (Trump) and also to a fractionalization and polarization of politics in normally democratic nations.

That is leading to the appeal of right-wing populists like Donald Trump, but equally to the appeal of islamist groups like ISIS among immigrant youth in for example France and Belgium. Once the democratic alternative loses its appeal extremists and populists will gain ground.

The geopolitical version of this is Ukraine and Syria (and to some extent the South China Sea). With no growth the appeal of protectionism and ultimately of war increases.

Unfortunately the parallels to the 1930s are very clear – without overstating it try to look at this:

  • Syrian war vs Spanish civil war: Direct and indirect involvement of authoritarian foreign regimes (Stalin/Hitler vs Erdogan/Putin)
  • Euro  zone vs the gold standard
  • The rise of populists and extremists: Communists, Nazis and Fascists vs Syriza, Golden Dawn, Jobbik, Orban, regional separatism in Europe, anti-immigrant sentiment, Trump and ISIS (in Europe) etc.
  • The weakening (failure?) of democratic institution: Weimar Republic vs the total polarization of politics across Europe – weak and unpopular minority governments with no “political muscle” for true economic reforms across Europe.

Maybe this is too alarmist, but you would have to be blind to the lessons from history not to see this. However, that does not mean that history will repeat itself – I certain hope not – but if we ignore the similarities to the 1930s things will only get worse from here.

PS if you are looking for more empirical evidence on these issues then have a look at Manuel Funke, Moritz Schularick and Christoph Trebesch’s recent very good post on voxeu.org on The political aftermath of financial crises: Going to extremes.

HT Otto Brøns-Petersen.

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

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A warning from the past: The politics of Trump and Corbyn – it is time for classical liberals to wake up

When I see what is being said about the new Labour leader in UK Jeremy Corbyn I fear that we are underestimating the change in electoral preferences in Europe.
 
It is said that Corbyn will cause Labour to collapse from within. That might very well be, but ask yourself why he was elected in the first place. And then ask yourself why Donald Trump is doing great in polls in the US and Syriza ruled Greece for six months and might – god forbid – continue to rule the country for sometime. 
 
What we are seeing is 1930s style politics. It is the politics of fascists and communists. It might be much less extreme, but remember these things don’t happen overnight. It is a gradual process where men in nazi uniforms put on suits – as they are doing in Sweden in the form of the Swedish Democrats. Or keep on the uniforms as Jobbik in Hungary.
 
It is a reflection of the fact that we are now eight years into an economic crisis – in my view mostly a results of failed monetary policies – as it was the case in 1930s. Mainstream democratic politicians failed to get us out of this crisis. In fact they made it worse and therefore people who otherwise would never have voted for Corbyn or Trump are now willing to listen to them.
 
And with mainstream democratic politics weakened in the US and Europe authoritarian figures from Putin, Erdogan, Orban and Assad are now increasingly setting the agenda for Europe and the world.
 
We might be on the way out of the crisis economically in both the US and Europe, but remember that was in fact also the case in 1936. The US had given up the gold standard as had many European countries, but the economics turnaround came too late to change the political sentiment. The result was catastrophic. And with anti-immigrant sentiment increasing in both Europe and the US we have reasons to fear the worst. The fact that it is now becoming political acceptable to suggest mass deportation of Mexican immigrants in the US or of muslims in Europe is horrendous.
 
The similarities between the Great Recession and the Great Depression are unfortunately many. That also goes for the politics and geo-politics of the times: Populism, extremism, anti-foreigner politics, protectionism and war.
 
And who are most to blame other than the central bankers that brought us into this mess? Well, the classical liberals – like myself – who again and again failed to speak out against these tendencies.
 
Classical liberals initially had a very hard time identifying the causes of the crisis and many resorted to ill-informed internet-Austrian analysis of the crisis instead of embracing the monetarist explanation of the crisis (think of Hayek versus Cassel in the 1930s). This has caused classical liberals to oppose monetary easing that would have ended this crisis long ago. As a result many classical liberals – particularly German style ordo-liberalists – should be blamed for helping to create an economic situation, which have created the fundation for the populism and extremism.
Classical liberals also failed because they ignored the social injustice done by the massive rise in unemployment in Europe and partly in the US and the effect that has on the political sentiment. Classical liberals didn’t really care about the suffering of Europe’s unemployed – as was the case in 1930s. In Greece and Hungary parties like Golden Dawn and Jobbik show that they care (or rather pretend to care) for the suffering of the unemployed.
 
At the same time many classical liberals out of fear of the effects on public finances have not spoken out against the anti-immigrant rhetoric and as a result borderline racisme has become politically acceptable on the political right in the US and Europe.
 
Effectively the centre-right is no longer providing a message of hope and optimism. Instead the centre-right is increasingly being taken over by anti-immigrant crazies like Donald Trump and on the left the centrist and market oriented (social) democrats of 1990s have been replaced with people like Jeremy Corbyn who has praised IRA, Hezbollah and Hugo Chavez and who dream of a Great Britain where militant labour unions rule the land.
 
It is time for a counter-revolution against the politics of fear and hatred. It is time for liberals of the left and the right to speak out against those who would like to close the borders for goods, capital and people. It is time to speak out against the authoritarian tendencies in Europe and US politics and to the the libertarians who like the feeling of revolution and the anti-establishment sentiment, which is in the air when Trump and Corbyn speak I tell you – Hitler was also anti-establishment.
If we fail to speak out against racism and protectionism of Donald Trump and the economic fantasies of Jeremy Corbyn we will lose our freedom. 

November 1932: Hitler, FDR and European central bankers

The headline of most stock markets reports yesterday said something like “Stocks: Worst Thanksgiving Drop Since ’32”. That made me think – what really happened in November 1932?

As is the case this time around European worries dominated the financial headlines back in November 1932. The first of two key events of November 1932 was the German federal elections on November 6 1932. We all know the outcome – Hitler’s National Socialist Germans Workers’ Party (NSDAP) won a landslide victory and got 33.1% of the vote. As the Communist Party won 16.9% the totalitarian parties commanded a firm majority – what at the time was called the “negative majority”. This eventually led to the formation of Hitler’s first cabinet in January 1933.

The second key event of November 1932 of course was the US presidential elections. Two days after the German in elections Franklin D. Roosevelt won the US presidential elections defeating incumbent president Herbert Hoover on November 8 1932. FDR of course in 1933 took the US of the gold standard, but also introduced the catastrophic National Industrial Recovery Act (NIRA).

Going through the New York Times articles of November 1932 I found a short article on the gold standard in which it said the following:

“Governors of Europe’s central banks who met today (November 13 1932) at the Bank of International Settlements expressed the unanimous opinion that the gold standard was the only basis on which the world economic situation could be bettered”

Obviously we today’s know that the failed gold standard was the key reason for the Great Depression and especially European central bankers’ desperate attempt to save the failed monetary regime created the environment in which Hitler and his nazi party was able to win the German elections in November 1932. What would have happened for example if Germany had been given proper debt relief, the European central banks had given up the gold standard and the French central bank had stopped the hoarding of gold?

Had I been a Marxist I would had been extremely depressed today because then I would had believed in historical determinism. Fortunately I think we can learn from history and avoid repeating past mistakes. I hope today’s European central bankers share this view and will learn a bit from the events of November 1932.

If European central bankers this time around decide not to learn from events of 1932 then they might be interested in learning about the dissolution of the Austro-Hungarian currency union in 1919. Then they just have to read this excellent paper by Peter Garber and Michael Spencer.

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