Party Like It's 1937
by Randall Forsyth
Friday, April 15, 2011
Dueling deficit-cutting plans, plus end of QE2, raise risk of premature withdrawal of stimulus. St. Augustine, let us pray.Just as the U.S. economy is emerging from a severe contraction caused by a credit crisis, there are pressures to tighten both fiscal and monetary policies in order to rein in an excessive budget deficit and stave off nascent inflation.
Sound familiar? It should, because that is precisely what happened in 1937. As students of economic history are aware, those shifts to restrictive policies on the budget and by the Federal Reserve set the stage of the second part of the Great Depression.After all, remember what ultra Right-wing, conservative and now Former VP Dick Cheney said? No, of course you don't. He was famously quoted as saying "Reagan proved deficits don't matter.
Back to the article:
The history of the 1930s is the best example available to us. After contracting by more than 30% in 1929 to 1933, the U.S. economy grew more than 9% per annum in the next four years. The recovery began in March of 1933 — before Franklin D. Roosevelt took office — but after the Federal Reserve embarked on large-scale purchase of U.S. government securities, which would be called quantitative easing today.
In 1936, however, sharp rises in income taxes were enacted. Beginning in August of that year, monetary policy was tightened through a doubling of bank reserve requirements to absorb excess reserves that were thought to threaten inflation.
That sounds awfully like that's what's in prospect.
So yeah, bring on the budget cuts, folks.
Deepen and lengthen that recession.
And while we're at it, let's not learn from history, how about that?
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