Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
The Best of Times, the Worst of Times: Economic Booms,
Financial Crises And the 18 Year Cycle.
Akhil Patel*
While it is generally accepted that developed economies experience an “economic cycle”, that is, an alternating rhythm of economic expansion followed by recession – answers to
important questions as to its causes (why?), period (how long?), frequency (how often?) and
impact (to what extent?) continue to defy resolution. This paper takes steps to addressing this
gap by marshalling evidence that not only has an economic cycle been operating in Western
economies (the US and UK in particular) since the Industrial Revolution but also that it has
done so on a remarkably stable average 18- to 19-year period over that time.
Drawing on historical data from the early 1800s to present, this paper presents a theoretical
framework for this 18 year economic cycle; it then explains why the cycle repeats so regularly
- its fundamental causes are rooted in the role that land (and speculation in land in particular)
plays in an economy and the transmission of such speculative activity into the rest of the
economy through the major pro-cyclical sectors such as banking. Economic difficulties
(including a fall in the value of stock prices) are thus more severe at the end compared to at
other points in the cycle. The recent global financial crisis must therefore be viewed in its
proper context, i.e. as merely the latest (albeit the most globally synchronised) episode of a
repeating phenomenon.
Field of Research: Economics, Finance, Banking
1. Introduction
The recent global financial crisis has renewed interest in economic and financial cycles.
Output losses during recessions can be extremely large, as recent history shows. i The
literature on such cycles does not well serve the investor or the business owner, faced with
the prospect of significant gains and losses at such times, given that there is little
consensus on how to anticipate, date or explain business cyclesii that is, how and why
business cycles arise and, critically, when they occur and how long they last. This paper
marshals evidence to help address this gap. This paper finds clear evidence of an 18 year
economic cycle that has operated in at least the United States and the United Kingdom for
well over two centuries. Major economic variables are affected at key turning points of the
cycle.
2. Literature Review
Mainstream economic, finance and business research, dominated by the neoclassical
school, is limited in two important ways in relation to understanding the economic and
business cycle operating in “Western” economies, i.e. those characterised by pricing
mechanisms, mature financial sectors and private land ownership (and transfer). The
literature lacks an explanation for the business cycle, and relies on the idea that its root
cause is down to exogenous demand and supply shocks or largely unanticipated
disruptions in the supply of money (Foldvary, 1997). These limitations relate to the role that
*
Mr Akhil Patel, Director, Ascendant Strategy, 27 Old Gloucester Street, London, WC1N 3AX,
www.theascendantstrategy.com, Email: akhil@theascendantstrategy.com
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Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
land plays in economic activity and to the role of banks in creating an economy‟s money
supply.
2.1 The Role of land
Land is one of the three basic, mutually exclusive, factors of production. This was
understood by the classical economists. However, in modern neoclassical theory, land is
treated as a species of capital. Gaffney and Harrison (1994) posit reasons why and how
this came to be the case. In its characteristics land is very different to capital: it completely
fixed in supply and has a supply cost of zero. (Gaffney 1994). Therefore high land values
do not arise because of any action of the owner; nor do high values results in more supply
(Harrison, 2007).
Property developers know the value of land as „locational value” but its real term is
economic rent (Ricardo, 1821) – that is its value over and above its supply price. Economic
activity inherently tends to cluster in certain locations and the land in such locations attains
the greatest value. As an economy develops (e.g. through investment in infrastructure,
population growth etc.), a piece of land‟s ability to generate rent increases, so does the
value of the land. This is unlike capital (and labour) – where competitive dynamics ensure
that any excess returns to capital come back down to reflect risks and so on (Hodgkinson,
2011). The relative scarcity of land, especially in the best locations, gives owners
bargaining power in relation to the capture of a greater share of economic surplus (Harrison
(1983), Gaffney (1994) et al.). Over time, as an economy develops more and more of the
gains accrue to the land, increasing its value and price. This creates economic incentives
away from investing in the production of real economic goods and services towards
speculation in the increasing price of land.
2.2 The role of banks and the money supply
Banks are regarded is mere intermediaries in majority of economic models – that is a
channel between savers with excess funds and borrowers with needs for capital. This view
of banks has been challenged repeatedly over the years by heterodox economists who
have pointed to the role of banks in creating the money supply through their lending (credit
creating) activities. In early 2014, this view was given official confirmation for the first time
by a central bank (Bank of England, 2014).
