Are you sure this is another Great Depression?

Economist's View: Fed Watch: What If the Analogy is Wrong?

What if years of research on the Great Depression have left even the best and the brightest with tunnel vision such that they could not accept that they were wrong?

Bottom Line: The Fed is headed to the zero mark, with another 50bp almost certain this week. It is widely expected that they will give some guidance as to their next steps, pointing us in the direction of an explicit policy of quantitative easing. Fed policy, as well as fiscal policy, assumes that the Great Depression is the most accurate analogy. This assumption ignores the external position of the US, which stubbornly refuses to adjust. If that failure to adjust is relevant, then recent Dollar stability was simply a head-fake. We should see pressure on the Dollar and, ultimately, Treasuries. Policymakers could adjust, but would they? With pursuit of the Great Depression case as the baseline scenario, it seems prudent to keep in mind the risk that this is not the relevant analogy for the US, and that policymakers are not prepared to accept such a possibility.

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