Are we really seeing a return to the Roaring 20s?

It’s on the lips of everyone you meet from economists and developers to entrepreneurs and manufacturers.

Europe and the US stand on the threshold of a new Roaring 20s, with unprecedented growth driven by technological change, a world economy awash with cheap capital and a US$3Tn and EU €750Bn ‘bazooka’ to be injected into the economies of the US and EU Member States.
But using the term ‘Roaring 20s is unfortunate and unhelpful. It conjures up images of lopsided optimism and a dizzying lack of regulation in which, to use the name of a popular song of the time “Anything Goes” or rather went.
But just how ‘roaring’ were the 1920s and should we be looking to avoid the kind of over-confidence and madness in a decade that the French more accurately called ‘Les Années Folles’ (The crazy years) if they will indeed return at all.
For starters the Roaring 20s were only roaring for 50% of the US population, at the time the richest country in the world. The other 50% would barely have noticed much tangible difference to the quality of their lives except in the realm of dreams at the cinema where they would have been entertained by all-singing and all-dancing musicals and racy jazz babies known as ‘flappers’.
And in economic terms, the prosperity that fuelled the 1920s will not be the fake prosperity that may or may not fuel the 2020s based as it is on gargantuan public loans, quantitative easing (yes, that’s merely printing money to you and I).
This was a question that was intensely debated by a group of top Portuguese economists at Lisbon’s prestigious ISEG – Lisbon School of Economics and Management on 14 June. In a debate organised by ISEG with the Harvard Club Portugal, the lineup of speakers were Jorge Barros Luís, Managing Director – Macroeconomics and Financial Markets Research at Montepio Bank and Invited Professor of Finance – University of Lisbon (ISEG) and Nova SBE, Eduardo Catroga, an economist, former finance minister and EDP general and supervisory board president 2012-2017, Clara Raposo, Dean of ISEG, Bernardo Baretto, an International asset manager and founder of Lateen, Cristina Casalinho, president of IGCP (Portugal’s public debt and treasury agency) and moderator Stephan Morais, co-founder of venture capital company Indico Capital Partners.
Up for discussion were macroeconomic structural issues like the Recovery and Resilience Fund, monetary and budgetary policy and financing the economy.
But before turning to their ideas and thoughts it might be a good idea to ask why the Roaring 20s were, well, roaring and if they were ‘roaring for everyone?
If you were clever, enterprising and adept at risk-taking they were roaring indeed. There was a clutch of mega rich magnates. The Elon Musks, Bill Gates, Mark Zuckerbergs, and to add a Portuguese name, Paulo Rosados of their day.
These included the absurdly anti-semite and eugenics-minded car tycoon Henry Ford who famously told the public they could afford a car and have it in any colour so long as it was black. He helped to develop the assembly line concept.
Then you had Arthur Curtiss James, a prolific railway tycoon who owned one-seventh of all the railways in the US. There was the newspaper tycoon William Randolf Hearst who developed America’s largest newspaper empire, and the ‘King of Wall Street’ JP Morgan Jnr who lost 40% of his wealth in the stock market crash of 1929. In Portugal it was mostly the banking tycoon families: the Mellos, Salgados and Champalimauds.
The 1920s were a period of post-war and, interestingly, post-pandemic prosperity (the Spanish flu had killed 50 million worldwide between 2018 and 1920) in which the not very financially savvy public, particularly in the US, were told they simply had to have the latest mass-produced home convenience devices: the radio, the telephone, the refrigerator and vacuum cleaner, and could do so on hire purchase (buy today, pay back later). By the end of the decade which had ushered in jazz, cocktails, catalogues, flappers and the silver screen, they were told they just had to buy stock in the technology companies of the day and never mind if they didn’t have the cash, they could simply buy ‘on margin’ via a broker who lent them the money.
It is true that for a sizeable majority of working-class people disposable income increased for the first time in much the same way as it increased for the growing middle classes in Europe in the mid to late 19th centuries.
Of course, for a variety of reasons, to lengthy to go into here, 1920s prosperity ended in tears with a banking crisis, a stock market crash, agricultural famines and tariff wars resulting in the Great Depression of 1930-1939. It is arguable too that most people in Great Britain, eclipsed by the US at this time, didn’t enjoy a Roaring 20s at all.
Today, as Portugal, Europe and the US are suffering through another pandemic after a banking, sovereign debt and tariff crisis, it is tempting to think that we could be on the brink of another wild economic boom, this time fuelled by the green economy, exciting new startups, cheap cash, low interest rates and new AI, IoT and digital technologies.

