A few weeks ago I attended an extremely good lecture by a chap called Taylor Goodspeed, which, as names go, is fantastically wonderful. It was all to do with recessions and because it was a lecture perforce was somewhat peripheral and truncated in scope, but what it did do was make me buy the book that the lecture was based on.
And what a book it is. Niall Ferguson – no less – says Tyler is “one of the most brilliant economic minds of his generation,” and I certainly wouldn’t disagree. He is certainly one of the most analytical and painstaking.
The basis of his thesis – forensically researched and endlessly statistically correlated or not as the case may be – is that a recession has nothing to do with the excesses of the previous expansion. Economists have long believed that we are subject to Boom only to have it followed by Bust because things get out of kilter during expansions, but in reality there is no correlation there at all. Randomly generated numbers do a walk that very nearly matches preceding booms and busts.
Standing things on their heads, it is almost that Recession is the harbinger of Boom. Certainly, checking Tyler’s excellent research, it is clear that a recession really makes no great difference to the trend line of expansion even a relatively short time after it hits. Perhaps there is a build up of capacity of all kinds in a bust and once a catalyst pushes those imbalances, expansion (Boom) ensues.
What needs to be thought about is, if that is the case, what causes recessions? The answer – as it always is in any given situation – is that it is not one thing but the overlapping of several different catastrophes. To simply lump a few together, wars, crop failures, energy deficiency, credit curtailment and inappropriate responses to economic situations individually might only affect one country, or one part of that country, but over an entire region taken together they will for sure end up resulting in a recession.
There is, however, one common linking thread that all these catastrophes have – which to be fair I don’t think Tyler makes enough of. Each and every one results in liquidity (in the old days it was gold) being drained from the system. That on its own need not be a problem, but as each shock hits, it affects the next in line like a set of falling dominoes.
Think back to the 1973 first oil shock. At the time I remember there being worries that countries buying oil would simply be unable to gather enough cash together to pay for it. There was a book called “$100 million a day” which basically said the oil producers were going to buy everything and everyone else was sunk. Apart from anything else $100million sounds like a lot but even then wasn’t even $1billion in today’s money. The current oil bill daily is around $7billion and even that isn’t all that much in the scheme of things. Lovely to get your hands on it yes, life changing yes but relative peanuts when every couple of months America runs through another $trillion.
But back to the Good Ship Goodspeed. For sure the shock in 1973 created recession pretty much everywhere but only because at the same time there had been harvest failures all across the world – even America and Canada were well down. And then the Russians – who denied they had a problem – bought somewhere between 25 and 30 million metric tonnes of grains. That resulted in simply massive price increases in all kinds of food (not only croissants). And what is the result of having to pay more for your croissant and the petrol to go to buy it? You have less cash in your pocket. So you stop spending because in reality you don’t have much chance to increase what you earn (at least not in the aggregate). Oh and there was a war as well in the Middle East.
Now each one of those things might not have resulted in a recession, but together a veritable vortex of value destruction took place and we had a recession worldwide (pretty much). That then led on to what is called the Secondary Banking Crisis in the UK a year or so later which took years to work its way out. I remember all the mini merchant banks getting absorbed by big brothers and the tangle of securities and mortgages that had been built up. In some cases, there were third and even fourth mortgages on barren pieces of ground which – when sold or refinanced – didn’t even make enough to cover the FIRST mortgage. As far as I was concerned, I was very lucky. It was a time before everything had to be offered on the open market so in order to get some cash flowing, a lot of the banks spoke to people they regarded as solvent and said take this property and our existing loan and we will turn it into a 10 or 15 year mortgage for you. These properties were of course underwater on day one but over that number of years it was a fair bet they would turn out pretty profitable. Which they did. The one I remember best was a small property in the centre of Glasgow which had originally been sold for £4,400 – different times dear reader. It had had two more mortgages on it making it £7,700 in loans outstanding. The top two mortgages were going to get precisely nothing and as I recall number one bank gave them £100 each to release their security. That left them with a debt (including rolled up interest) almost exactly at the £4,400 original value. At the time it was probably unsaleable at even half that. Come the end of the negotiated mortgage 15 years later it was sold for £66,000. In 2026 money, it was worth about £48,000 in 1975 and £195,000 in 1990. Just looking at those figures should make you shudder at what inflation has done.
So when recession hits, don’t worry too much. Within a few years you will be back above where you would have been had there been no recession. And maybe – just maybe – you might pick up a bargain along the way.
But the question that should be on everyone’s lips is what difference is tokenisation, crypto and the digital era going to make? There is a very definite push towards tokenisation and South Korea in particular has said it will set out specific rules. Others I’m sure will follow. One of the great things about central governments using CBDCs is you can, say, give everyone in the country £2000 if you think things are looking a bit iffy and tell them it has to be spent within 2 months. Or it combusts and you ain’t got nothing. In a way this is what the Americans did over Covid but with real fiat.
One of the points Tyler makes is that we have got a bit better at dealing with recessions over the years. That is certainly true and my own belief is that the new digital world we are living in will improve things again. As Warren Buffett has said, buy when there is blood on the streets.
