- Nationalism and panic – Covid recovery policies share many of the hallmarks of economic crashes gone by
- Investors can learn from the triumphs and mistakes of the past and apply long-term thinking
The fallout from the Wall Street Crash in September 1929 reverberated around the world. It brought mass unemployment, bankruptcy and depression, and in response to the crisis, world leaders came up with a paradoxical solution: recovery through spending.
Politicians recognised the need to inject new cash into domestic businesses and many came up with policies specifically targeted at the unemployed. America’s Social Security Act of 1935 established a system of benefits. In Italy in 1931, Banca IMI was created and lent substantial sums to private companies to be reimbursed in a period of 10 years. And despite Hitler’s tyrannical shortcomings, his rearmament and the construction of autobahns created millions of jobs for German workers.
By recovering through spending, America, Italy and Germany inevitably built up debt. Yet because this debt made up a small proportion of GDP, it did not have any lasting damage on recovery. This approach is arguably more favourable to a period of austerity which – as demonstrated by the UK circa 2008 – often leads to dramatically increased levels of unemployment. In contrast to the UK’s austerity, America has consistently supported spending during periods of economic downturn, and in consequence unemployment levels have been consistently low.
Evidently, racking up debt is not always the best solution. When countries such as Argentina, Venezuela and Greece defaulted on debt after the 2008 crisis, they found themselves in a bit of a pickle and still cannot afford to pay the loans back. But while debt can be an enemy at times, if built up responsibly it can provide the means to recover through spending.
Every country for itself
In the 1930s, a side-effect of the recovery through spending was an intensified sense of nationalism. With every country focusing predominantly on internal policies, it became a race to see who could recover economically first.
Inevitably this nationalist policy-making widened the gap between powerful economies such as America's and more dependent economies such as Latin America's. Brazil was hit particularly hard as foreign investment in the country was reduced to zero and its coffee exports fell 50 per cent between 1929 and 1932.
This sense of abandonment finds parallels in Trump’s America First foreign policy. In March he announced that the US would halt its funding to the World Health Organisation and the White House’s communications with USAID have been criticised for being cryptic.
Another superpower quick to exacerbate global nationalist feeling during the Great Depression was the Soviet Union. It claimed unemployment levels of 0 per cent in an attempt to prove the superiority of the communist model, which was insulated from the collapse of capitalism. Again, one can recognise a modern day parallel in Kim Jong-un, who has hailed his country a "shining success" in dealing with Covid-19 (he seems unfazed by rumours of a cover-up).
The nationalist response to the Great Depression bares striking similarities to our current Covid-ridden world. In the 1930s, it took the common enemy of fascism for countries to be reunited again in war. Today, our hope for global co-operation rests in the hands of scientists as they search for a vaccine.
What nationalist feeling does to investment?
Against a prevailing attitude of every country for itself, governments are keen to seek immediate solutions to allow their country to recover from the pandemic. While many industries have faced share price slumps, the obvious investment solution is to tap into areas directly profiting from the crisis, such as video conferencing company Zoom (US:ZOOM) and many businesses in the pharmaceutical sector.
However, it is important for investors to be aware that shares like this could simply be short-term beneficiaries of the current situation. As the world moves back to normal, businesses that cater specifically to the pandemic and lockdown may fall out of favour.
The best type of recovery through spending looks more towards long-term solutions. During the Great Depression the most successful investments were in industries helping America in its Second World War efforts, including: defence, energy, technology and materials. In fact, the top-performing company was Electric Boat Company, which posted a 55,000 per cent return between 1932 and 1954. The company merged with Canadair in 1954 to form what is now the $40bn market cap aerospace and defence giant General Dynamics (US:GD).
Recovery through spending is an important lesson to investors tempted by quick fixes. As demonstrated by the Great Depression, it takes long-term thinking to make long-term profits. Indeed, the origins of General Dynamics reveal that the best investors are not distracted by fleeting successes, but rather anticipate trends formed post-crisis.
