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, as the highly-respected Ray Dalio of Bridgewater has notably done.
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. Therefore, we are told, we must not act today.
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