Simply put, private banks are not intermediaries but active agents in the monetary system:
they create the money supply. When they extend a loan to a borrower, they simultaneously
create a matching deposit in the system – in the borrower‟s bank account – thereby
creating new money. Operating within certain, system-wide constraints, it is the demand for
loans that creates deposits, not the other way around (Bank of England, 2014).
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Proceedings of 9th Annual London Business Research Conference
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The majority of lending that banks do in an economy is to provide mortgages (Hodgkinson,
2011), that is creating credit against the price of land. The availability of bank credit for
acquiring real estate (land) helps to create additional demand against a fixed supply,
thereby bidding up prices further.
The impact of understanding the role of land and banks in this way is to see that over time
more and more of economic activity becomes predicated on high land prices, including the
health of the banking system balance sheet. But speculative activity cannot go on forever;
at some point it stops. Prices in speculative scenarios either rise or fall: there is no
equilibrium (Gaffney, 2010). As prices fall, this comprises the health of the banking system
at the point at which the value of the loans exceed the value of the land they are
collateralised against.
Anderson (2008), Harrison (1983, 2007) demonstrate that this is a cyclical process
throughout US and UK history, lasting on average 18 years. This is the process by which
speculation in land transmits itself to the rest of the economy: as banks fail, credit is
contracted and businesses start to fail (Gaffney, 2010). This also reduces aggregate
demand. Furthermore, many major sectors of the economy, such as construction, start to
contract – as major employers this is a further transmission mechanism into the rest of the
economy (Harrison, 1983). Eventually, prices of land fall enough for new production to
start again in earnest. Once the banking system has recovered, banks lend back to the
economy and the process starts again (Anderson, 2008)
The literature reviewed above argues for the existence of an 18 year real estate cycle. This
cycle is seen to be driven by speculation in real estate. Land among the factors of
production is uniquely suited to speculative activity. Other literature demonstrates the
proper role that banks play in creating an economy‟s money supply and the flow of bank
lending towards land prices via mortgages. Thus, when real estate prices rise, the money
supply in an economy rise and becomes dependent on real estate prices continuing to rise.
Thus, property price falls or real estate busts have an impact on an economy in two ways –
in causing over-leveraged borrowers to default on loans and in the swift contraction in
money supply for an economy. Further impacts occur in the construction industry and for
SMEs which face external financing constraints.
From the point of view of an investor or business owners, these insights give them the
possibility of understanding how the business cycle operates and therefore to anticipate
their major turning points, allowing the possibility of taking decisions to ameliorate their
negative effects (and exploit opportunities for growth). This paper will examine if this is the
case.
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Proceedings of 9th Annual London Business Research Conference
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3. Methodology
The paper takes the theoretical framework set out above and then examines historical data
to see its impact on key variables. Since it is posited that this cycle is driven by real estate
speculation, data on the following variables are gathered:





Real estate (land) prices
Bank lending
Economic output (GDP) and the dates of major falls in output
Short- and long- term interest rates.
Asset values (e.g. stock indices)
The focus of this paper is to derive insights that are of practical use to business owners and
investors, that is to understand how the cycle operates and when it is likely to negative
impact the bottom line (and the opposite).
Data for these areas was gathered from at least the second half of the 20 th century. This
study was confined to the United States and United Kingdom primarily for data availability
issues but also because the literature reviewed above tended to focus on economies
following the “Western” capitalist model – of which the US and UK are arguably the prime
examples.iii
The following data sets were gathered:







UK real house price indexiv, 1955-2013
US real house price index, 1974-2013
US public land sales (acres), 1800-1923
UK M4 money supply and US broad money supply, 1964-2013
UK 10 year bond yields and short-term Treasury bill yields, 1956-2013
UK Gross Domestic Product, 1956-2013
UK FTSE All-Share Index, 1955-2013
This data was analysed for confirmation of regular 18 year fluctuations in real estate prices,
bank lending/money supply, asset prices and so on. If there were fluctuations in these
variables that coincide with the major turns in the real estate cycle, this provides evidence
of the importance of the 18 year cycle and would provide the ability to assist business
owners and investors in anticipating when business cycles are going to turn up and down.
