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America’s “roaring 20’s” was a decade of peace and prosperity, wealth and hedonism, where a $5 a day labourer could park a car in his driveway, feed his family, and make a fortune on a stock market that rose by 218% between 1922 and 1929.
In a decade marked by excess, there were plenty of events that might have marked out the top of the boom. But in the end, the last hurrah for this most self indulgent of decades, came courtesy of William Van Halen, and the Chrysler building in New York which he helped to design. Standing 319 metres high, the art deco masterpiece was the world’s tallest building when he added the 90-metre spire to it on October 23rd, 1929.
The next day, the stock market crashed. The economy gradually sunk into a depression whose effects would be felt for decades.
And today, rising skylines across the world could be warning that we’re heading for the same fate…
By 2010, London’s skyline is set to be home to a host of new buildings – assuming they are ever finished – including the Shard London Bridge Tower, standing 75 metres taller than 235m-high Canary Wharf. And when the Burj Dubai is finished in September 2009, at about 630m, it will dwarf even the closest of competitors.
But the completion of yet another record-breaking tower block is no cause for celebration. Back in 1999 Andrew Lawrence, research Director at Deutsche Bank in Hong Kong, came up with the ‘Skyscraper index’. His research suggested that the tallest buildings in the world tend to pop up just before an economic downturn. Take a look for yourself:
– 1929: Chrysler and the great depression.
– 1973: Sears Tower and a decade of stagflation.
– 1997: The Petronas Towers and the East Asian Financial Crisis.
Why multiplying skyscrapers are a warning sign
Now, you can find correlations between anything and everything if you look hard enough. But it makes sense that skyscrapers should mark the top of a boom. For one thing, they tend to rise in indirect proportion to their owners’ humility, and there certainly isn’t a lot of that around in Dubai right now.
Indoor ski arenas jostle for space with glass-panelled souks and city districts set aside to everything from media to finance. The more money people have, the more they feel inclined to splash it around on status symbols and trivia, rather than productive assets – in other words, the cockier they get, the more money they waste.
Of course, with an oil boom in full flow, it may be a while before the residents of Dubai are humbled by events. Even across the ocean in the US, and over here in the UK, pundits are still so pumped up by the recent years of plenty that they still believe that central banks can save us from any financial bogeymen, simply by lowering interest rates.
The return of stagflation
But those same high oil prices that are driving the Gulf’s boom times, are pushing inflation higher across the world, at a time when both the Federal Reserve and the Bank of England are warning of a drop in economic growth.
Oil is at $95 a barrel and food prices are rising. And with sterling starting to head down against the dollar, we could start to feel the pain from higher oil prices more keenly. What’s more, with house prices heading south, there’s no way indebted Britons can spend their way out of the coming economic slump.
Inflation plus slowdown equals one of the most dreaded financial spectres – stagflation.
Stagflation’s a headache for central bankers. Whatever they do, the consequences are unpleasant. You either tame inflation by raising rates, which hurts borrowers and tends to result in recession; or you let inflation run riot, which is how you end up with Zimbabwe or Weinmar Germany, eventually.
And the last time we had a bout of it was in 1973, when Gordon Metcalf opened Sears Tower in Chicago. This time, there’s a good chance it will be Dubai’s record-breaking skyline that marks the start of a global recession.
Turning to the wider markets…
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London market close: FTSE 100 – 6,369.1 (+42.9)
European markets:
US markets: Dow Jones Industrial Average – 13,311.73 (+22.28); S&P 500 – 1,469.72 (+0.70); Nasdaq – 2,668.13 (+5.22).
Crude oil – $91.35. Brent spot – $91.08.
Gold – $802.200. Silver – $14.405.
Currency markets: pound/dollar: 2.0661; pound/euro: 1.4004; dollar/euro: 0.6776; dollar/yen: 110.3500.
Finally, our recommended articles for today…
Central bankers can’t have it both ways
– History has shown that you can either bail out the big banks with a flood of cheap money, or you can keep a lid on inflation. Though at the moment central bankers are struggling to achieve either. For more on how they’re attempting to tackle the twin shocks of money financial market turbulence and sharp rises in food and oil prices, read: Why Central Bankers can’t have it both ways
Japan looks set for a massive rally
– The cash returns on holding Japanese equities is now higher that those on holding bonds. It sounds boringly technical, says Merryn Somerset Webb, but it’s a strong sign of a rally ahead. To find out why the buyers could be about to come back to the market, read: Japan looks set for a massive rally