Morgan Stanley: It’s 1938 All Over Again

The simpletons at Morgan Stanley are equating this era of economic Frankenstonian proportions, where $10 trillion in debt resides in negative yielding instruments, to the ho-hum soup kitchen, pre-war days of 1938. This, of course, is to lure the idled and the sloths to read the research report, just like many of you clicked in via Twitter to see whatever the fuck I was talking about.

The truth is, it’s a lot worse than 1938. Back then, we didn’t have assholes in Central Banks commanding rates in such a manner that it literally destroyed capital. We only had assholes in Germany, trying to take over the world (No EU).

Some things never change.

“We think that the current macroeconomic environment has a number of significant similarities with the 1930s, and the experiences then are particularly relevant for today,” they wrote. “The critical similarity between the 1930s and the 2008 cycle is that the financial shock and the relatively high levels of indebtedness changed the risk attitudes of the private sector and triggered them to repair their balance sheets.”

Like then, the end result could be a prolonged weak period and subdued inflation expectations, with a risk that those price expectations are un-anchored. The danger is that central banks move too quickly to raise interest rates or governments cut back on spending, triggering an even deeper slowdown.

“In 1936-37, the premature and sharp pace of tightening of policies led to a double-dip in the U.S. economy, resulting in a relapse into recession and deflation in 1938,” the analysts wrote. “Similarly, in the current cycle, as growth recovered, policy-makers proceeded to tighten fiscal policy, which has contributed to a slowdown in growth in recent quarters.”

“Activating fiscal policy, particularly at a time when the monetary policy stance is still accommodative, could lead to a virtuous cycle where the corporate sector takes up private investment, and sustains job creation and income growth,” they wrote.

The Fed has already taken their foot off the pedal. We’ve raised rates 1 time and the market threw a hissy fit. All other economies of importance have enacted QE schemes to fend off deflation, by creating more deflation. It truly is a sick world. However sick it may be, we’re not hiking rates into an earnings recession, last I checked. Ergo, this Morgan Stanley report is only useful as toilet paper inside of a filthy Wedbush bathroom.