Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money

79% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

FREE EBOOK

How to Day Trade Stocks & Indices

  • Place your first trade
  • Identify 9 chart patterns
  • Pro strategies step-by-step

You'll also receive our newsletter and other Opto emails in accordance with our privacy policy.

Columnists

Barclays' William Hobbs on the investment lessons from the last 1,000 years

The return of the strongman has been gathering pace, with many of the institutions and behaviours built up over the last two centuries to shackle populist authoritarian leadership appearing to wobble. Should we care? And what’s wrong with strong leadership anyway? 

New studies looking at how the world economy has performed over the last millennium provide clues. Take Growing, Shrinking and Long Run Economic Performance by economists Stephen Broadberry, of Oxford University, and John Wallis, of the University of Maryland.

In their 2017 paper, they argue the sustained growth of the last few centuries may not just be a function of a change in the nature of innovation back in the middle of the 18th century. Fewer and less severe recessions have also played a role.

It has long been accepted that economic growth and rising living standards are a relatively new phenomenon. Prior to the 18th century, the world economy flatlined, with living standards from one generation to the next barely changing. From around 1750, output per head suddenly took off and has kept rising ever since (by around 1.5% per year).

Prior to 1700, it took around a millennium for living standards to double. The last few centuries have seen this trick occur every half century. The growth take-off has coincided with other happy trends: infant mortality rates have almost halved since the end of the 18th century and human lifespans have doubled. 

"Prior to 1700, it took around a millennium for living standards to double. The last few centuries have seen this trick occur every half century."

 

What changed in the middle of the 18th century?

Previous answers have pointed out developments in the nature of innovation; for example, that humanity escaped stagnation through an intense period of advancement during the Industrial Revolution. Innovations such as the steam engine finally freed us from our physical and geographical constraints and propelled us towards a path of technologically-driven growth.

But new studies provide other, fascinating explanations. It has been found that, while growth up until the mid 18th century did indeed flatline on average, there were significant swings within it. The reason that average growth was far lower during this period was not so much an absence of growth, but rather because expanding periods were almost exactly offset by contracting periods.

“The reason that average growth was far lower during this period was not so much an absence of growth, but rather because expanding periods were almost exactly offset by contracting periods."

So the revolution in living standards may not be solely down to a surge in ideas and technologies but, rather, from societies finding the means to avoid recessions. While recessions occurred 50% of the time prior to 1700, they have occurred 30% of the time since 1700 and only 17% of the time since 1900.

To better understand the foundations of long-term growth, we need to understand why economies have become less prone to recessions. The most plausible explanation seems to be because of two things: the emergence of institutions that cushioned the damaging effects of recessions (welfare systems, central banks), and those that improved political stability.

17%

The frequency with which recessions have occurred since 1900

The latter is an especially important condition for long-term growth, as it allowed inventors and entrepreneurs the freedom to focus on innovation, rather than worrying about having their livelihoods appropriated by unrestrained monarchs, corrupt bureaucrats or even the unfriendly tribe next door.

More importantly, it paints a more sustainable picture of long run growth. Innovation is not something human-kind discovered in the past few centuries. It is likely a much longer, more durable truth of the world economy. What has changed is that we now have the institutional framework to better harness and protect the gains that arise from such activity.

In terms of a practical application, this again argues for putting as much of your hard-earned money to work for the long–term in capital markets, particularly stocks, as your risk appetite and financial plans will allow. The pronounced de-rating of stocks seen over the course of last year would suggest an inexpensive long-term entry point.

There is, however, a caveat. We still suspect that the current populist spasms will pass at some point. But if they don’t, and the institutions and norms that enabled our prosperity were eroded, then this lesson from the long sweep of history will be a salutary one – recessions could once again become more frequent and severe, and growth not so much the norm.

 

By William Hobbs: Chief Investment Officer of Barclays Investment Solutions, the team focused on the core aspects of the bank’s investment offering. He leads strategic and tactical asset allocation, as well as investment philosophy.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Continue reading for FREE

Join the 40,000+ subscribers getting market-moving news every week.

Written by

Free ebook

Tricks of the trade: 7 interviews with the world’s top traders

Get it now

Related articles

7 Interviews with the world's best traders

Learn about the techniques and strategies used by expert traders

Get it now