In a series of tweets on Saturday, Cathie Wood, the founder and CIO of investment management company Ark Invest, discussed inflation and how the Federal Reserve may cause the world economy to enter a slump similar to that of 1929.
She went on to say that the Smoot-Hawley Tariff Act, which imposed more than 50% tariffs on more than 20,000 items and sent the world economy into the Great Depression, was passed by Congress in 1930 after the Federal Reserve boosted interest rates in 1929 "to suppress financial speculation." She cautioned that the situation will resemble 1929 more if the Fed did not change course. Elon Musk, CEO of Tesla, SpaceX, and Twitter, agreed.
Wood emphasized that “If inflation is unwinding, as we believe, then we could be heading back to the future, the Roaring Twenties,” noting:
"The setup is remarkably similar!"
According to the executive of Ark Invest, the globe was at war before the Roaring Twenties, specifically during World War I and the Spanish Flu pandemic. She went on to say that at that time, inflation skyrocketed, reaching a peak of 24% in June 1920, and that the Federal Reserve responded by increasing interest rates by less than a half, from 4.6% to 7% in 1919–1920.
Wood noted that "the Fed decreased interest rates from 7% in May 1921 to 4% in July 1922, flipping the switch for the Roaring Twenties," which caused inflation to fall "precipitously in one year to negative 15% in June 1921." The executive also revealed:
"We would not be surprised to see broad-based inflation turn negative in 2023."
She added, "The Fed has boosted interest rates 16-fold, which is a significant mistake in our view, faced with considerably lower inflation this time around.
The Ark Invest CEO warned that "the Consumer Sentiment Survey from the University of Michigan is at a historic low, below levels achieved in 2008–09 and 1979–82, a setup for a liquidity trap like that in the Great Depression when enormous monetary stimulus failed."
Wood stated: "Given conflicting data and the stark difference in these outcomes, the Fed should, at the very least, be debating the possible risks associated with its current policy, instead of voting unanimously." Wood noted that the Great Depression and the Roaring Twenties are two possible outcomes.
She emphasized the similarities between the economic climate of today and that of 1929, stating:
"Unfortunately, today has some echoes of the same. The Fed is ignoring deflationary signals, and the Chips Act could harm trade perhaps more than we understand."
