The Fed Is Set to Repeat Errors of the 1930s

Tariffs are back in the news. But policy makers at the Fed seem to be out of touch and set to repeat mistakes like those seen in the 1930s.

Tariffs are back in the news. But policy makers seem unable to understand what that means to consumers.

President Donald Trump announced that he would impose a 25% tariff on imported steel and a 10% tariff on aluminum. Some economists and consumers worry this will raise prices.

Billionaire Secretary of Commerce Wilbur Ross explained this won’t be a problem for consumers. He told CNBC the costs are small, citing a can of soup as an example.

“In a can of Campbell’s Soup, there are about 2.6 pennies worth of steel. So if that goes up by 25%, that’s about six-tenths of 1 cent on the price on a can of Campbell’s Soup.”

Some might not expect the well-heeled Ross to do his own grocery shopping. But, he noted: “I just bought this can today at a 7-Eleven … and it priced at $1.99. Who in the world is going to be too bothered?”

Most consumers will be bothered.

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Even before tariffs, many consumers seek out bargains at grocery stores rather than paying the higher prices at convenience stores like 7-Eleven. Ross’ comments could lead to concerns that policy makers are out of touch and set to repeat mistakes like those seen in the 1930s.

The Fed’s Big Mistake

The chart below shows that stock prices dipped in the face of tariffs in the Great Depression.

Tariffs are back in the news. But policy makers at the Fed seem to be out of touch and set to repeat mistakes like those seen in the 1930s.

Many economists say that tariffs weren’t the primary economic problem at that time. Federal Reserve tightening also contributed to the economic downturn.

Well…

The Fed is insisting on tightening again.

Fed Chair Jerome Powell said in a recent Congressional testimony that the economy is growing, and government deficits and tax cuts should lead to more growth. He noted the Fed plans to raise rates three times this year but will need to review recent data with an eye toward four hikes.

The Fed is also unwinding quantitative easing. Officials are removing $20 billion of bonds a month in the first quarter of 2018. Each quarter, the amount increases by $10 billion a month, reaching $50 billion a month in October.

The Fed won’t be buying bonds just as the federal governments budget deficit heads back to $1 trillion a year. Less demand for bonds means interest rates will rise.

Companies that borrow money will pay more in interest. That puts upward pressure on prices for many companies.

So the Fed is in position to raise rates, just like it did in the Great Depression. Tariffs will hurt international trade, just like in the Great Depression. Stocks will fall, just like they did in the Great Depression.

It’s still possible to avoid a trade war. But if there is one, expect the consequences to be dire.

Regards,

Michael Carr, CMT

Editor, Peak Velocity Trader

  • Ron Meyn

    you are comparing a 300 point dow at the time . with very few companies.
    with a 25000 point dow with over 8000 stocks and etfs in US alone. this market can swallow up 500 points in 43 minutes.
    I would actually welcome a 30% dump in this market .

  • PL RTZ

    Michael, what you are effectively saying is Markets go up and markets go down. Perhaps you don’t follow what negotiations look like. This is not the 1st time tariffs have been imposed in recent memory and likening this 1930 is just pure ridiculous. Virtually nothing is equal to what was happening at that time. Perhaps you didn’t notice, but the government just passed a large tax reduction (Not an Increase like 1930). That alone is ultra stimulative hence the 6000 gift DOW points we have received in the last 14 months. If you didn’t hear the president correctly, perhaps I can translate. They want Free Trade….but FAIR TRADE. i.e. Europe for one charges a 25% VAT Tax on all things imported from US, is that Fair?. So what the President has done, is gotten their attention. That’s what he was aiming for. Now let the Negotiations begin in earnest. Stop the hand wringing. If the market goes down 30% I will be buying some of the best earnings companies on the planet for a 30% discount. You can sit it out if you like.

  • brown7228

    All of the problems we have today we brought upon our self. Now we want to blame others to solve our problems. The answer to all of this is innovation. We have the technology robotics, the internet of thing, and meeting the challenges of global warming. That’s not to mention things like rebuilding the infrastructure and high speed rail. How about attomonis driving, and electric cars. If we do these things we don’t need to worry about what other countries are doing. Stop doing stupid things like bring back coal and tariffs on steel and aluminum. If we were building high speed rail steel would be booming.

  • Carl Smith

    yes, you are at fault for all of our problems. So you will not mind it if the stocks crash and your retirement funds eliminated because of your negative talk….

  • Michael Carr

    You are correct that this isn’t the first time tariffs were imposed. Reagan also imposed tariffs in 1987, right after a tax cut was passed. The Fed raised rates then, as well. Plus ça change, plus c’est la même chose. It’s better to be ready for a bear market if an trade war starts by accident.

  • Charles Burton

    It is easy for stupid politicians to talk about penalizing foreign producers with tariffs, but foreign countries and foreign companies do NOT pay those tariffs: American importers DO pay the tariffs, and they pass on the costs to American consumers like you and me. Those costs add up to inflation and higher costs for us all. Tariffs may cost some jobs in other countries, as we import less, but they cost US out of our pockets. A lose-lose proposition for everyone.

