Since the collapse of the Bretton Woods system, the Federal Reserve's monetary policy has gradually transitioned from price targets to quantity targets. However, influenced by Keynesianism, the Federal Reserve still regards interest rates as the primary position in the monetary policy system in actual operations. Therefore, during this transition stage, monetary policy was unstable, coupled with high interest rate fluctuations in the context of high inflation, which ultimately led to excessive money supply.
Specifically, although Burns announced that the monetary aggregate would be the supply target shortly after taking office in 1970, he actually used the federal funds rate as the ultimate target. Every six weeks, the Federal Open Market Committee resets the target range for various monetary aggregates and the federal funds rate to match that target range. If the federal funds rate is above or below the target range, the money supply is adjusted to keep the federal funds rate within the target range. Therefore, the money supply often spirals upward or downward unexpectedly, making it extremely unstable.
In addition, there are disadvantages to choosing interest rates as the regulatory target. First, although information about interest rates is available every day, it is not easy to control. Second, the main factor affecting aggregate demand is the expected long-term real interest rate. The so-called forecasted long-term real interest rate is the real interest rate that market participants infer by subtracting the expected inflation rate from the nominal interest rate. It was precisely in the 1970s that the United States experienced relatively high inflation. In periods of such high inflation, the relationship between nominal long-term interest rates and aggregate demand is neither stable nor predictable.
Therefore, during the period of stagflation, the Fed's monetary policy failed to help economic growth. Instead, due to the excessive money supply, it was considered to be one of the factors pushing up inflation.
The expansion of bank credit business also contributed to the emergence of inflation. Rising energy and food prices pushed inflation straight into double digits
The economic "stagflation" of the 1970s is often attributed to rising oil prices. Our research also found that there is indeed a close relationship between the sharp rise in oil prices and the subsequent economic recession. The first oil crisis occurred in 1973-1974. When the October War broke out, OPEC jointly cut oil exports in order to sanction the West. International oil prices rose from US$3 to US$12 per barrel. At the same time, the economies of developed Western countries began to decline. From 1973 to 1975 US real GDP growth fell by 0.7. The second oil crisis occurred in 1979-1980. Revolution broke out in Iran, and war ensued between Iran and Iraq. Daily oil production dropped sharply and oil prices soared from US$14 per barrel to nearly US$40. The second oil crisis also caused an economic recession in major Western industrial countries. From 1979 to 1980, the real GDP of the United States dropped by 0.23. The third oil crisis occurred in 1990. In August 1990, Iraq invaded Kuwait, and in January of the following year, the United States went to war against Iraq. In three months, oil prices rose from $14 to $40 a barrel. From 1990 to 1991, U.S. real GDP fell by 0.17.
Why will rising oil prices cause a chain reaction of economic recession? First, productivity is closely related to oil prices, and an increase in oil prices will lead to a decrease in productivity. The use of oil by the U.S. industrial sector reached its peak in the 1870s.
The rise in oil prices directly affected the production sectors that used oil as fuel and raw materials.
Secondly, the rise in oil prices has directly promoted the already high inflation rate. Oil affects price trends in the form of final consumer goods and intermediate products.
In addition, not only oil prices have risen, but food prices have also risen sharply due to food shortages, which has increased inflationary pressure to a certain extent.
In 1972, natural disasters swept the world. The world's total food production decreased by 2.9% compared with the previous year, and severe famines occurred in many countries. The former Soviet Union went on a panic buying spree this year and imported large quantities of food, resulting in unprecedented food shortages after the war. World food production fell again in 1974, further intensifying the shortage. In 1978, before the second oil crisis, there was another world food shortage.
Due to insufficient food supply, food prices rose sharply. In 1973 and 1974, the price increases of food and beverages in the United States reached 13.2 and 13.7 respectively; in 1978 and 1979, the price increases reached 9.7 and 13.7 respectively. 10.7. The collapse of the Bretton Woods system and the depreciation of the US dollar
The rise in oil prices was ostensibly caused by the oil crisis, but in fact it was also related to the continued depreciation of the US dollar. In 1975, the United States and the Gulf countries signed agreements one after another. The main content of the agreement was that these countries would only use U.S. dollars for oil settlement. Oil prices are marked by U.S. dollars, which creates a logical relationship between crude oil prices and the U.S. dollar exchange rate moving inversely. In 1970, the continued depreciation of the U.S. dollar following the collapse of the Bretton Woods system provided ample justification for rising oil prices. The impact of stagflation on the global economy
Stagflation has dealt a fatal blow to the U.S. economy. On the one hand, U.S. industry has experienced a prolonged period of declining production. The economic crisis in 1973 caused the US industrial production to drop by 15.3%, lasting for 18 months; the economic crisis in 1979 caused the US industrial production to drop by 11.8%, lasting for about 44 months. On the other hand, a large number of companies went bankrupt and the unemployment rate rose to the highest level in any post-war crisis. The economic crisis that occurred in 1979 caused the bankruptcy of nearly 15,000 companies, the unemployment rate reached a peak of 9.2, and the number of unemployed people was approximately 8.36 million. During the economic crisis of 1979, business failures, bank bankruptcies, and unemployment all hit postwar records. The number of corporate bankruptcies reached 25,300, and the unemployment rate reached a peak of 10.8. In addition, the sharp decline in fixed asset investment and the serious rise in prices have seriously affected the development of the U.S. economy. The "stagflation" stage is the most difficult stage in the United States after the end of World War II. From the outbreak of the economic crisis in December 1969 to the economic recovery in December 1982, the United States stayed in the shadow of stagflation for approximately 13 years. On average, there is a recession every more than three years, and the average real GDP growth rate is only 2.9, while the average economic growth rate in other periods is 3.87 to 5.69. At the same time, the inflation rate was unprecedentedly high, with the average annual inflation rate reaching 10.46, while the average inflation rate in the various post-war economic periods in the United States was 2.33 to 3.54. The performance of various industries in the United States during the "stagflation" period
