In the first section of a two-part article, the author takes a look at the extended period of leverage from the 1970s to 2007. 

Following the dark stagflation years of the 1970s, the world entered an extended period of growth, driven by many positive forces including the end of the Cold War, the invention of the personal computer coupled with the internet, globalisation of trade and capital, the emergence of China and India, human genome sequencing, feminism, environmental awareness, flexible labour and workplaces etc. These changes resulted in improvements in the overall the wealth and happiness of much of the world’s population, albeit with some groups suffering.

This environment enabled a period of leverage and excessive indebtedness by individuals, corporations and governments. This came to a crashing halt in 2007–2008. We are now several years into what is almost certainly an extended period of deleveraging.

The leveraging leg of this cycle lasted three decades. By understanding how we got here, we may be able to sense the pain and duration of what is to come.

 

Two generations

 

The social, geopolitical and technical changes that occurred since 1980 had made living more secure and prosperous, especially in developed nations. Compare, for example, the circumstances of Joe, a hypothetical 40 year old of today with that of Edward, his grandfather.

Joe married Judy when they were both 30 and have two young children. Joe is a project manager for an insurance company and Judy is a lawyer, who is working full time and earning more than Joe. They come from different towns and have willingly moved around the country to promote their careers.

Joe’s grandfather Edward, on the other hand, left school at 17, found a job at the local steel engineering shop. He married Mary, his childhood sweetheart, at 22 and they scrimped and saved to buy a house in their hometown. Babies followed soon after and by the time Edward was 40 they had five children. Mary was active in the community, but never worked.

Let’s assume that both families have the same attitudes to risk. Edward and Mary lived a precarious life. They had many mouths to feed and were dependent on just one paying job. That job is subject to the ups and downs of the car industry and Edward was laid off several times for periods of several months. He found it impossible to find another job and his specialist skills were not of use in other industries. For these reasons, Edward and Mary managed their finances carefully, keeping spending within budget and holding a reserve for a rainy day. They were only able to get a 50 per-cent mortgage to buy their house, but they could do so as house prices were affordable relative to incomes.

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