The Roaring ‘20s: Richmond Fed Bank President Expects Boom to Continue

Federal Reserve Bank of Richmond President Thomas Barkin poses during a break at a Dallas Fed conference on technology on May 23, 2019. (Ann Saphir/Reuters)

The U.S. economy could go through a second version of the Roaring Twenties, according to Federal Reserve Bank of Richmond President and CEO Thomas Barkin in a recent speech.

Speaking in front of the Virginia Bankers Association and Virginia Chamber 2022 Financial Forecast event, Barkin said U.S. households have seen a significant increase in net worth over the past two years, swelling to about $32 trillion.

He alluded to several factors that could sustain this immense growth despite the central bank tapering its pandemic-era stimulus and relief measures: record corporate profits, durable balance sheets, low inventories, and budget surpluses at the state level.

At the same time, Barkin does anticipate some problematic hurdles to overcome moving forward, including labor shortages and the Omicron coronavirus variant “wild card.”

“COVID has now largely become a supply-side and an inflationary challenge,” he said.

Barkin noted that inflation challenges would likely subside in 2022 amid easing supply chain pressures and the Federal Reserve initiating the normalization process.

Ultimately, the United States has learned several lessons since the early days of the global health crisis, he said. In the past two years, trillions of dollars in federal stimulus contributed to a spike in the demand for goods and decimated supply chains. He noted that workers were slow to return to the workforce, with pandemic benefits playing a role. Also, the national debt substantially increased, as it surpassed $29 trillion, he said.

Will the 2020s Mirror the 1920s?

While the U.S. landscape is far different today than it was a century ago, experts say there are some similarities to one of the most prosperous decades in the nation’s history, particularly in relation to the pandemic and the financial markets.

When the country welcomed the new decade in 1920, the United States was coming off the Spanish flu pandemic. During the four waves, approximately 675,000 Americans died, contributing to a global total of 50 million.

A commuter walks past a sign outside a bar in London on Dec. 9, 2021. (Chris J Ratcliffe/Getty Images)

Despite a sharp 19-month depression and subsequent recessions throughout the decade, the U.S. stock market soared during this time. Following a 32 percent decline in 1920, the Dow Jones Industrial Average rallied 327 percent until Black Tuesday in October 1929.

The finance industry enjoyed some new tools to attract more investors, including allowing clients to purchase stocks on margin. Brokers would lend as much as 90 percent of the price of the security, while traders only needed to put down as little as 10 percent. Investors made a lot of money during the boom period, but portfolios were decimated when the stock market crash occurred, resulting in margin calls.

A hundred years later, the United States has grappled with similar circumstances.

In the past two years, about 68 million infections have been recorded domestically, and close to 859,000 Americans have died either because of or with COVID-19.

The stock market has rallied significantly following the market meltdown that bottomed in March 2020. The Dow Jones Industrial Average has surged by more than 90 percent, while the Nasdaq Composite Index has advanced by roughly 100 percent. The S&P 500 has also spiked by 100 percent.

However, fiscal and monetary policies between these two decades have been slightly different.

The Republican administrations of Presidents Warren Harding and Calvin Coolidge had cut the top income tax rate, slashed spending, and reduced the national debt. However, the U.S. government instituted policies that laid the groundwork for many of the interventionist schemes implemented by Presidents Herbert Hoover and Franklin Delano Roosevelt, such as the War Finance Corporation and Foreign Trade Financial Corporation.

In response to swelling inflation, the Federal Reserve sharply raised interest rates to as much as 7 percent. In the later years, the central bank eased monetary policy. The Fed expanded credit conditions throughout the economy by regularly lowering the discount window, a mechanism to help commercial banks manage their short-term liquidity needs.

As the Bank for International Settlements (BIS) noted in a September 2003 paper (pdf), it was “a credit boom gone wrong.”

“The credit boom and its ultimate impact were especially pronounced where the organisation and history of the financial sector led intermediaries to compete aggressively in providing credit,” the paper reads.

“In addition, the structure of management of the monetary regime mattered importantly. The procyclical character of the foreign exchange component of global international reserves and the failure of domestic monetary authorities to use stable policy rules to guide the more discretionary approach to monetary management that replaced the more rigid rules-based gold standard of the earlier era are key for explaining.”

Consumer, business, and bank credit growth has been immense in the present-day economy. This has been especially pronounced in the stock market in the form of margin debt.

A sign for Wall Street hangs in front of the New York Stock Exchange on July 8, 2021. (Mark Lennihan/AP Photo)

According to the latest numbers from the Financial Industry Regulatory Authority, total U.S. margin debt stood at $918.6 billion in November 2021, up by 27.2 percent from the same time in 2020, and up by more than 91 percent from March 2020.

Data compiled by Yardeni Research (pdf) also highlighted a correlation between margin debt and growth in the Russell 3000 Index, the S&P 1500 Composite Index, and the Wilshire 5000.

The 1970s All Over Again?

The Federal Reserve plans to finish its quantitative easing program in the next couple of months, raise interest rates at least three times in 2022, and potentially shrink the more than $8 trillion balance sheet. Market analysts note that the central bank’s tightening efforts will need to juggle fighting inflation and sustaining economic growth and the bull market.

The Smoothed U.S. Recession Probabilities rate is below 1 percent. The CBOE Volatility Index, which is also known as the Fear Index, is at around 22—anything above 30 indicates tremendous consternation and uncertainty. But consumer sentiment is waning, and inflation expectations remain elevated for 2023.

Be it a correction in the stock market or sluggish growth in the broader economy, some believe the United States will emulate the economy of the 1970s more than the 1930s.

“Many people think we are in the 1930s, but I think we will wake up somewhere in the 70s,” Amundi Chief Investment Officer Pascal Blanqué said.