The thought of another Great Depression is enough to make even the most optimistic investor clutch their portfolio a little tighter. Recently, an interesting article packed with charts by the well-respected Edward Yardeni caught my eye. It is a reprint of his September 9, 1985, topical study titled “The Protectionist Road to Depression.”
The original Great Depression of the 1930s was the economic equivalent of tripping down a flight of stairs and landing in a decade-long recession. Yardeni’s piece is particularly timely given the Trump administration’s love affair with tariffs, kind of like a reality show plot twist with real economic consequences. I have learned a lot from him over the years.
Here is a section:
Is a depression possible? We are not forecasting a depression, just worrying about one. We suspect you are too. We continue to believe that the economy will muddle down the middle between boom and bust.
We expect that another drop in US interest rates plus a lower dollar will induce other industrial countries to lower their interest rates. Then, we hope that a rebound in the industrial economies will eliminate the global glut of commodities, products, and labor.
This would relieve the deflationary pressures that are behind the international debt crisis. Growth in the industrialized world would stimulate the exports of debt-ridden nations. Worldwide competition and ample productive capacity should keep a lid on inflation. Policymakers could concentrate on promoting growth. This scenario is bullish for both bonds and stocks.
Sound too good to be true? Maybe so. This is the scenario we are rooting for. We admit, a lot has to go right for it to work. Unfortunately, a lot is going wrong: commodity prices are falling, debtors are resisting austerity programs, agriculture is in a depression, industry is in a recession, nonperforming loans are increasing, banks are failing, the trade deficit is widening, protectionism is gaining support, fiscal policy is gridlocked and the Fed is in a box.
Here is another section:
In our opinion, the single most catastrophic cause of the Great Depression was the Smoot-Hawley Tariff of June 1930, not the stock market crash of October 1929, not the collapse of the Austrian Kreditanstalt Bank in May 1931, not the sharp increase in the Fed’s discount rate during October 1931, not the tax increase of 1932, not the subsequent bank failures or collapse of the money stock.
All these events contributed to the economic explosion, but the detonator was the tariff. That was confirmed by the collapse in industrial production immediately after the tariff was enacted.