Very interesting chart crossed my desk which caused me to go back once again to history to search for investment answers. Is the current environment like the 1930's? The simple answer is of course not, but there seems to be a close link between the two time series. We have become much more sophisticated in our understanding of economics and policy options, yet the end result on asset prices seems to be the same so far. The key will be whether we repeat what occurred in 1937. The key take-away from the 1930's is that when monetary and fiscal policy were tightened in 1937, there was a significant decline in financial assets. If we taper in 2014, will we have the same response in asset prices?
There has been a growing revisionist economic history concerning the Great Depression that is being discussed by who I would call the new economic historical structuralists. Their argument is that the Great Depression was not solved by Keynesian policies, pure folklore given the date of when the General Theory was written. It may not even have been solved by the early policies of Roosevelt. The 1933 Banking Holiday and moving off the gold standard may have caused a significant harm, albeit some form of deposit insurance was helpful. Many of the policies of the New Deal were used to curtail demand and thus arrest the deflation in prices.
A close look at stock prices shows that the markets were recovering before 1933 and the New Deal was not able to get equities back to new highs. Clearly, many of the policies of the New Deal created a safety net for citizens, but they did not get us back to full employment or close the output gap. Social policies are not the same as growth policies. We needed to survive a world war to get back to new highs.
There has been a growing revisionist economic history concerning the Great Depression that is being discussed by who I would call the new economic historical structuralists. Their argument is that the Great Depression was not solved by Keynesian policies, pure folklore given the date of when the General Theory was written. It may not even have been solved by the early policies of Roosevelt. The 1933 Banking Holiday and moving off the gold standard may have caused a significant harm, albeit some form of deposit insurance was helpful. Many of the policies of the New Deal were used to curtail demand and thus arrest the deflation in prices.
A close look at stock prices shows that the markets were recovering before 1933 and the New Deal was not able to get equities back to new highs. Clearly, many of the policies of the New Deal created a safety net for citizens, but they did not get us back to full employment or close the output gap. Social policies are not the same as growth policies. We needed to survive a world war to get back to new highs.
My take-away from the chart is that the Fed should not pull the stimulus too early. I have also said that zero rates is not a good policy. Is this inconsistent? I don't think so. Liquidity has to be made available so money is available of lending but that does not mean that it has to be at zero rates. Zero rates distort the investment process. Monetizing debt distorts capital markets. Regulations that make it more profitable to lend does not have as much a distortion on lending and growth.
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