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Proceedings of 9th Annual London Business Research Conference
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4. Findings
4.1 18 year cycle in US and UK history
The newly created United States Federal Government officially began selling off its land in
1800 after the existing 13 States ceded their land to the newly formed United States
Federal Government. The transfer to private ownership took place via sales of the public
domain. The historical process is not our concern here. Note that propensity to speculate in
land is a key driver of the 18 year cycle, and right on cue land sales reached a speculative
peak every 18 years (Figure 1 below): 1818, 1836, 1854, 1869, 1888, 1908. Anderson
(2008) documents the history of this process: following each boom in speculation, there
was a bust which was economy wide.
Figure 1. Public land sales in the United States, 1800-1923
In the 20th century, this pattern continued. Foldvary (1994), drawing on evidence
marshalled by Hoyt (1933), noted that that the next real estate boom occurred in 1925. The
subsequent downturn in the economy came to be known as the Great Depression of the
early 1930s . The one after that would have occurred in 1943/44 but building was impeded
by war measures. Thus, for the first 144 years of private ownership of land in the United
States, real estate speculation peaked every 18 years and contributed to subsequent
business downturns.
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Proceedings of 9th Annual London Business Research Conference
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The US experience, as seen through land sales data (in the absence of data on underlying
land prices), is quite clear. The creation of private ownership of land took place over a
longer period and was a more complicated historical process in the UK.v Nevertheless,
Harrison (1983, 2007), noting significant data limitations is able to piece together a similar
historical pattern in the UK going back into the late 18th century, i.e. a real
estate/construction/output peak every 18 years on average, even though the dates of the
peaks and troughs are different than for the US. This is summarised, set out below (Table
1).
Table 1: UK 19th and early 20th century real estate or construction activity peaks
(taken from Harrison, 1983, 2007)
Year
(peak year to
downturn)
1792-1794
1811-1816
1828-1832
1847-1850
1865-1867
1883-1885
1898-1902
Historical evidence
Building activity and construction peaked in 1792 following a rise
in speculation focused on the rent-generating opportunities
presented by the canals that were built at this time. These carried
raw materials to the great factories of the north and returned
finished goods to the consumer markets of the south. Banking
collapses started in the City of Liverpool, the centre of cotton
industry at the time.
Land prices and construction increased in the early 19 th century,
assisted by canal building, deepening industrialisation as well as
higher food prices (which increased the price of agricultural land).
Construction peaked in 1811 and then fell dramatically. The
subsequent economic depression occurred in 1815-16.
Frenzy in stock speculation peaked in 1825; then moved into land.
This soon burst in and investment slumped, beginning in 1828.
The building industry hit its trough in 1832.
In the three years prior to 1848, the government authorised the
investment of some £250m to construct 9,500 miles of railway.
The effect was to raise land prices along the railways and in the
newly connected cities. This induced speculation which peaked in
1847. Six banks failed as a result.
The first mortgages started to appear in this cycle. The peak was
characterised by real estate and stock speculation. Even Karl
Marx made money in the stock boom of the 1860s.
Housebuilding increased between 1875 and 1885 and then
slumped – another indication that real estate activity was high 18
years after the prior peak. Another index of activity was
construction of ships in the north east. The output of shipping
tonnage peaked in 1883 and then slumped. This is clear evidence
of the 18 year cycle in operation.
Speculative frenzy reached a crescendo at the turn of the century.
Financial scams were rife in this period, as they are at every 18
year cyclical
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Proceedings of 9th Annual London Business Research Conference
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Year
(peak year to
downturn)
(1920)
1938
Historical evidence
The 18 year peak would have fallen in the early 1920s. However,
this cycle was affected by the First World War. Nevertheless, after
the war ended there was a massive land boom that started in the
early 1920s.
The interwar years were a period of continuous growth. Note that
the UK was not at its cyclical peak in the early 1930s and so the
Great Depression had less (though a still significant) impact on the
UK economy. The end of the cycle affected by massive rearmament expenditures in the run up to the Second World War.
After the reconstruction efforts following the end of Second World War, the cycle picked up
again in the same way as it did in the UK and US. However, after the Second World War it
appears that the US and UK cycles were now synchronised. This is demonstrated in Figure
2 below.
