The CEO of investment management firm Ark Invest has warned that if the Federal Reserve does not pivot, the current economic setup will be similar to that of 1929, when the Great Depression began. Elon Musk, CEO of Tesla and head of Twitter, agrees.
The Fed, Inflation, and the Great Depression
Ark Invest CEO Cathie Wood, who is also the management company’s founder and chief investment officer, shared her thoughts on inflation and how the Federal Reserve could propel the global economy into a 1929-like depression in a series of tweets on Saturday.
She explained that the Federal Reserve raised 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% on more than 20,000 goods and brought the economy world in the Great Depression. “If the Fed doesn’t pivot, the setup 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 subsides, as we think it will, then we could be heading into 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 soared during this period, reaching a peak of 24% in June 1920, she continued, adding that the Federal Reserve responded by raising interest rates less than twice, from 4 .6% to 7% in 1919-1920.
Inflation then fell “precipitously within a year to negative 15% in June 1921,” said Cathie Wood, noting that “the Federal Reserve lowered interest rates from 7% in May 1921 to 4% in July 1922, triggering the Roaring Twenties“. The leader also shared:
We wouldn’t be surprised to see headline inflation turn negative in 2023.
“Faced with much lower inflation this time around, the Fed hiked interest rates 16x, a big mistake in our view.“, she still opined.
“The University of Michigan consumer sentiment survey is at an all-time low, below levels reached in 2008-2009 and 1979-1982, which is a cash trap like that of the Great Depression, when massive monetary stimulus failed“warned the head of Ark Invest.
Noting that the Great Depression and the Roaring Twenties are 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.”
Highlighting the similarity between today’s economic situation and that of 1929, she insisted:
Unfortunately, today there are some echoes of the same thing. The Fed ignores deflationary signals, and the chip law could hurt trade perhaps more than we realize.