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INVESTMENT INSIGHTS ARCHIVE
Originally posted in April 2015
The Ghost of 1937
• With the Fed supposedly steeling itself at last to remove a little of its emergency ‘accommodation’, it has suddenly become fashionable to warn of the awful parallels with 1937
• That year, the story goes, the nation’s ascent from the depths of the Great Depression was aborted because the Fed ‘tightened’ and the government ‘cut spending’: a sharp recession was the immediate and highly avoidable result
• We strongly refute the analogy: Fed actions were marginal and largely technical in nature while the real fiscal story was the rise in taxes, not any slashing of regular outlays
• Far more instrumental in the slump was the nature of those taxes being steep, ideologically motivated increases in levies on wealth, profits, and capital
• Also to blame were the government’s tolerance of labour militancy and its concerted campaign against ‘tax avoiders’, ‘economic royalists’ and the ‘top sixty families’ all of which frightened and discouraged the entrepreneurial classes.
• It is in such displays of pitchfork populism by financially and intellectually bankrupt governments that we in the age of Piketty, of the organised deprecation of the ‘1%’ and of the abuse of the ‘Fair Share of tax’ slogan need to draw the most pertinent comparisons
• The real Ghost of ’37 takes the form of such mean spirited and, counter productive politics: the spectre should not be conjured up to excuse the central bank from further delaying its embarkation on the long road back to normality and policy minimalism.
With his recent, detailed foray into the world of historical comparisons, the renowned fund manager, Ray Dalio has given rise to something of a journalistic cottage industry in which every journeyman scribbler tries to ensure that references to 1937 feature as prominently in their submissions as can be, all the better to frighten the horses with the catastrophe that they insist must inevitably befall us should the Fed ever take that first, tentative step away from extreme over accommodation.
In some ways this is gratifying, if woefully belated, for this is a theme that your author has been propounding all through our seven long years of financial famine though for almost exactly the opposite use than that to which the analogy is being put today.
For instance, a bare couple of months after the demise of Lehman triggered the great convulsion, we
'...the sorry track record of both post Bubble Japan and the post Tech Boom West amply demonstrates the central banks will be far too reluctant to remove their unparalleled degree of accommodation for fear of provoking a new crisis, as fears of 1931 3 are essential replaced by those of 1937 8 supposing, that is, that with balance sheets now so horrendously compromised, they would feel able even to make the attempt
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