Crisis after crisis. Is this an „L” crisis?

Marcu Ioan-Victor
Stiinte Economice
Master B7, anul I
vik162004@yahoo.com

This study presents a comparative analysis between the current crisis and one of the most important crises
in history, the eighteenth century. It shows the causes that gave rise to that crisis and the main similarities between
the two periods, the main economic actors, how were resolved past problems through fraud. Is the history repeating?
Is it possible that this crisis has a trajectory of moving the US power pole to China in the present economical
conditions?
Besides the European Union is treating the problem, especially after the problems brought by the sovereign
debt crisis PIIGS countries, at which eurosceptics have gained more courage, having available several arguments.
Going on this theory there is expected an entry into loss of confidence in EURO, all culminating in 2015 when the
temporary disintegration can occur eurozone. Finally conclusions will be drawn after the presentation of two cases
and establish a direction for the world economy.

crisis, comparison, public dept, eurozone, history

In this article I would like to develop a theory of the present crisis which, while giving evidence
of pessimism is also very interesting and well-founded. It is a prediction of the development crisis, taking
into account several aspects of international economic unions and the main global economic players.
All these aspects will be compared with the large "depression" from 1720-1784, taking into
account the common causes of both crises and possible similar developments, the same kind of large
economic actors then as now, and finally we might ask if "History repeats itself?". I would like to
mention that this idea was first presented by the trader and financial analyst Ghidiu Dorin, possessing
extensive experience in stock markets, he searched into history and concluded that this crisis is very
similar the one from the eighteenth century.
It is very important when studying economic phenomena to begin with the causes from which
they have led, in our case the phenomena will be present crisis and the crisis in 1720. In the early
eighteenth century, political and economic power was concentrated in Europe, the American continent
being discovered only two centuries earlier. The major problem of the main European countries, England
and France, was huge public debt which will lead to crisis. France had a national debt that the tax system
at that time one could pay in about 500 years, and the UK was in a very similar position. Being in this
situation, the two countries make the transfer in private debt through an ingenious way, which leads to
crisis.
In France the year 1710, Louis XIV, known as the Sun King, was closing to the end of his reign.
A reign during which many wars happened, this is the main cause of emptying the French treasury at that
time. Next on the throne was the Orleans Duke who was regent and knew very well the financial situation
of the country. Even before coming to the throne he was worried the fact that he would not be able to
redress the situation and then begins to be guided by rumors that said that a certain Scotsman, John Law,
has the idea that will solve this problem. He meets with him and finds out the idea of "miraculous" rescue
of the French finance. Law proposes to establish a single central bank to issue paper money and other
credit instruments in the empowerment of the king, hoping for a better circulation of money will improve
the economic situation. He believes that giving people as much money as they ask can solve a country's
economic woes, by fixing a forced currency.
Law's idea was previously presented to the Scottish government in 1700, but has not been
accepted, because it had gaps. The theory was based on hope and the state power, that a nation can get
rich without work through strong state power and public hope in miracles. This was not a conclusion from
a study that Law made, but was an idea based more on hope and opportunity in life, we can say that was
some game of cards, knowing that he earned like that his living.

