Prepare for financial meltdown

Professor Niall Ferguson has drawn an ominous parallel between today's markets and conditions prior to the financial collapse triggered by the outbreak of World War I. Should we be worried?

Investors need to wake up we may be heading for a financial meltdown. So says Niall Ferguson, the Scottish professor of history at Harvard, who draws an ominous parallel between today's markets and conditions prior to the financial collapse triggered by the outbreak of World War I in 1914. It was the "first great age of globalisation", he says in Time. Trade was expanding rapidly, growth was steady amid low inflation and interest rates, commodities were up, emerging markets were booming and volatility was historically low. "Sound familiar?"

Stock and bond markets barely budged when Archduke Franz Ferdinand was assassinated on 28 June. Only three weeks later, when Austria demanded access to Serbia to investigate alleged Serbian sponsorship of terrorists, did financial markets twig that war was not just possible, but certain. The selling happened so suddenly, and on such a scale, that only by closing stock exchanges could a complete meltdown be avoided; the London exchange was shut until January 1915. It should have been clear to investors what damage war could do to stocks and bonds, but "it's as if investors didn't want to factor in [the likely war between Germany and Britain] until it was upon them", Ferguson told Barron's.

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