Figure 2. UK Real House Price Index, 1955-2013, US Real House Price Index, 19752013
UK real house price index: 1955 Q1 = 100; US real house price index: 1975 Q1 = 100
Data: Nationwide, OECD, Dallas Federal Reserve.
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From a low in the mid-1950s, UK real estate prices peaked in the early 1970s as did US
real estate prices. Then they fell before rising throughout the 1980svi into the peak in 1989.
They fell again into the early 1990s before the most recent expansion that ended in 2007.
The historical picture in relation to real estate speculation is pretty clear – there is a
property boom and peak in prices that culminates every 18 years. The question now is to
examine how and whether this phenomenon arises in relation to other economic variables
in the way suggested above.
4.2
Bank lending, crises and recessions
An increasingly large share of lending by banks is for mortgages. As the recent financial
crises demonstrated, lax lending for real estate purchases was responsible for the credit
crunch and subsequent financial crises in a number of countries. The severe contraction of
lending by banks is responsible for contractions in economic output. What is interesting to
the current discussion is that such issues arise at the end of every real estate cycle. The
sudden drop in credit that follows the fall in property prices transmits to the rest of the
economy as banks stop lending in general.
In the context of the 18 year cycle, defaults on bank loans caused by a fall in real estate
prices ignite a vicious downward spiral, which can cause a banking crisisvii and a pullback
in other bank lending, leading to economic contraction and further pressure on borrowers,
leading to more defaults. Reinhart and Rogoff (2009) examine the impact of such crises,
noting also that they are often accompanied by crises such as exchange rate, domestic and
foreign debt and inflation crises. Reinhart and Rogoff (2008) and Bordo and Jeanne (2002)
noted the run up in asset, (including real house) prices prior to banking crises and credit
contraction across countries and over time (though they do not necessarily posit a causal
link as is being done here).
Figure 3 below plots the change in M4 money supplyviii in the UK and broad money in the
US since 1964, mid-way through the first post- WW2 cycle. The episodes of abrupt
contraction in money supply – and therefore in lending - took place in 1972-75, 1989-1992
and 2009-12. These all followed the top of the real estate prices set out in Figure 1. Note
that prior to these contraction episodes were periods of (often swift) expansion in the
money supply, at the same time that real estate prices were accelerating (1970-72, 198589, 2005-07).
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Proceedings of 9th Annual London Business Research Conference
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Figure 3. UK and US Broad Money supply, 1964-2013 (year on year change, %)
Data: Bank of England, St Louis Federal Reserve
Banking crises affect small and medium sized enterprises in particular as such borrowers
lack access to other sources of finance. This is one way in which the lack of credit is the
transmission mechanism by which the effects of real estate/land speculation and their
collapse are passed into the economy.
4.3
GDP and recessions
Figure 4 depicts the periods of recession between 1956 and 2013.ix Apart from the
recession in the early 1980sx, the only recessions lasting more than two successive periods
of negative growth took place in the downturn of the 18 year cycle once real estate prices
were falling and bank lending was contracting. These took place in 1973-1975, 1990-1992
and 2008-10. Though not graphed, the picture for the US is similar – the main contractions
in output occurring in the mid-1970s, early 1990s and the late 2000s (as well as the early
1980s).xi
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Proceedings of 9th Annual London Business Research Conference
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Figure 4. UK GDP growth and recessions, 1956-2013
Data: Office of National Statistics
4.4
Interest rates and the yield curve
The rate of interest is a key economic variable for investors and business owners. One of
the best lead indicators for recessionary events is the inversion of the yield curve (when the
yield on longer-term government securities drops lower than shorter-term ones), because
the short-term economic outlook has turned negative and requires monetary policy
intervention to stimulate the economy.
The graph below plots the interest rate spread between 10 year UK government bond
yields and short-term Treasury bills as a proxy for the yield curve: it is normal when the
spread is positive; steep when the spread is large and inverted when the spread is
negative. As can be seen, the negative spread (yield curve inversion) in many cases this
anticipates the coming recession. However, there are times when the yield curve inverts
without a subsequent recession (e.g. the mid-to-late 1990s).
