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Depressing Similarities Between 1938 And The Present

Depressing Similarities Between 1938 And The Present

By the late 1930s, the worst of the Depression had passed after the U.S. President Franklin Roosevelt jolted the economy through the "New Deal," which focused on the "three Rs" — relief, recovery and reform.

At the same time, private investment was at poor levels, as individuals chose to pay down their debts rather than spend. Inflation was also on the low side, and the government started to back off its fiscal stimulus programs and implement a tightening of financial policy.

Sounds a bit like 2016 doesn't it?

Business Insider, citing a research report by analysts at Morgan Stanley, made the case that 2016 is no different from 1938.

Related Link: How Trump Could Cause A Recession, Even If He Loses The Election

"The critical similarity between the 1930s and the 2008 cycle is that the financial shock and the relatively high levels of indebtedness changed the risk attitudes of the private sector and triggered them to repair their balance sheets," Business Insider quoted the analysts as saying. "During the deleveraging process, the private sector becomes risk-averse and shifts its attention towards restoring health to its balance sheets."

What Happened Next?

Private investments failed to replace government investments and deflation resulted in a double-dip recession. Unemployment shot back up, and the economy struggled yet again.

The Morgan Stanley analysts noted that in the current cycle, growth to the economy was restored, but now the Federal Reserve is eyeing at least one, if not more, interest rate hikes in the near to medium term.

The analysts did, however, acknowledge that we shouldn't worry. Both presumptive presidential nominees are advocating for a policy of fiscal stimulus could help boost the economy, not slow it down.

"Activating fiscal policy, particularly at a time when the monetary policy stance is still accommodative, could lead to a virtuous cycle where the corporate sector takes up private investment, and sustains job creation and income growth," the strategists wrote.


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