The CEO of investment management firm Ark Invest warned that if the Federal Reserve does not pivot, the current economic configuration will be similar to 1929, when the Great Depression began. Tesla CEO and Twitter chief Elon Musk agrees.
The Fed, Inflation and the Great Depression
Ark Invest CEO Cathie Wood, who is also the founder and chief investment officer of the management company, shared her thoughts on inflation and how the Federal Reserve could push the global economy into a 1929-like depression in a series of tweets Saturday.
She explained that the Federal Reserve has been raising interest rates “to stifle financial speculation” in 1929, followed by the passage by Congress of the Smoot-Hawley Tariff Act in 1930, which imposed tariffs of more than 50 percent on more than 20,000 commodities and sent the world economy into the Great Depression. “If the Fed does not pivot, the pattern will look more like 1929“, she warned. Elon Musk, the boss of Tesla, Spacex and Twitter, agreed.
– Elon Musk (@elonmusk) November 12, 2022
Cathie Wood pointed out that “if inflation goes away, as we think it will, then we could be headed for the future, the Roaring Twenties“, insisting:
The configuration is remarkably similar!
The Ark Invest director noted that the world was at war before the Roaring Twenties, citing World War I and the Spanish flu pandemic. Inflation skyrocketed during this period, peaking at 24% in June 1920, she continued, adding that the Federal Reserve responded by raising interest rates by less than two times, from 4.6% to 7% in 1919-1920.
Inflation then fell “precipitously within a year to a negative 15 percent in June 1921,” Cathie Wood said, noting that “the Federal Reserve lowered interest rates from 7 percent in May 1921 to 4 percent in July 1922, triggering the Roaring Twenties“. The executive also shared:
We wouldn’t be surprised to see headline inflation turn negative in 2023.
“Faced with much lower inflation this time, the Fed increased interest rates by 16 times, a serious mistake in our opinion“, she opined again.
“The University of Michigan Consumer Sentiment Survey is at an all-time low, below the levels reached in 2008-2009 and 1979-1982, which is a liquidity trap like the one in the Great Depression, when massive monetary stimulation failed“, warned the Ark Invest executive.
Noting that the Great Depression and the Roaring Twenties were two possible outcomes, Cathie Wood described, “Given the conflicting data and the stark difference between these outcomes, the Fed should debate the possible risks associated with its current policy, at the very least, instead of voting unanimously.“
Pointing out the similarity between today’s economic situation and that of 1929, she stressed:
Unfortunately, today there are some echoes of the same thing. The Fed is ignoring deflationary signals, and the chip law could hurt trade perhaps more than we understand.