This Is What Keeps Central Bankers Up At Night

sleeping glasses

Photo: flickr/Richard Elzey

UBS’s Art Cashin thinks the world’s central banks are suffering from the same sleepless nights that plagued their compatriots in the 1930s.He turns almost all of his note to clients this morning to Liaquat Ahamed, author of the award winning book, Lords of Finance.

“What really keeps this generation of central bankers up at night is not whether the unconventional monetary tools that they are contemplating will work,” Ahamed writes. “It is that some of the same intractable factors that their predecessors of the 1930s had to contend with will overwhelm them once again.”

More from Ahamed via Cashin:

The situation in Europe today bears an eerie similarity to that of Europe in the 1930s. Ironically, Germany was then in the po­sition of the peripheral European countries to­day. It was weighed down with government debt because of reparations imposed at Versailles; its banking system was severely undercapital­ised, the result of the hyperinflation of the early 1920s; and it had become dependent on for­eign borrowing. It was locked into a rigid fixed exchange rate system, the gold standard, which it dared not tamper with for fear of provoking a gigantic crisis of confidence. And so when the Depression hit and international capital markets essentially closed down, Germany had no choice but to impose brutal austerity. Eventually, unem­ployment rose to 35 per cent.

Like today, in the 1930s there was one major economy in Europe doing well. It was France. While the rest of Europe was suffering, unem­ployment in France, as in Germany today, was in the low single figures. And France, again like Germany today, had large current-account sur­pluses and was in a financial position to act as the locomotive for the rest of Europe. But the French authorities of the 1930s, refusing to ac­cept responsibility for what was happening elsewhere in Europe, would not adopt expan­sionary policies. Nor would they lend directly to Germany, fearing that they would be throwing good money after bad. The effect of French pol­icy eventually brought down the whole financial system of western Europe.

Deja vu.

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