However, in the context of the 18 year cycles, the yield curve associated with a peak in
house prices is a much better indicator. Times when the yield curve has inverted and house
prices were not at their peaks have not resulted in recessions, i.e. intermittently 1965-67,
1985-87, 1997-99.
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Proceedings of 9th Annual London Business Research Conference
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Figure 5. The spread between 10 year bond yields and short-term Treasury bills
Data: Bank of England
4.5
Stock market
From an investor stand point, the impact of the 18 year cycle on stock prices is a key area
of concern as major stock market down turns can wipe large proportions of profits and have
a long-term effect on the gains made by an investment portfolio. Stock markets tend to
price in the coming downturn prior to the onset of the recession or banking crisis
(something noted by Reinhart and Rogoff (2009) who found that real equity prices fall in the
year before a banking crisis but recover to pre-crisis peaks within three years of the crisis).
In Figures 6-8 below, the FTSE All Share Index is graphed based on the 18 year segments
relating to the 18 year economic cycle. These charts clearly show that the major stock
market bear market periods (apart from the fall following the bursting of the dot com bubble
in 2000-2001) take place after the peak of the 18 year cycle – 1972-75, 1990 and 2008-09.
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Figure 6. FTSE All Share Index, 1955-75
Real estate peak in
1973; stock market
peak in 1972
Figure 7. FTSE All Share Index, 1976-93
Real estate peak in
1989; stock market
peak in 1990
October 1987
stock market
crash and
recovery
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Proceedings of 9th Annual London Business Research Conference
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Figure 8. FTSE All Share Index, 1994-2013
Dot com
crash
Real estate peak in
2007; stock market
peak in 2007
Data: Global Financial Data
4.6
The downturn
On average, the downturn following the peak of the 18 year cycle takes around 3-4 years.
The process includes both the contraction in output and the recapitalisation of the banks
that is required for the new cycle to begin again. The stock market recovers first, as noted
above and as pointed out by Reinhart and Rogoff (2009) – stock markets are back up to
pre-crisis peaks within three years of the banking crisis (see also Harrison (1983) and
Anderson (2008)). However, the normalisation of the yield curve takes longer as does the
pick up in lending and rise in house prices.
Table 2 below sets out the length of this process in the last three cycles in the UK. While
the stock market does reach its low point first (within two years), house prices, in real
terms, fall for up to six years; the contraction in credit (or reduction in growth) up to four
years and the yield curve reaches its most positively sloped point anywhere up to six years
after the peak of the cycle.
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Table 2. The length of the downturn after cyclical peaks, United Kingdom, 1956 2013
Cycle (peak
date)
1973
Stock market: Real house
Lending: peak
peak to trough prices: high to growth to low
low
24 months
6 quarters
11 quarters
Yield curve:
inversion to
peak spreadxii
45 months
1989
Dec 1972 –
Dec 1974
8 months
Q4 1973 – Q2
1977
23 quarters
Q4 1972 – Q3
1975
14 quarters
Nov 1973 –
Aug 1977
57 months
Q2 1989 – Q1
1996
Q4 1988 – Q2
1994
Oct 1989 –
June 1994
2007
April –
December
1990
16 months
22 quarters
15 quarters
(and counting)
29 months
Oct 2007March 2009
Q3 2007 - Q1
2013
Q1 2009 - ?
Oct 2007 –
March 2010
4.7
The expansion
The downturn takes 1.5 to 6 years, depending on which measure is used (Table 2 above).
Harrison (2007) and Anderson (2008) suggested this was on average four year process,
drawing on real estate and other data and on the works of Hoyt (1933) who studied the real
estate cycle in Chicago in the one hundred years up to and including the Great Depression.
Once the expansion is underway, the process lasts on average 14 years to the next cyclical
peak, based on the observation that low to high, real house prices go up for around that
length of time. Harrison (1983, 2007) suggests that this expansion is interrupted by a midcycle recession. Thus, in the analysis above, the recessions of 1961 and 1979-81 should
be seen as of a different type to those of 1973-75, 1990-92 and 2008-10. The key point to
note is that the latter stages of the cycle is characterised by much easier credit conditions
and looser lending standards. As argued above, as economies expand the gains of this
wealth is ultimately increases the economic rent and therefore accrues to the owner of land
rather than the owner of capital or to wages.
