Risk of global economic crisis due to protectionist sentiments and potential defaults on international debt

From Investing.com: 2025-03-29 04:30:00

The possibility of a depression is being discussed due to various economic challenges. Factors such as falling commodity prices, resistance to austerity programs, and increasing nonperforming loans are reminiscent of events leading to the Great Depression in the 1930s. Protectionist sentiments are on the rise, with over 300 protectionist bills introduced in the US Congress. If passed, such legislation could reduce world trade, worsen economic conditions, and lead to defaults in international debt. The Federal Reserve’s cautious approach to lowering interest rates raises concerns about mitigating potential economic crises. The U.S. is currently facing huge trade deficits, leading to increased support for protectionism. President Hoover raised taxes in 1932 to balance the budget, a move not possible today due to the massive federal deficit. Industrial production peaked in 1929 and stock prices soared, but a decline followed in early 1930, aggravated by the Smoot-Hawley Tariff. The Federal Reserve raised interest rates in 1928, contributing to the economic downturn. The Smoot-Hawley Tariff of 1930 triggered the Great Depression, causing stock prices to crash by 78% and output to plummet by 42%. President Hoover’s support for farm relief programs and tariff increases in 1929 worsened the economic situation, despite warnings from economists and foreign governments. The Smoot-Hawley Tariff Act of 1930 imposed record high rates on American tariffs, leading to international trade retaliation. Countries like Spain, Canada, Italy, and Britain enacted new tariffs, causing a collapse in world trade. President Roosevelt sought to revive world trade by proposing Reciprocal Trade Agreements in 1934. The United States, once the world’s largest creditor nation after WWI, saw a lending boom in the 1920s, but the imposition of the Smoot-Hawley Tariff led to financial panics and bank failures during the Great Depression. The Federal Reserve responded by cutting discount rates and engaging in open market purchases to stabilize the economy. Efforts to arrange cooperation between incoming and outgoing presidents during the interregnum until Franklin D. Roosevelt took office broke down, leading to a run on the dollar and sizable gold outflows in early 1933. The Federal Reserve raised the discount rate to address banking failures, but Milton Friedman and Anna Schwartz argued that the Fed’s failure to increase the monetary base caused the Great Depression. Despite protectionist sentiment in Congress, a repeat of the Smoot-Hawley disaster is unlikely. The Federal Reserve may lower interest rates further to avert a recession caused by deflation.

Notes: During the first half of 1982, there was concern about the risk of a depression if the Fed remained committed to "knee-jerk monetarism." The parallels between the equity market today and the late 1920s were examined in 1985. The tariff’s role in causing the Great Depression is debated, with some analysts pointing to it as a significant contributor. Protectionist sentiment led to import-restricting bills being attached to crucial measures in Congress. Fed Chairman Paul Volcker highlighted the potential threat to progress against inflation posed by adverse sentiment towards the dollar. The U.S. economy faces risks of recession, with distressed industries like textiles, shoes, and petroleum feeling the pressure. The White House aims to curb protectionism in Congress by filing complaints against foreign producers. Global oversupply and extreme competition are causing deflationary pressures on the world economy. In 1934, the Reciprocal Trade Agreement Program gave the President power to negotiate tariff reductions. President Hoover raised taxes in 1932 to restore confidence in the economy. The New York Times described the tax increase as a normal step during large gold withdrawals.

Read more at Investing.com: Could a Protectionist Domino Effect Tip the Global Economy Into Crisis?