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 In 1715 the Orleans Duke came to the throne and France found itself in the following situation:
145 million pounds in annual revenue (an old unit of precious metals and name for the first precious
metal coins in England and France), annual expenditure of 140 million pounds and, besides that huge debt
of 3.5 billion pounds of 150-200 million pounds plus interest. In this situation some French noblemen in
the Crown Council proposed bankruptcy state.
Because of the huge debt the state will take some very tough measures, and finally a scam will be
made with John Law's involvement. The first phase uses seigniorage right, beat the currency with the
sovereign face and so its weight decreases by 30%, forced changes in state bonds, treasury bills were not
carrying interest and proceed to arrest collector accused of corruption, confiscating their wealth. Even in
these conditions was very high state debt, and then the regent remembers John Law, who was waiting to
be called.
In 1716 Law gets into action and give permission to set up a bank called „Banque Generale”
which was a corporation and issue paper currency that currency on demand in gold. In the first year the
bank has a good business and fulfills its main purpose: to inspire confidence in people, because every
time the banknotes were exchanged immediately upon request and administrators of the kingdom have
been guided by the king to send bank notes Law's collections. After having relative success with this
bank, in 1717 John Law founded the second company that will lead to the fulfillment of his plans,
"Mississippi Company". He made this concession after the regent territory that France is held in North
America, Louisiana, for a period of 24 years, transforms into a guarantee for the new company he set up.
The capital of this company was 100 million pounds, payable solely in treasury bills. So after people buy
shares in the new company with Treasury bills, they were burned and reduced the state debt which was
converted, in fact, shares in the company's Law. The big mistake was that he Scotsman did not pursue the
improvement of economic and social life, but its main purpose was to get rid the regent of debt. Even in
that short period of Law's bank loans with relatively low interest rates and economic life began to flourish
due to usage of these credits, he thought of a long-term development, but only on the acquisition of
confidence for its institutions which are then solve the debt problem.
Law was abusing of population naivety convincing through some rough lies to achieve the goal.
Louisiana's propaganda said that for gold and silver to bring they needed plenty of ships, even those who
saw the territory were misconstrued, thereby increasing public hope.
In fact there was no guarantee behind huge institutions, as even the regent patronage was made
only verbally, omitted any paper to make it legal. Thus, stock prices grew a lot and Law knew that it
wasn’t long enough until they will be able to redeem the entire debt. He made new issues of shares, and
the population led a struggle to get into their possession, especially after the right of preemption has been
implemented and were promised 200% dividend. So, these maneuvers John Law managed to ease the
regent of the debt by simply transforming the state bonds and treasury bonds into shares in the two
institutions and banknotes issued by "Banque Generale."
After four years in which all these happened the climax was reached in 1720, when Mississippi
Company shares went from 500 pounds to the first issue at a price of 20,000 pounds and owners began to
sell to make profit. Shortly after the bank had no gold to redeem banknotes and Law's system began to
fail, then the Mississippi Company shares have suffered the same fate, is well known picture of a big
financial „crash”. In 1720 the total value of banknotes issued by the bank was somewhere around 3
billion pounds, but they have suddenly become worthless paper, and in 1721 the regent decides removal
from circulation of banknotes. John Law was with great difficulty escaped the rage in Paris by the regent,
but still managed to leave France, but poorer than when he arrived.
In a careful analysis of what happened in France during that period we can see that the population
was subjected to people abuse and scams that have made on it’s back, only to pay debts the kingdom had.
The main cog that started this maneuver was inflation, because Law's banknotes had nothing to do with
the economy, but they had to cover the population's demand for money, money that finally devalued
completely.
In the same situation, there was a huge public debt and England (1711) after the war with Spain,
and Prime Minister, Lord Oxford, thought that a solution to these problems will bring a big increase in
popularity. Its idea is similar to Law’s, from which it was inspired, thus making under state patronage, the
South Sea Company, which used to support the alleged wealth of South America that England was to
exploit them and enrich shareholders. The population began to buy shares, especially at that time in
France and Law's scheme was in full prosperity, and its stock price went from 125 pounds to the first
issue, finally reaching 1,100 pounds. Meanwhile the state has paid a great deal of debt, but with prices
reaching up to stop speculation and held the same "crash" financially as well in France, leaders of the
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South Sea Company were blamed for speculation, this event being called later "the great South Sea soap
bubbles."
We can see that in the same way, by creating high expectations of the population, the issue of
shares virtually without a core value, this big scam was made and that state debt have been paid. Also in
this case the burden from the state for population transfer occurred through a non-transparent inflation
hedging actions that. Initially they were very valuable for the owners to finally discover that they were
just deceived.
If we analyze the present crisis we see that the debt of the world major economies are very large,
a prime example being the current U.S. system of income will need around 1,500 years to pay off debts.
The world's largest economy added EU countries: Greece, Portugal, Spain, Italy (national debt of 115%
of GDP) and Ireland. Thus, we see that there was common cause with now and then you can reach a debt
