In the 60s and 70s, most economists believed in the Phillips curve theory
- When the inflation rate increases, the unemployment rate decreases, and vice versa
Before 1979, the Fed used a "Stop and Go" monetary policy to deal with high unemployment and high inflation that year.
Go means the FED reduces interest rates, causing inflation to increase but in return reduces the unemployment rate.
Stop is the opposite, the FED increases interest rates, the unemployment rate also increases
In 1960, the US unemployment rate was extremely high, the Fed immediately applied the Go policy, which reduced interest rates. This policy was very successful in continuously reducing the unemployment rate for many consecutive years.
But by the 1970s, the market proved that the Stop and Go policy was a major failure of the Fed.
Because after the Fed raised interest rates, it rushed to reduce interest rates to save the unemployment rate, resulting in escalating inflation, the highest unemployment rate in history reaching 10%, or 10.7 million unemployed people. causing the entire United States to be angry, at this time, a person who was considered the savior of the entire United States appeared, Paul Volcker, the new chairman of the Fed at that time.
He looked at the core of the problem: the amount of money in circulation was too much, so he used every method to reduce the amount of money circulating through banks. He only focused on increasing interest rates and attracting money at all costs.
According to the theory of supply and demand, the less something is, the more demand there is, the more valuable that thing is, so attracting money raises interest rates, making the dollar strong again, even though the initial stage causes unemployment. increased quite high, many people thought he was wrong, even threatened to assassinate him, even the president who nominated him could not bear the pressure and had to resign.
By the end of 1980, the Fed raised interest rates to nearly 20%, in the end this journey only took 3 years to bring inflation down to 5% and the US economy was back on track, at that time people saw him as a man. heroically, he completely changed the concept of the FED Reserve. Until today, the FED still only applies one method of raising interest rates that he used to save the economy.
After all, if a body wants to be born, a body must die.
If you want to see wave 1 2 3, you have to go to wave 5, so that wave abc appears.
Decades of human currency have shown that the value of a country's currency is still the most important thing, because it is the belief of the entire people (read the old article Brazill again).
In theory, if interest rates are increased to reduce inflation, the unemployment rate will increase and the economy will decline, but economic cycles show that recession is unlikely to occur, and even if it does occur, the value of the national currency will decrease. If the family is still strong, people will gradually revive the economy.
Think about it, right? Only when the value of that country's currency is no longer strong, will people let go of their holdings, no longer having the motivation to work to find and keep that valuable thing.
- The US PMI index recently increased to its highest level for 3 consecutive months.
- US consumption index and orders (Code Durable Goods Orders) also increased to the highest level in 3 months
-GDP reaches the strongest increase since 2022
- Employment figures, increased continuously for 39 months
- Consumption has reached its highest level in the past year and from March 2023 until now, the US consumption index has never decreased.
So, do you think there will be a recession? What is the lesson from the above story?
Next day, we will share and explain more about many indicators, telling many other interesting things at the Macro channel.
