A century ago, the 1920s exploded into a decade of prosperity and excess called the Roaring Twenties. Could we be about to see something similar happen in the 2020s?
The world had just been hammered first by World War 1 from 1914-1918, and then by the 1918 Spanish Flu which killed somewhere between 17 and 100 million people.
It was a period marked by the loss of loved ones, economic hardship, and a stressed-out population in need of a release-valve.
As we head into the decade of the 2020s after coronavirus, many economists are looking at the parallels in the history books with excitement, that the Roaring Twenties might be set to repeat itself.
The 2020s have begun with around 2 million deaths so far attributed to coronavirus worldwide, and lockdowns have caused similar economic harm to what you might expect in war-time.
Here we look at all the reasons to be hopeful that the 2020s will indeed be a new Roaring Twenties.
And then, the alternative viewpoint – that the 2020s will end up being The Lost Decade…
Part 1 – Sunshine and Optimism: The Roaring Twenties
How The Years 2010-2020 Set The Stage
Western economies cocked up in the years running up to the 2008 recession, but the years of financial reforms and political shake-ups that followed it have put us in a good position today to move forwards.
We could hardly go much further backwards – in the UK, real GDP per head in Q3 2020 was no higher than it was in 2004. And remember, Q3 was the good times between lockdowns.
In 2016 Brexit was voted for, and then eventually resolved.
What really matters is what this government and future governments choose to do with their new powers.
Hopefully they make a good job of it and the UK takes a competitive lead in the world in the 2020s.
Whether you believe Brexit was a good or a bad thing doesn’t really matter. A good poker player will often win regardless of the hand they’ve been dealt.
Then of course, Covid hit. The recession that followed is unique from other recessions, and we should take some relief from that.
In the name of public health, governments took the intentional decision to tank the economy, trusting or perhaps hoping it would come back again when the virus had passed.
Unlike in a normal recession, the locked-down population still want to spend, they have the cash to do so, but are just not allowed to.
Such a thing has never been tried before.
What’s really positive though is that some demand is still there, building up and longing for a spending spree, and will be able to do just that once all our shackles have been removed.
Will the world see a quick rebound, leading into a decade of prosperity?
We Were Due A Big Crisis
As we covered in this article on the upcoming debt crisis, we think the artificial recession caused by lockdowns has popped the bubble of the economic cycle at a time when it was due to be popped anyway.
Asset values, debt and the economy all move in cycles, and with a good run since the 2008 crash, economists were just waiting for the next global event to light the dynamite that had been naturally building up.
We’ve been critical of the furlough scheme, but if lockdowns were necessary, then this scheme was too. While many people lost their jobs, more kept theirs, and these people can now contribute to an economic boom rather than being pushed into the benefits system.
And government policies of endless money printing and dumping cash into the economy is likely to stay in place for some time.
In many ways, debt is now all that keeps the UK economy going.
This ultra-loose monetary policy could support a decade of strong growth, but is also just the kind of irresponsible short-termism that could lead to something similar to the 1929 Great Depression that ended the last Roaring ‘20s. But the going will be good for a while.
Savings And Debt
The national debt should hopefully be manageable if interest rates stay low for the next couple of decades. Let’s hope it does.
But while national and corporate debt has ballooned through the crisis, household debt has actually shrunk. In fact, the average household saved £7,100 in 2020.
If everyone splurges that cash once the economy opens up again, it could be the boost needed for a speedy recovery.
The National Feeling
The cash is there, the government policy and willingness for unfettered growth is there too. But there’s something more emotional going on too.
The impatience to escape from our cages is there, and it’s strong. So much depends on the quick roll out of vaccines though, to catch this wave of confidence before it descends into despair.
Imagine the effect on the culture if lockdowns lasted until summer 2022 for instance.
We’ve been denied the basic human rights of eating together, drinking together, and leaving the house, let alone the country. Even a hug has been made illegal.
Hopefully when this is over, people will want to get out and explore the world, live life to the max, and spend like there’s no tomorrow.
Part 2 – Doom and Gloom: The Lost Decade
In the UK, the 1920s may have been called Roaring, but they were still very much restrained by government policies.
During the Great war, the UK’s money supply had more than doubled through money printing, much like what we are familiar with today.
So in 1925, the government just cut the money supply in half, which caused a recession in 1926, three years ahead of the Great Depression in the US in 1929.
We’re no fans of the UK’s dependency on the magic money tree, but to cut it off abruptly would result in a Lost Decade.
The immediate risk is that policymakers panic and clamp down on the recovery before it has a chance to turn into a boom – possibly even kickstarting a new Depression.
The government has chosen the solution of printing money, and so must keep doing that until we’re fully past the corona-crisis.
As we said earlier, Brexit can be either good or bad economically depending on what happens next. The government could easily mess it up, or it could set us on a growth trajectory much faster than the EU is able to achieve, bogged down as it is with 27 nations with different priorities.
The double hit of Covid-recovery mismanagement and bad post-Brexit policies could be a vicious cocktail that sets us back a decade.
But get both right, and we’ll have little to worry about!
Ramifications Of Furlough
The scale of the economic mess we saw in 2020 was an opportunity for all the bottled-up crap in the markets to be flushed out in one go.
Allowing inefficient companies and bad systems to die is a natural process that is meant to happen in recessions. Indeed, it’s a big part of why booms often follow them.
Like Australian bush fires that clear the old dead trees to leave fertile ground for a new generation, rubbish companies are swept aside allowing room for innovative upstarts to do the job better.
But Rishi’s furlough schemes and business support packages have had the side effect of keeping zombie companies alive right through this crisis, as well as the genuinely good ones of course.
Another risk is that confidence in the recovery never shows up. Vaccination rollouts may take too long or be ineffective against new strains.
Or enough people may have been so terrified by the news in 2020 that they decide it’s just safer to stay indoors, away from other people and their germs – forever changing their social and economic lives.
This permanent culture shift could permanently leave the hospitality and travel industries at half-capacity.
And of course, the precedent has now been set so that if another virus or strain rears its ugly head in the next couple of years, the policy of first resort will be to shut down again, inadvertently nipping any economic recovery in the bud.
A Tale Of Two Lockdowns
The Lockdown Era has been very different for 2 different groups of people, with a dividing line drawn between the employees protected by furlough or able to work remotely, and the small business owners and the self-employed who have been largely left impoverished.
While most remote working office staff will have seen their savings increase throughout the pandemic – thanks to spending opportunities being limited – this has come at the expense of the entrepreneurs and job-creators in the economy, who enter the 2020s saddled with debts and the risk of bankruptcy.
Investing Through The 2020s
In a Roaring 20s scenario, all asset values would go up, particularly productive ones like stocks and property.
In a Lost Decade scenario, as confidence in business and the economy stagnates, it would be to precious metals and possibly bonds that people turn.
And if a new Great Depression comes along later in the ‘20s as a result of the Debt Mountain collapsing, deflation would reign supreme and cash would have the natural advantage as the main asset class to benefit.
The key is to have a balanced portfolio. We think the 2020s will be good times overall, and we’ll continue to hold a majority of our portfolio in equities like stocks and ETFs.
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We love equities, but in the current economic climate we’ll continue to protect our downside with around 20% of our portfolios in cash and precious metals. If the decade ends up a write off, we’ll be glad we didn’t go all in.
What’s your outlook on the 2020s? Let us know in the comments below.