The Great Depression of the 1970s could be repeated if nothing changes, say top economists
Some are negative, some are a little more positive. There is also a group of people who proclaim that if nothing changes, a real catastrophe could come.
Several economists believe that if nothing changes, all the signs are that we are heading for a crisis similar to that of the 1970s. How is this possible? Let's take a look at that. But first, a little context:
The economic side of the 1970s crisis was characterised by rising inflation, recession and rising oil prices. During the 1960s, there was high growth in economic activity, which led to inflation. In the early 1970s, governments in Western countries cut tax rates and increased spending to stimulate economic growth, which is what led to the increase in inflation. In 1973, OPEC countries restricted oil exports to Western countries in response to the foreign policy of some countries towards Israel. This led to an increase in the price of oil and a consequent increase in the price of petrol, fuel oil and other energy products, which had a negative impact on the economy and the manufacturing sector.
High energy prices and rising inflation led to a recession, resulting in a decline in economic activity, production and employment. Western countries were faced with low economic growth, rising unemployment and rising inflation. Stagflation (a combination of stagnant economic activity and inflation) became a characteristic feature of the crisis. Inflation rose while economic growth slowed or stopped altogether.
These crises have led to increased uncertainty and fear in the Western world, with significant consequences for the political and economic stability of the world.
And what are the similarities now?
The jobs report in January pushed the unemployment rate to a 53-year low of 3.4%, and despite persistent inflation, consumers continue to support the economy with strong spending. Normally, this would be great news, but the Fed said Wednesday that it means the fight against inflation is far from over.
Fed officials have raised interest rates eight times in the past year in hopes of cooling the economy and taming runaway inflation, and have succeeded in slowing annual consumer price growth from a 40-year high of 9.1% in June to 6.4% last month. Fed Chairman Jerome Powell even mentioned the word "disinflation" 13 times in his press conference in early February, setting a much more optimistic tone than in 2022.
Also then last Wednesday, he warned that the latest labor market and retail sales data show that "the U.S. economy is stronger than we previously thought, which could lead to a tougher path for disinflation in 2023."
"Hopefully there will be disinflation in 2023, but right now it's wilder than we thought," Bullard told CNBC on Wednesday, arguing that the Fed's benchmark interest rate will have to move above 5%.
While Bullard expressed confidence in the Fed's ability to eventually beat inflation, he also argued that officials should raise rates aggressively now or the U.S. economy could repeat the situation of the 1970s - when year-over-year inflation rose as much as 12% and destroyed Americans' purchasing power.
"Our risk now is that inflation doesn't come down and accelerates again, and then what do you do? We're going to have to respond," he said. "If inflation doesn't start to come down, you run the risk of a repeat of the 1970s... and you don't want to get into that. Let's be tough now so that we have inflation under control in 2023."
Other Fed members also warned against being too lenient in the fight against inflation. Cleveland Federal Reserve Bank President Loretta Mester said at a conference last week that she sees compelling economic reasons to raise interest rates faster. The Fed is preparing for the worst. Inflation said to take longer than expected
It's not just Fed officials who are worried about the recent run of strong economic data stoking inflation; a number of economists and investment advisers have expressed concern about the surprisingly resilient labor market and retail sales, saying they may slow the process of disinflation.
Disclaimer: This is by no means an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.