restructuring on the back of the population.
As a unit of measurement in this study consider the transfer of political and economic power pole
from one continent to another. The power pole was 1700 in Europe, a continent full of debt, and great
hopes were linked to the U.S., ''New World'' at that time, a debt-free realm. In this context, individuals
seeing that on the shoulders falls a very high debt burden, as the schemes of "Law" of the main European
countries began to immigrate to the U.S. After 1720 took place a real exodus of people from European
countries to the “new world”. This has made economic and political transfer of power on the American
continent because at the end of the crisis (1775-1785) U.S. wins its independence.
Today all eyes are turning towards China and hope that this can be considered "the new new
world." According to this theory and comparisons with the crisis in the eighteenth century, when it was
Europe where the U.S. is now, and the pole of political and economic power will be transferred to China,
the second world economy at present. These expectations can be seen in capital markets, since any
rumor's yuan is regarded favorably by investors much more than rumors to the contrary that coin.
This transfer of power was made in decades, and this theory predicts a crisis in "L" (rapid
correction and long to return) which will cover at least 10-20 years. It is natural that today's economic
structure is incomparable to that of the eighteenth century, and because of the current technology, even if
the causes of the two crises are alike, the current is much shorter, but with a similar trajectory.
You can not overlook the importance of the EU in this crisis, however, argue that the euro area is
a virtual construction are becoming increasingly noisy, especially after the problems in Greece and
Ireland. This may not be sufficient nominal convergence to a strong and lasting monetary union, which
increasingly emphasizes immense debt of the "Mediterranean fringes”, whose deficits are financed by
Germany and the Netherlands. We see thus a divergence rather than convergence among Western
European countries. Germany tries to save the euro area but also has problems at home, one of which
being Deutsche Bank, the largest private bank in Germany which has huge debts, and if they try to
rescue it the state may not have enough money for November to stop the eurozone's default.
Also in the same study, Dorin Ghidiu makes a comparison between changes in the American
union and the euro area, suggesting a temporary disintegration of the area, like the U.S. in the period
1845-1848. Carrying the analogy between times of maximum extension of American union in 1837 and
the EU in 2004, the American continent in 1848 achieved a secession of some states because of debt, and
comparing this prediction can make EURO disappearance in 2015, and in the same period of crisis to
reach the climax.
The disappearance of the euro area may also be regarded as the century’s speculation, because
there are many billions of dollars earned from it, billions that banks will be able to cover losses caused by
the current crisis. Thus, it is estimated that since 2011, amid loss of confidence in euro, to move into
Central and Eastern European currencies (the effects of this trend is already beginning to be seen), and
because the dollar has many unknown factors, especially by programs "Quantitative easing" of the U.S..
Another argument is eurosceptics union between West Germany and East, where there are still significant
discrepancies, and if a union between two economies that have been separated less than half a century is
difficult to achieve, why would it be easier to achieve one between countries with much different customs
and tradition.
Referring to the current situation compared with the global crisis in the eighteenth century, it is
important to see if we can find the same items now. We saw that the main reason that the crisis was
reached in inflation made the most powerful countries in the world at the time. If you look carefully in the
configuration of the global economy and today's most powerful economic player, the U.S., uses inflation.
Programs long discussed of "Quantitative easing" in which hundreds of billions of dollars were released
in the market we cam notice that they led to galloping inflation across the globe. We can say that the U.S.
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inflation is exported everywhere, but especially, as it was normally in the developing world, so in this
may be followed by financial crisis and a food crisis if the prices will keep increasing.
We can see that after a drastic fall of stock market indices since 2007 until 2009, now there is a
sharp increase, especially if we look at Dow Jones factor, but compared with the financial scams of the
eighteenth century these increases can be liked to former „bubbles soap" which in the near future are
likely to break. It is obvious that in this case the stock price will drop very much, and those who want to
be insured against the risk according which this theory must own cash money and subsequently put them
in the state in order to obtain benefits from it.
I admit that this theory is very surprising and radical, but the actual cases, although we are in a
different era, are very similar to those of the crisis in the eighteenth century. I tend to think that because
of technological advances "L"-will be much smaller, but it seems as the theory presented there will be an
"L". It can be said that "history repeats itself”, even if the current situation is totally different scales and
coordinates, we see that there is the same type of economic actors which fail in showing a different
variant.
However, I hope that the hardness of this crisis will be much weakened by a global consensus
and will soon move towards prosperity, but it is very important to know the history and try not to repeat
past mistakes, as saying, "Who doesn’t know just a little history, knows nothing " can come true again in
the future.

Bibliography;

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ASE Bucuresti, 2010
2. Nicolae Murgu, Paul Stefanescu, Mugur Isarescu, „Afaceri si caderi financiare in lumea
capitalului”, Publishing house Dacia, Cluj-Napoca, 1979
3. Dan Popescu, „Cataclismele economice care zguduie lumea”, Publishing house Continent,
2010
4. www.nyse.com
5. www.tmctv.ro