Sir, With reference to your report “Fed rate rise risks 1937-style market slump” (March 18): I always understood the 1937 slump to be primarily the result of fiscal tightening, as the first round of social security taxes were levied in January that year. Industrial production started dropping in 1937 Q2. Higher taxes had a direct and quick impact on activity, as most economic theory would suggest. Monetary tightening didn’t help, for sure, just like in 1930-32. But, as in 1931-32, it was fiscal tightening that dealt the real hammer blow on the economy.

More generally, the Bridgewater Associates note to clients seems to reflect today’s era where financial markets give primacy to monetary policy and every little gyration/adjustment in monetary policy is seen as monumental. Ironically, as in the 1930s, fiscal policy today is playing a substantial role in defining the landscape, nowhere more obviously than in the eurozone where an overly tight fiscal policy has led to depression in the periphery. That creates the need for QE and other monetary policy experiments, which seem to have small economic benefits but substantial financial market effects.

Andres Drobny

Drobny Global Advisors,

Santa Monica, CA, US

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