Big boom unlikely

The likelihood, however, is that the Western world will continue to stagnate (low growth, low productivity and deflation — a huge problem right now) coupled with a weak demand for credit and almost negative yields of treasury bonds.
Veteran economist Eduardo Catroga points to a thesis that predicts a period of great optimism and exuberance as was the case in the 1920s, but hopes it will not be as irrational as back then.
“Unfortunately, I do not see the impact of the Covid-19 crisis having such great and far-reaching effects as the boom in technology, art and architecture had in the 1920s. Will there be a boom in consumption as there was in the 1920s? I don’t think so, since consumption in the developed western countries grew between 2010-2019 at around 18% while in 2020-2021 (down only 2.6%) it was kept high because of federal and central bank support and online commerce).
“For there to be a boom in consumption there cannot be an environment of uncertainty so I don’t think there will be one as happened in the 1920s,” said the seasoned economist.
A boom in enterprise investment and productivity, despite the introduction of new technology, had not been seen in the OECD countries, certainly not one which had led to an increase in productivity and GDP growth. In fact, over the past 30 years there had been a fall in GDP potential.
How the western world was going to reverse this downward trend would need to be one of the challenges of the post-Covid-19 world.
In fact, the new technologies only served to reinforce the duality of the employment market in terms of the technologically savvy and those with low skills and high qualified jobs were simply not being created with the necessary intensity and speed to effect such a boom.
“Apart from highly-specialised and highly qualified sectors, most professions are low-skilled jobs, particularly in Portugal with so many call centres,” said Catroga.
There would, however, be a certain ‘re-industrialisation’ of the OECD countries but “not at a spectacular rate.”

Spending wisely

The issue for Catroga was how, when the US saw a much quicker economic recovery, would Europe manage to boost its economies, qualified jobs and create hubs of investment attraction. That is the challenge.
What had happened was that the EU and US had created an environment that was favourable and an expansionist monetary policy with the suspension of the EU’s budgetary rules to allow an increase in deficits, the financing of public deficits through bond purchasing without a risk for EU euro zone countries.
The challenge was how to increase European productivity and spend the ‘bazooka’ money and EU structural funding wisely and in a targeted way and tackle the anaemic growth of the past two decades in France, Italy, Greece and Iberia.
“The German economy does not in itself have the force with 10% of the EU´s GDP to be the only driver, it needs three or four other drivers to provide this productivity and growth boost in the real GDP,” says the economist.
Nevertheless, there are encouraging signs in the recovery plans for Greece, Italy and France to attack the “gargoyles” that strangle productivity and foster a lack of external competitiveness. In terms of general and political economic and monetary policy Europe is now heading in the right direction.
In 40 years Portugal has received €200Bn in EU funding. Since 2011 Portugal has had €130Bn from EU restructuring funds, and now to 2027 the country will get some €23Bn from the EDRF.
How judicially these funds will soon be distributed within the economy towards up-skilling, productivity, competitiveness, digitalisation, modernisation and technological advancement remains to be seen given that the level of convergence with more dynamic and developed EU countries has been relatively small regarding Portugal.
Markets expert Jorge Barros Luís said there were now the financial resources and a new attitude, but asked if Portugal and Europe would be able to make the most of the funds and opportunities the EU ‘bazooka’ would provide?
On the Resilience and Recovery Plan, Carla Raposo said that the extra money that Portugal would receive — and has yet to arrive — had to do with the need to bring additional money to Europe’s economies because of the Covid crisis, to “sweep away” the past 18 months of lost (economic) activity in terms of growth. “If the funds had not been made available, Europe would fall into a deep recession,” she said.
In other words, it was precisely creating a 1930s New Deal investment plan now to avoid the chaos scenario that unfolded at the end of the 1920s.
“I think within the pluriannual financial framework and that regarding the RRP I would expect there should be a way of controlling and implementing the plan in a different way than we had in previous pluriannual financial frameworks, so we know where, how and if the money is spent and the impact of the application of these funds,” she said referring to EU funding.
As to the Roaring 20s, the Dean of ISEG said the 1920s in the 20th century started well and ended badly, with the Great Depression. The only positive thing about it was the discovery of penicillin in 1928.
“At the start of the 20s in the 21st century we have the vaccine developed as a result of a huge public health crisis but all the uncertainty at present surrounding its effectiveness. If they work well, I think we’ll have good 20s because there is a willingness to believe in transformation and investment,” said Clara Raposo.

