From the London Times, August 5:
We are currently experiencing a reminder of the challenges that are familiar to multiple economic meltdowns — are we condemned to relive the drama yet again?
Satya Nadella has been thinking about the 1873 global financial panic. When asked last week about the risk of an oversupply of data centres and artificial intelligence chips, the Microsoft chief executive said that “the book to read right now” is 1873: The Rothschilds, the First Great Depression, and the Making of the Modern World.
“All of us are reading this,” he told Wall Street analysts on an earnings call, after the software giant predicted its investments in AI infrastructure would propel its capital spending to $175 billion in 2026.
The book, by historian and economist Liaquat Ahamed, explores the Victorian-era industrial revolution, when the Rothschild banking dynasty created the international bond market and the introduction of the railway transformed international trade. Those innovations combined began as a rational construction investment bonanza but eventually would lead to a speculative investment frenzy.
At the start of the 1870s, output in economies across western Europe was booming, and some 12,000 miles of track was being added every year to European and North American rail networks.
According to Ahamed, about $3 billion was invested in the US railroad buildout from after the Civil War until 1873, of which roughly $1 billion came from Europe and $2 billion came from individual investors in the US, where millions of people bought bonds in small denominations to fund rail construction projects.
The revolutionary rail expansion has drawn comparisons to the AI infrastructure investment bonanza. Last year America’s biggest technology companies, including Microsoft, Amazon, Google and Microsoft, spent $450 billion on infrastructure. Their combined spend is expected to rise to $900 billion this year, and $1.4 trillion in 2027. They have borrowed more than $400 billion this year to fund the buildout.
Back in the early 1870s, asset bubbles emerged in different countries. In Vienna, property prices doubled and redoubled, while the stock market rose by 300 per cent in three years. High stock prices were supported by rising profits and dividends at rail companies around the world.
The gilded age came to an end gradually, then suddenly. The first signs of trouble emerged in early 1873 in Austria, where a group of senior officials at a railway company were arrested for fraud. Then, in April, the news got around that Creditanstalt, the bank run by Anselm von Rothschild, had withdrawn its deposits on the stock exchange and liquidated a large position in equities. The report triggered a sell-off and bank shares on Vienna’s stock market fell 45 per cent in a single day on what became known as Black Friday. Vienna’s property market crashed and the unemployment rate shot up. Many of the nouveau riche who had made fortunes during the boom went bankrupt.
Panic spread after the collapse in America of Jay Cooke & Co, the financier of the Northern Pacific Railroad who had been the leading salesman of Union war bonds during the American Civil War. In September, Cooke was forced to announce he had run out of money, which led people to doubt whether any capital could be raised for a railroad. The New York Stock Exchange temporarily closed as investors panicked, and by the end of the year, a third of railroad bonds had defaulted.
Within a year, Germany, much of Central Europe, and the US fell into a recession lasting until almost the end of the decade. Global lending dried up, and prices across the world fell by 30 per cent....
....MUCH MORE
Ha! Great minds and all that. The outro from July 7's "Frontiers of compute: The technologies to reduce AI inference costs"—McKinsey:
If for no other reason than to avoid reinventing the wheel, the challenge of thriving in a deflationary environment means someone (yours truly) might have to dust off the economic history books for the period 1873 to 1913 to see how those folks did it.
Related:
May 2012 - Irving Fisher, Deleveraging and the Lessons for Europe of 1873
The crowd on the street know Prof. Fisher, if they know him at all, for his October 1929 pronouncement
"Stock prices have reached what looks like a permanently high plateau."
Despite the unfortunate timing and that of the even more untimely/unprescient/unknown "There may be a recession in stock prices, but not anything in the nature of a crash" uttered on Sept. 4, '29 (The DJIA peaked the day before at 381, it would bottom at 41 in 1932), Irving Fisher was the most respected economist in the world at the time and actually quite good at what he did....
March 2020 - Crisis Chronicles: The Long Depression and the Panic of 1873
This is what we would like to avoid.
For 24 years, until shaking off the 1893 panic, the world experienced a general decline in prices, the so-called "good deflation", accompanied by spasms of unemployment and enlivened by the inflationary gold rushes that expanded the money supply: South Africa, Deadwood, some of the later Australian strikes and culminating in the Klondike and Nome discoveries.
Combined with the price-reducing effects of the second industrial revolution it was a recipe for disruption.
From the Federal Reserve Bank of New York's Liberty Street Economics blog...
