The famous saying that history doesn’t repeat, but it often rhymes, seems especially important in the current era. David Abramson, chief U.S. strategist and director of research at Alpine Macro, says there are a number of major parallels between the Roaring 20s of the last century and today.
Here's what he had to say in a recent interview with FS Insider (see Five Ways We Are Seeing a Replay of the Roaring 20s for audio).
1920s Similarities to Today
There are five critical factors that relate what is happening now to the period of the Roaring 20s.
One key similarity is the difficulty we’re seeing now in generating inflation. Producing goods price inflation was also hard in the 1920s. This has the effect of keeping interest rates very low, no matter what, Abramson noted.
Also, in the 1920s, as now, we’re experiencing the effects of a tech boom on productivity. New technologies are driving stronger productivity, Abramson stated, and this further depresses inflation and also doesn’t track with unemployment.
Another key similarity he sees between now and the 1920s is the growth of bubbles everywhere. Everyone knows about the 1929 boom and subsequent crash, Abramson stated, but other bubbles formed at the time up to and prior to the major stock market bubble, including a Florida real estate bubble. There were other smaller manias as well as investors chased the latest investment fad assisted by cheap and easy credit.
Imbalances that were present in the 1920s, mainly related to the carry-over from World War I and the reparations in a fixed exchange rate regime, echo similar setups that are occurring today.
There are tremendous tension between a number of large countries or regions, just as we saw in the first part of the 20th century.
Lastly, the effects of the global pandemic we’re experiencing right now may give way to a general historical pattern of exaggerated borrowing and spending that occur after a pandemic finally ends. This is a pattern that Dr. Nicholas Christakis noted in his book, Apollo's Arrow.
"During epidemics you get increases in religiosity, people become more abstentious, they save money, they get risk averse and we’re seeing all of that now, just as we have for hundreds of years during epidemics,” Christakis told the Guardian. “In 2024, all of those [pandemic trends] will be reversed.” (source)
We saw a wave of new business creation in that era, just like we're seeing right now, Abramson noted, along with a tremendous amount of pent-up savings, partially because of the fiscal stimulus last year.
Additionally, the pandemic put the level of global demand well below the level of global supply, which may take a while to catch.
All of these factors create conditions that keep interest rates low, he noted.
“The 1920s was a time of asset bubbles, low interest rates and low inflation,” Abramson said. “Those are the real similarities. … Just look at the fiscal boost that the Biden Administration is preparing. They want to see a boom. They want to see higher inflation. So they're not going to get in the way at the first sight of it, which is what they have done for the past 12 years. The Fed is extremely different right now.”
To listen to our full-length interview with David Abramson at Alpine Macro, click here. If you're not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts from across the globe 3 days/week on all things economics, finance and markets...
Written by Ethan D. Mizer