Different recovery rates

Economist Cristina Casalinho, who looks to a long-term future without extraordinary aid packages, but does recognise that now is time to make the most of loans because interest rates are so low, said the developed economies of Europe and the US had to show “some caution” as the different sectors of the economy were in a transitionary phase and it was not yet clear which parts would be destroyed, which sectors would be recycled, and which parts would be influenced by technologies that had already been in the process of development before the crisis.
“When we look at the question of who is going to be left behind, this crisis, although chronic, has not been the same in terms of effects for all sectors, and in reality the consequences were not felt at the same time nor were they homogenous.”
“There will be economies like Spain, Portugal and Greece which are more dependant on tourism which will be more affected, while the German economy less so, with consequences mitigated since they are already closer to their potential growth rates,” said the expert who is responsible for overseeing Portugal’s issue of sovereign bonds.
It was vital for the vaccines to be effective because while uncertainly continued “companies won’t invest, hire staff, people won’t feel confident to consume and we will not secure a solid recovery” said Casalinho.
The economist also said there was a section of the population which had been made unemployed that may not be able to be re-skilled quickly enough and this was a serious problem which implied a change in budgetary policy. “If we can’t retrain and retain a significant part of the workforce relatively quickly this will have a significant effect on the country’s budget”.
Bernardo Barreto, who works in the capital and funds markets on a daily basis, said the consequences of an expansionist, (i.e. big borrowing, big spending) EU policy mix on the markets reaction and on interest rates
He said there had been negative impacts on logistics and product chain, raw materials and transport and container costs had risen, with the EU economies lagging behind the US and China in terms of recovery.
“The truth of the matter is that we have had a fairly high level of inflation (EU: 2% in May, 1.6% in April and US 5%). If this policy mix is sustainable or not, the inflation compared to May 2020 is fairly high. Oil prices were in negative territory last year or at US$20, US$30 and now are at US$60 a barrel, it has doubled with no precedents,” he warned.
“Both the FED and ECB have said inflation is transitory, and for the time being the markets are buying this argument, at least the bond market,” he said.
What is interesting that while interest rates continue to be low, the 2-year yield hit its highest rate in a month on 10-year US treasuries bonds, while inflation has climbed to a 13-year high of 5% from 4.2% in May – the highest level sine 2008 when oil was US$150 a barrel.
However, Barreto said that the FED’s medium to long term goal is to have an average inflation rate of 2.0% and that the inflation rate would have to be above that before reacting. As to US monetary policy “it seems that the FED is comfortable having a slightly higher inflation rate and will continue to stimulate the economy”.
Overall, the message is that the developed world will continue to face stagnation because of an ageing population, low birth rate, poor labour force productivity growth and a weak demand for credit which is why traditional monetary remedies are not working and the latest evidence is that neither economists nor investors hold out much hope that the 2020s will buck the current sluggish trend and pave the way for a new Roaring 20s.