The risk of another 1937

This blog regularly talks about profits, and seeks to explain why understanding profits is so important to truly understand what is happening in economies, both national and global.

Michael Roberts Blog

Financial markets responded to the news of US economic growth jumping to a 4% annual rate in Q2 2014 by selling off. The reason was that faster growth in the economy would imply an earlier move by the Federal Reserve to raise interest rates and ‘normalise’ monetary policy. The Fed’s monetary policy committee said it was sticking to its existing ‘easy money’ policy, although it was tapering its rate of credit injection and stopping altogether in October. However, one Fed board member dissented and wanted a rate rise now. This spooked markets into reckoning that the era of cheap money since the Great Recession might soon be over.

The whole situation reminds me of the move to tighten monetary policy in 1937 during the Great Depression. Then it appeared to the US authorities that the slump was over and it was time to ‘normalise’ interest rates. On doing so, the…

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