Fighting the last war and What it means for the economy

People prepare for the future based on their past experience. Armies learn from the last war and use that knowledge to plan for the next war. However, by the time the next war comes along, things have inevitably changed. So the strategies from the last war do not work.

The most famous example is the Maginot Defense Line.

Learning from their World War 1 experience fighting Germany, the French decided to build the Maginot Line – a massive 280-mile-long fortification on the border with Germany. It had fortresses, underground bunkers, minefields, and gun batteries. It was designed to withstand heavy artillery fire, poison gas, and whatever else the Germans could throw against it.

However, by the time World War 2 happened, there were several military advances like fast-moving armored vehicles. This meant that instead of attacking the Maginot Line, German forces were able to go around it – driving through the Andrees mountains. Within six weeks of the German offensive, France surrendered.

World War 1 trench warfare defense strategies proved useless in the changed circumstances of World War 2.

Investors fighting the last war

Just like armies, investors also keep fighting the last war.

Many investors that got burnt in the dot-com crash of 2000 did not invest in technology again. So they missed out on massive gains from Amazon, Apple, Google, etc.

After the 2008 financial crisis, investors prepared a playbook to deal with financial crises. But the next crisis was not a financial crisis – it was a global pandemic.

Governments also keep fighting the last war.

Governments fighting the last war

The 2008 crisis led to a slowdown in economic activity and high unemployment. Governments were reluctant to provide assistance to the economy, partly because it was thought that printing money would lead to inflation.

So the 2008 stimulus package was only $800 billion. The result was that the economy struggled for many years, and it took more than ten years for the unemployment rate to fall back to levels before the 2008 crisis. And the inflation that everyone was worried about never materialized.

People blamed the government for not doing enough. The lesson governments learned after the 2008 crisis was that no matter how much money they print, it will not cause inflation.

So when the covid pandemic stuck in 2020, governments were not shy about printing money. In fact, the pandemic stimulus was more than six times the 2000 amount. Throwing so much money into the economy coupled with the fact that the 2020 crisis is of a different nature than the 2008 crisis, has led to the recent spike in inflation.

No one knows when the next crisis will happen and what it will look like. Two things are certain – there will be another crisis in the future and it will not look anything like the 2000 dot-com crash, or the 2008 financial crisis, or the 2020 pandemic.

When the next crisis happens, let us hope governments stop fighting the last war and respond appropriately.

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