This process is most emphatically demonstrated by the prevalence of tall buildings that
open at the peak or just after the peak of the ensuring recession. The business case for a
tall building is high land prices (requiring the need to build up to generate economic
returns), optimism about the economic outlook and large amounts of credit. This
phenomenon was first observed by Richard Cantillon in the 18th century. The two tallest
buildings in London (and at the time of opening, in the EU) are the Shard and the One
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Canada Square, which opened, respectively, in 2010 and 1991, during the recessions
which occurred after the peak of the 18 year cycles which gave rise to them.
4.8
The generalised cycle
The foregoing analysis demonstrates that the 18 year cycle is both a theoretical framework
as well as an account of the key expansions and contractions that take place within the
developed economy. Not all recessions take place every 18 years, but the ones which are
prolonged and which involve major financial and credit problems and are more costly to
firms and households occur on average every 18 years. In between times, the economies
expand, a process interrupted only by minor recessions which in general come and go
quickly.
Following the evidence presented in Anderson (2008), Harrison (1983, 2007) the following
general patterns can be observed within an 18 year cyclical period.
The first act of the 18 year cycle begins as the wreckage of the previous cycle is cleared
away, where economies move from recession back to growth and business conditions pick
up, unemployment comes down and consumer spending returns. This leads to the first
expansion of an 18 year cycle.
The first key policy dilemma within the new cycle is the point at which monetary policy
should tighten (following the looser policy adopted in the throes of the previous crisis).
Monetary policy tightens once the recovery is underway. Banks lend into the economy
when the yield curve is in more normal territory (when it is steeply sloped, banks have an
incentive to borrow short to lend long back to government: there is less money for lending
to businesses; thus once the recovery has started, loose monetary policy rather than tight
inhibits the recoery).
An increasingly confident economy may often experience a mid-cycle slow down. Such
contractions generally prove to be short-lived and tend not to be financial in their nature, i.e.
implicate the financial system. xiii
The next act of the cycle is the second boom. Speculation plays as much of a role in this
boom as does business expansion, though standard economic data may not be able to
distinguish between the two. In this phase of the cycle, higher demand for real estate
(land) is more obvious; and land is more expensive to acquire, mortgages comprise an
increasing proportion of the loans made by the banking system, the quality of a bank‟s loan
book is increasingly predicated on high land values. A characteristic of this phase is easy
credit and relaxed lending standards. The final part of this phase is frenetic real estate
activity.
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The final great act of the cycle is the crash. At some point the cycle can no longer continue
to support ever increasing values. When asset speculation is taking place, if prices are not
increasing they are falling. As speculation stalls, prices fall, dramatically. Unlike other
contractions, the problem with such falling values is that the banking system faces the real
possibility that loans outstanding exceed the collateral value of assets they were created
against and that people are no longer able to meet their loan obligations. Such problems
disrupt the normal operation of the banking system (e.g. inter-bank lending) and can lead to
a full-blown economic crisis. They also result in the need for large scale intervention in the
banking system by government; the cost of such bailouts is often huge additional borrowing
which then results in reduced public spending in other areas, exacerbating or prolonging
the recession.
A stylised diagram of the 18 year cycle is presented in Figure 9 below.
Figure 9. The stylised diagram of the 18 year cycle
5. Conclusion
This paper argues that it is possible to understand the business cycle and anticipate its
various expansions and downturns. For the benefit of investors and business owners,
making real life decisions that significantly affect profitability, it provides a coherent
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framework in which more timely decision-making can be made. It also argues that the
recent global financial crisis while more globally synchronised than other historical crises
needs to be viewed in the context of a repeating occurrence. It therefore may have been of
a different scale to other cyclical peaks in the UK and US but was not of a different type.
The evidence underpinning the demonstration of the 18 year cycle has largely been drawn
from the United States and United Kingdom. This analysis could usefully be extended to
other countries or regions that follow the same “Western” economic model. A further
extension could also be made to consider the increasingly important emerging markets,
some of whom have only just adopted similar patterns of land ownership and financing of
real estate activity. A key area of interest would be to consider whether such economies
display a similar 18 year rhythm and at what point after such Western economic practices
are adopted does this materialise.xiv
6. References
Anderson, P. 2008, The Secret Life of Real Estate and Banking, Shepheard Walwyn.