  • Wenda Kennedy

    I understand what Trump is doing. China and friends don’t play fair. I am less worried about the prices of stocks than I am about the overall health of our economy and our position in the world. The stock market is also playing the game for themselves — not America. Interest rates have been kept low because of servicing the national debt. It’s all a game to you guys in government and finance. For the rest of us, it means a lot more.

  • CaptTurbo

    The sky is falling.

  • DieselBoatMan

    You lost me when you criticized the can of soup prop, and used it to make a case for his being out of touch. Perhaps it was the easiest stop along the way for one of his underlings, but I doubt you gave that any thought.

    Lastly, I find it hard to believe the financial prognostications of anyone that believes that bad trade deals are good economic policy as long as the deals hurt the US. Let me help you out a bit. The US is on it’s way to not only being self sufficient energy wise, but perhaps establishing itself as the leading exporter of all forms of fossil based energy. Might that change things shortly? Start thinking more broad scale if you want anyone to pay attention to what you have to say.

  • Mr.Brown7228
    Steel is by far not a dying industry. We need to smelt more domestic quality ferrous and non-ferrous product.
    I would rather pay more for a quality toaster, wash machine and TV, and pay less for unemployment and welfare.

  • AlMart

    The Fed does not see these things as “errors”.

  • Ryan Koch

    Great Article, Michael. I really value your insights, and always look forward to them. Keep up the good work!

  • Marc Herlands

    Focusing on the cost of finished product does not at all indicate the cost to the consumer. It depends on market demand, the elasticity of demand, and whether the producer will substitute something cheaper to compensate for the increase in steel and aluminum prices. Tariffs will benefit workers, not owners, if the additional profits are passed along to the workers. But they probably won’t be because of low corporate tax rates which give corportations every incentive to buy back their stock and pay higher dividends rather than pass along increases in productivity to workers.

  • brown7228

    The auto industry will demand thinner sheets with mare alloy . Thinner sheets should mean thinner slabs to make it efficient. Every slab I have seen are 8″ to 12″ . All of this to me sounds like they need new design mills.
    A complete redesign with electric furnaces. With a more consolidated production line. Why don’t you just employ people to dig holes then fill them up again so you don’t have to pay a subsidized wage. Italy just passed a bill to subdise everyone in the country to the tune of $950.00 per person That the fourth country to start a program like that. All business should be run by the basic rule better, faster, and cheaper. With the technology that coming you will have no choice. What’s the matter you can’t stand the idea of not having poor people.

  • Frank Z.

    Tariffs should not be implemented to protect our industries. Our industries must be able to compete on the world markets.

    If they cannot today, then innovation, wage cutting, or other means, must be implemented so that we can compete. I mentioned wage cutting, by that I mean is, that some/most industries are unionized which is NOT giving us a competing labor for our dollar. A union work-force is demanding and also becomes lazy over time. That was the down-fall of the Detroit auto-industry in the 1970/80s, it could no longer compete agains foreign countries. (cost and quality).
    I look at tariffs as an addition tax, as those tariffs will be paid by the consumers of the products. Also the products for export will include those tariffs, which again makes it harder for any industry to compete in the world markets.

  • charles moore

    The average increase in a car is $175.Most people finance over 5 years so $35 a year more or $3 a month, People spend more then that at Starbucks. We have a 2.5% Tariff on cars form China and they charge us 10%. India has a 100% tariff on Harley Davidson Motor cycles. I believe that can also has lead in it which can seep into its contents. If these people want to avoid our tariffs then they can build a plant in the U.S. . Beer companies also make beer in bottles. People will buy the cheaper versions. If American cars are cheaper then……..etc. We want Fair Trade .

  • Brown7228
    You have no idea about metals do you.
    Slabs are called ingot.
    Coil material is derived from ingot in a process of rolling down to thickness desired.
    Standard coil widths are 48″ and 60″
    Gages are fixed and do not change.
    The point here is the more domestic product manufactured in the U.S. the less unemployed and welfare we (taxpayers) will forfeit.
    Those folks that tell us we don’t need to make washers and toaster have no idea.

  • brown7228

    Are you kidding me I worked in the steel mills for 43 years. Ingots went out when continuing cast come in. They don’t make Ingote today. The point is if you stand still the world will pass you by. Something like your thinking. The only thing wrong with the world market is we just can’t stand the idea of sharing the tremendous wealth. Haven’t you noticed the stock market is at 25,000. Don’t give me that Trump crap all of this should have happened during Obama but, as usual the Republicans hijacked his success by doing nothing but voting to repeal Obama Care for six years. Plus forcing him to cut the budget so he couldn’t be successful. Technology will move the shape of the word whether we become part of it or not depends on getting rid of Trump and moving forward on the path we were on. Socialism is the only solution to balance the economy.

  • brown7228

    If you don’t face up to your problems they will bite you in the end. Instead of giving all those Tax breaks to the rich why didn’t they rebuild the country. Clinton had one of the best booming economy by cutting defence by $300,000,000,000.00. Lowered our debt and things were booming. There is more than one way to skin a cat.