Today's parallels with 1914 are very worrying
Armed conflict is worsening in Gaza, Syria, Ukraine and Iraq, while financial problems in emerging markets are growing
The global financial crisis of 1914 was in some respects even bigger and more internationally all-embracing than its early 21st-century version Photo: GETTY
When events escalate, it’s time to worry. Almost everyone will know that the assassination of Archduke Franz Ferdinand in Sarajevo lit the fuse on the First World War – or if they don’t, they’ve not been reading the newspapers, filled as they have been of late with retold accounts to mark the 100th anniversary of the war to end all wars.
Less well known is that the shooting was also the trigger for the first truly global financial crisis of the 20th century, one that in some respects was even bigger and internationally all-embracing than its early 21st-century version. As the clouds of war gathered, financial markets were gripped by panic, closing stock exchanges around the world and forcing governments to bail out and support banks in the same manner as today. In the City, restaurants and shops began refusing coinage and notes. Only gold would do as payment.
When borders closed, many foreign assets became worthless, causing a chain reaction of defaults, banking runs and insolvencies. It scarcely needs saying that the potential for meltdown had been almost wholly unanticipated by money markets and the central banks that oversaw them.
Only a few years previously, the British journalist Norman Angell had argued in his book The Great Illusion that countries had become so economically interdependent and integrated that it made war not just futile but virtually unthinkable.
Poor Mr Angell has been much misrepresented since as one who was blind to the geopolitical tensions of his age, and their ability to override the assumptions of rational, economic self-interest. In fact, he never actually said that war was impossible, only that no one had anything to gain from it.
None the less, he came to epitomise the misplaced complacency of his age. This was a time of unprecedented international travel and trade, of exchange of ideas and technology. It was entirely reasonable to assume that tribal, national and regional conflict was a thing of the past.
By now, you will have guessed where I am going with this. In some respects, the world as it was just before the Great War bore a remarkable resemblance to our own. Gaza, Ukraine, Iraq and Syria – with the S&P 500 reaching new highs on an almost daily basis, all these crises have been met with a quite astonishing degree of indifference by financial markets.
Even the latest Argentinian default has failed to have any significant effect on this blissful insouciance, though this showed ominous signs of cracking last night amid a serious sell-off in US equities.
With the benefit of hindsight, trigger events for wider geopolitical and economic upheaval are always obvious. It’s easy to see them looking back, not so easy looking forward. Shocking though it was, the assassination of the heir to the Austro-Hungarian throne initially had very little impact. It was not until nations started declaring war, a month after the event, that markets became seriously rattled. Right up until the last moment, investors managed to convince themselves that things would turn out fine in the end.
Much the same point might be made about financial events. The collapse of Lehman’s, a comparatively minor investment bank, prompted the worst financial and economic crisis since the Great Depression. Few if any anticipated the scale of its impact. Similarly, the cascading series of banking collapses that marked the start of the Great Depression began with the failure of Creditanstalt, an Austrian bank that scarcely anyone had heard of at the time.
Looking at today’s events, a similar complacency afflicts investors and commentators as they weigh the carnage of the Middle East and the disgusting expansionism of Vladimir Putin’s Russia. I’ve lost count of the number of City reports I’ve read explaining why today’s geopolitical events don’t matter for financial markets.
These are considered small wars in faraway places, of no relevance – beyond the constant pounding of the 24-hour news agenda – for the economic powerhouses of the West. No major player in the global financial system, it is reasonably postulated, would be quite so stupid as to go to war over them. Well perhaps, but just consider the way events have already escalated. The murder of three Israeli teenagers – a shocking but tiny atrocity by the standards of the region – has led to the invasion of Gaza. Few could doubt, post this response, that Israel would also strike at Iran if Tehran gets any closer to arming itself with nuclear weapons.
Consider also the escalation of events in Ukraine, and the economically perilous ratcheting up of sanctions in retaliation. For a Europe still struggling to extract itself from the ravages of the financial crisis, these developments could hardly have come at a worse time.
All this might not matter so much if it were against the backdrop of a generally stable world economy. But very few would describe it as such. Pregnant with record amounts of debt – emerging markets are now piling it on with the same reckless abandon as the West – and highly reliant on the steroids of artificial monetary support, financial markets have rarely looked more vulnerable to unexpected shocks. I don’t want to over-egg the point, but the parallels with the calm before the storm of 100 years ago are impossible to ignore.
None the less, he came to epitomise the misplaced complacency of his age. This was a time of unprecedented international travel and trade, of exchange of ideas and technology. It was entirely reasonable to assume that tribal, national and regional conflict was a thing of the past.
By now, you will have guessed where I am going with this. In some respects, the world as it was just before the Great War bore a remarkable resemblance to our own. Gaza, Ukraine, Iraq and Syria – with the S&P 500 reaching new highs on an almost daily basis, all these crises have been met with a quite astonishing degree of indifference by financial markets.
Even the latest Argentinian default has failed to have any significant effect on this blissful insouciance, though this showed ominous signs of cracking last night amid a serious sell-off in US equities.
With the benefit of hindsight, trigger events for wider geopolitical and economic upheaval are always obvious. It’s easy to see them looking back, not so easy looking forward. Shocking though it was, the assassination of the heir to the Austro-Hungarian throne initially had very little impact. It was not until nations started declaring war, a month after the event, that markets became seriously rattled. Right up until the last moment, investors managed to convince themselves that things would turn out fine in the end.
Much the same point might be made about financial events. The collapse of Lehman’s, a comparatively minor investment bank, prompted the worst financial and economic crisis since the Great Depression. Few if any anticipated the scale of its impact. Similarly, the cascading series of banking collapses that marked the start of the Great Depression began with the failure of Creditanstalt, an Austrian bank that scarcely anyone had heard of at the time.
Looking at today’s events, a similar complacency afflicts investors and commentators as they weigh the carnage of the Middle East and the disgusting expansionism of Vladimir Putin’s Russia. I’ve lost count of the number of City reports I’ve read explaining why today’s geopolitical events don’t matter for financial markets.
These are considered small wars in faraway places, of no relevance – beyond the constant pounding of the 24-hour news agenda – for the economic powerhouses of the West. No major player in the global financial system, it is reasonably postulated, would be quite so stupid as to go to war over them. Well perhaps, but just consider the way events have already escalated. The murder of three Israeli teenagers – a shocking but tiny atrocity by the standards of the region – has led to the invasion of Gaza. Few could doubt, post this response, that Israel would also strike at Iran if Tehran gets any closer to arming itself with nuclear weapons.
Consider also the escalation of events in Ukraine, and the economically perilous ratcheting up of sanctions in retaliation. For a Europe still struggling to extract itself from the ravages of the financial crisis, these developments could hardly have come at a worse time.
All this might not matter so much if it were against the backdrop of a generally stable world economy. But very few would describe it as such. Pregnant with record amounts of debt – emerging markets are now piling it on with the same reckless abandon as the West – and highly reliant on the steroids of artificial monetary support, financial markets have rarely looked more vulnerable to unexpected shocks. I don’t want to over-egg the point, but the parallels with the calm before the storm of 100 years ago are impossible to ignore.