Ball, L. 2014, „Long Term Damage from the Great Recession in OECD Countries‟, Working
Paper. Available at
http://www.econ2.jhu.edu/People/Ball/long%20term%20damage.pdf Accessed 20th
July 2014.
Bank of England (2014) „Money Creation in the Modern Economy‟, Bank of England
Quarterly Bulletin 2014 Q1, pp.14-27. Available at
<http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14
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End Notes
i
Average potential loss of output, weighted by size of economy and measured against pre-crisis growth
trajectories, was 8.4 per cent across OECD countries between 2008 and 2009. Some countries experienced
a potential output loss of almost 30 per cent. For further analysis see Ball (2014).
ii
The term business cycle and economic cycle is used interchangeably in this paper. In some of the literature
or commentary on business and economic cycles, the business cycle is often used to denote shorter term
fluctuations in output while the economic cycle is a longer-term cyclical process.
iii
The US and UK were also easier cases to examine because they had not undergone changes such as
th
joining currency unions as other “Western” countries during the second half of the 20 century. However,
these insights can be extended to other countries that broadly follow the same economic model.
iv
Ideally, data on land prices would have been used: however, such data are not gathered systematically in
either the UK or the US.
v
Transfer of land to private ownership began in earnest after 1540 following the dissolution of the
monasteries under Henry VIII when vast amounts of Church land was claimed by the Crown, which then sold
it. Harrison (2007) notes that proper trading conditions for the sale and purchase of land were only in place
by around 1700 “with scriveners acting as conveyancers, cartographers as land surveyors and solicitors
doubling up as real estate agents and mortgage advisors” (p.77).
vi
In the UK, the 1980s economic expansion became known as the “Lawson boom”, named after Thatcher‟s
long-serving Chancellor of the Exchequer, Nigel Lawson. According to this view of the economy, the fruits of
the boom ultimately end up in the price of land – as seen in the higher prices for real estate.
vii
We follow Reinhart and Rogoff (2009) in defining a banking crisis as marked by
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Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
“bank runs that lead to the closure, merging, or takeover by the public sector of one or more financial
institutions” or the “closure, merging, takeover or large-scale government assistance of an important
financial institution (or group of institutions) that marks the start of similar outcomes for other financial
institutions” (p.11).
Our research shows that this occurs every 18 years, following the peaking of the 18 year real estate cycle.
viii
A measure of broad money (M4) has been used following the insight, now confirmed by the Bank of
England (2014), that private banks are largely responsible for creating an economy‟s money supply. Any use
of a broad money supply measure would suffice for this analysis. Ideally, one would also capture the flow
bank credit to the FIRE sector as an additional piece of analysis.
ix
The process by which the start and end of recessions are dated has generated a literature in itself. I follow
the general rule of thumb that is often used by academics and commentators – that is, two consecutive
quarters of negative GDP growth.
x
This was a manufacturing led recession owing to the strong pound (boosted by North Sea oil revenues) and
the need to tackle high inflation. The upward movement of interest rates, high borrowing costs and relatively
low costs of imports caused many manufacturing companies to fail. This recession, while significant in terms
of lost output, did not implicate the banking system unlike the cyclical recession to take place approximately
ten years later, in 1990-92.
xi
In this section and the ones that follow, for the sake of brevity, I have provided the data only for the UK and
made a comment where the picture for the US is significantly different.
xii
In Table 2, the stock market fall (peak to low), real house price fall (peak to low), lending or money supply
growth (peak to low) and yield curve (inversion to most positive sloped, i.e. widest spread) have been taken
as indicators of the length of the downturn. At the end of the periods indicated by these variables, stock
market or house prices start to rise again, lending picks up or the yield curve moves back into more „normal‟
territory – i.e. there is an improvement in economic conditions and a return to economic growth.
xiv
Harrison (1983) demonstrates that the Japanese experience from 1990 was an equivalent 18 year cyclical
peak. Anderson (2008) argues that the East Asian financial crisis that started in 1997 was the cyclical peak
for the economies of that region. Certainly, in both cases, there was a massive run up in real estate prices
and speculation, aided by loose lending practices, prior to the ensuing crises and downturns.
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