Were the old days really that good?

Were the old days really that good?

“The hardest arithmetic for human beings to master is that which enables us to count our blessings” – so wrote the great American working man’s philosopher Eric Hoffer.

It’s a piece of wisdom worth recalling at the end of another year that has tested the nerve of many investors and prompted questions about what current generations have done to deserve to live in such a tempestuous stage of history.

As the year winds down, financial markets continue to face uncertainty over developments in the Eurozone crisis. Each day brings fresh headlines that send some investors scrambling from virtual despair to tentative optimism.

While not seeking to downplay the very real anxiety generated by these events, particularly in relation to their effects on investment portfolios, it’s worth reflecting critically on our often distant memories of the “good old days”.

A Brief History of the 20th Century

Nearly 100 years ago, Europe was engulfed by a war that destroyed two centuries-old empires, redrew the map of the continent and left more than 15 million people dead and another 20 million wounded. The economic effects were significant, with widespread rationing in many countries, labour shortages and massive government borrowing.

Just as the Great War was ending, the world was struck by a deadly pandemic — the Spanish flu — that killed some 50 million people on the most conservative estimate. About a third of the world’s population was infected over a two-year period.

A little over a decade after the Great War and the pandemic, the Great Depression cut a swathe through the global economy. Industrial production collapsed, international trade broke down, unemployment tripled or quadrupled in some cases and deflation made already groaning debt burdens even larger.

In the meantime, resentment was growing in Germany over its Great War reparations to the Allied powers. Berlin resorted to printing money to pay its debts, which in turn led to hyper-inflation. At one point, one US dollar converted to four trillion marks.

In a new militaristic and nationalist climate, fascist regimes arose in Germany, Italy and Spain. Under Hitler, Germany defied international treaties and began annexing surrounding regions in Austria, Czechoslovakia before finally attacking Poland in 1939.

This led to the Second World War, a conflict that engulfed almost the entire globe as Japan pushed its imperial ambitions in Asia, while Germany sought to conquer Europe. More than 50 million died in the ensueing conflict, including a holocaust of six million Jews. The war ended with the invasion of Berlin by Russian and Western forces, while Japan surrendered only after the US dropped nuclear bombs on two cities, killing 250,000 civilians. The human tragedy over this period was catastrophic.

In economic terms, the war’s impact was profound. Most of Europe’s infrastructure was destroyed, millions of people were left homeless, many urban areas in the UK were devastated, labour shortages were rife and rationing was prevalent.

While the 35 years after World War II were seen as a golden age in comparison, the geopolitical situation remained fraught as the nuclear armed superpowers, the Soviet Union and the USA, eyed each other suspiciously. The breakdown of the old European empires and growing east-west tensions led the US and its allies into wars in Korea and Vietnam.

The cost of the Vietnam and Cold Wars created enormous balance of payments and inflation pressures for the US and led in 1971 to the end of the post-WWII Bretton Woods system of international monetary management. The US dollar came off the gold standard and the world gradually moved to a system of floating exchange rates.

In the mid-1970s, the depreciation of the value of the US dollar and the breakdown of the monetary system combined with war in the Middle East resulted in the quadrupling of oil prices. Stock markets fell sharply and stagflation — a combination of rising inflation alongside rising unemployment — gripped many countries.

While the 1980s and 1990s were a relative oasis of calm — aided by the end of the Cold War — there still was no shortage of bad news, including the Balkan wars, the Rwandan genocide and recessions in the early part of both decades.

In the past decade, there have been many tragedies including 9/11, the 2004 Asian tsunami, the 2011 Japanese earthquake, tsunami and nuclear crises and, now, the financial crisis sparked by irresponsible lending, complex derivatives and excessive leverage.

Another Perspective

So from this potted history, it seems clear that tragedy and uncertainty will always be with us. It is a moving backdrop to how many people invest. But the important point to take out of it is that previous generations have stared down and overcome far greater obstacles than we face today. And while it is easy to focus on the bad news, we mustn’t overlook the good news.

Alongside the wars, depressions and natural disasters of the past century, there were some notable achievements for humanity — like the development of antibiotics, civil rights, economic liberalisation and the spread of prosperity and democracy, space travel and advances in our understanding of the natural world and enormous advances in health, education and telecommunications.

Despite this backdrop of tragedy and despair over the past 85 years, the largest stocks in the U.S have still managed to return 9% pa, and the smallest stocks
13% pa[1]. So for people who like terms like ‘new normal’, they’re absolutely right – the world is constantly changing.

But new challenges are the driving force for human endeavour, entrepreneurship and innovation. Collectively, these are the foundations for economic growth and investment returns.

Today, while the US and Europe are gripped by tough economic times, much of the developing world is thriving. Populous nations such as China and India are emerging as prosperous nations with large middle classes. And smaller, poorer economies are making significant advances too.

The United Nations in the year 2000 adopted a Millennium Declaration that set specific targets for ending extreme poverty, reducing child mortality and raising education and environmental standards by 2015. In East Asia, the majority of 21 targets have already been met or are expected to be met by the deadline. In Africa, about half the targets are on track, including those for poverty and hunger.

Alongside these gains, new communications technology is improving our understanding of different cultures and increasing tolerance across borders, while providing new avenues for the spread of ideas in education, health care, technology and business.

Through forums such as the G20 and APEC, international cooperation is increasing in the field of trade, addressing climate change (if slowly) and lifting the ability of the developing world to more fully participate in the global economy.

Rising levels of education and health and workforce participation also mean the foundations are being built for a healthier and peaceful global economy, dependent not on debt, fancy derivatives and fast profits but on sustainable, long-term wealth creation.

Anxiety over recent market developments is completely understandable and it is quite human to feel concerned at events in Europe. But amid all the bad news, it is also clear that the world is changing in positive ways that provide plenty of cause for hope and, at the very least, gratitude for what we already have. These are ideas to keep in mind when we scan the news looking for positive stories and long for the “good old days”.

When it comes to being worried about global events, perhaps we should leave the final word for the year to the Dalai Lama:

“If you have fear of some pain or suffering, you should examine whether there is anything you can do about it. If you can, there is no need to worry about it; if you cannot do anything, then there is also no need to worry.”

With thanks to Jim Parker, DFA Australia Limited for his contribution to this article

[1] Source: Returns Program to 30 November 2011 for the largest 10% and smallest 10% of U.S listed stocks


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