MacroscopeCoronavirus recovery: is the US economy set for a rerun of the Roaring Twenties?

Name: Five things that could trigger the next global recession
Uploaded: 2021-04-13T16:30:16.000Z
Duration: 2 min 36 s
Description: Five things that could trigger the next global recession

Despite widespread enthusiasm in the financial press, the prevailing tone of optimism in US equity market sentiment feels too complacent

Public statements and Fed policy suggest the short-term future for the US might be more Grapes of Wrath than Great Gatsby

3-MIN READ3-MIN

A woman eats outside her tent at the Echo Park encampment at Echo Park Lake in Los Angeles on March 24. As Fed chair Jerome Powell said recently, “...even though some parts of the [US] economy are just doing great, there’s a very large group of people who are not”. Photo: AP

Neal Kimberley

Published: 12:30am, 14 Apr 2021Updated: 12:46am, 14 Apr 2021

What could possibly go wrong? Economic optimism has pushed US equity markets ever higher amid expectations of a post-pandemic US consumer boom that will feed into enhanced corporate earnings. With so much money riding on it, though, even the most ardent proponents of such an outcome should at least consider alternative scenarios.

“Reading the financial press, it seems that most commentators believe we are set for a repeat of the Roaring Twenties, most especially in the United States,” Albert Edwards, global strategist at French bank Societe Generale, wrote last week before going on to question that logic.

Edwards’ cautionary stance has its merits. Markets should resist the temptation to uncritically embrace the notion that the combination of US fiscal stimulus, Federal Reserve monetary largesse and a post-pandemic expected release of pent-up US consumer demand will produce a US economic recovery similar to that of the mid-1920s.

Of course, everything might go swimmingly and everyone might end up partying like the characters in F. Scott Fitzgerald’s famed novel of 1925, The Great Gatsby. Then again, maybe not.

What tends to be forgotten about the Roaring Twenties is that the decade began with the United States and much of the world in recession. The end of World War I was followed by a global pandemic, the Spanish flu, which killed millions of people around the world.

02:36

Five things that could trigger the next global recession

In addition, post-WWI inflation had led the Fed to tighten monetary policy in 1919 and 1920 despite signs that the United States was going into recession. The US central bank then became more accommodative for much of the rest of the decade before fatefully tightening policy in 1928 and 1929.