During the "stagflation" period in the United States in the 1970s, the performance of various industries varied. Our statistics show that most industries, especially the manufacturing industry, perform poorly; however, the upstream resource industries and downstream service industries with pricing power, as well as industries with new profit models, have significantly higher growth rates. Exceeding the CPI increase. In the 1970s, the industries with the strongest growth in the United States were the extractive industry, agriculture, forestry, animal husbandry, and fishery, financial services, and public utilities, with an average annual growth rate of more than 10%, far exceeding the rise in CPI. Among them, the annual growth of extraction, agriculture, forestry, animal husbandry and fishery has exceeded 50% several times, mainly due to the surge in oil prices and global food prices. The annual growth of the financial services industry was once close to 20%, which was due to the emergence of a new profit model in the US banking industry in the 1970s - the rise of international lending business. The Middle East's "petrodollars" were eventually deposited back into U.S. banks. In addition, the continued depreciation of the U.S. dollar stimulated less developed countries that did not produce oil to borrow money to pay for their international balance of payments deficits. Therefore, in the 1970s, the U.S. banking industry was in a period of credit expansion and high growth. It was a lucrative period of leverage and high profits until the debt crisis broke out in the early 1980s.
In the 1970s, industries with moderate growth in the United States, including information services, education and medical, real estate, accommodation and food services, culture and entertainment, etc., basically achieved positive growth after deducting inflation factors. . The growth of the information services industry was mainly due to the breakup of the monopoly of the U.S. telecommunications industry at that time, and the industry competition mechanism stimulated the growth of residents' consumption of communications.
In the 1970s, the growth of the United States was stagnant in a wide range of industries, including manufacturing, transportation and warehousing, construction, retail, wholesale trade, etc., mainly due to economic stagnation and high unemployment. influence.
Stagflation has soared global energy and commodity prices. Inflation has led to the devaluation of fixed-income assets. The economic recession has dragged down the rise of the stock market. Funds lacking investment channels have begun to pour into the commodity market. As a store of value against inflation, gold hit a high of $850 per ounce in 1980. The impact of stagflation on the U.S. stock market
Economic recession is usually accompanied by a decline in the stock market. We analyzed the bull and bear cycles in the stock market from 1942 to 1995 and found that there were a total of 8 economic recessions during this period, each time accompanied by a bearish stock market. The stock market trend is a leading indicator of economic growth. The stock market has fallen early in 7 of the 8 recessions. Before the economy begins to recover, the stock market generally stabilizes about 4 months in advance. Of course, not every bearish stock market is related to the economic cycle. Only 8 of the 14 stock market corrections are related to the economic cycle. Other factors such as the credit cycle also influence the trend of the stock market. The stock market corrected six times throughout the stagflation period and was in a bear market about half of the time. In other words, half of the 14 adjustments in the U.S. stock market from 1946 to 1995 occurred during the stagflation period. Stagflation seriously affected the development of the U.S. stock market. During the major stock market adjustment in 1973-1974, the U.S. S&P500 fell by nearly 43.3, which was the largest decline in previous adjustments. Judging from the performance of individual stocks, during the stock market adjustment period in the 1970s, stocks in some industries still experienced certain gains. For example, financial stocks, defense stocks, extractive stocks and service stocks. Generally speaking, the trend of the sector is closely related to the industry prosperity at that time.
The global impact of "stagflation" in Western countries - huge transfers of funds to less developed countries
Although Western countries fell into stagflation in the 1970s, U.S. credit The continuous expansion of scale has also contributed to the development of the world, especially the less developed countries, and the expansion of world trade. The rise of international lending business can be traced back at least to the first oil crisis in 1973, which was mainly caused by three factors.
First, funds. In 1973, the adverse effects of accelerating inflation and interest rate increases were unable to support the normal financing activities of U.S. banks, leading the evolution of the banking system to take another path. At that time, the huge wealth brought by the increase in oil prices continued to flow to oil-producing countries, and these petrodollars were eventually deposited back into U.S. banks. Banks that lacked normal financing channels suddenly had huge amounts of funds.
Second, demand. The demand for borrowing is related to the loose monetary policy and low real interest rates in the 1970s. Loose monetary policy, the depreciation of the U.S. dollar, and negative interest rates have reduced the cost of repaying principal and interest, and also indirectly enhanced the creditworthiness of the borrowing country. Falling real interest rates, expanding world trade, rising commodity prices, and a depreciating dollar all encourage debtor countries and give them the opportunity to increase their debt levels. Internationally, less developed countries that do not produce oil need loans to pay their balance of payments deficits, while oil-producing countries need loans to support economic expansion plans. At a time when relations between East and West were easing, American banks became a source of credit.
Third, profit. At the time, the Eurodollar market was unregulated and U.S. banks did not have to maintain minimum reserves for the debt of their overseas subsidiaries. The profits from international loans are quite lucrative.
International loan business has become the fastest growing business in the entire banking business. Coupled with the competition among banks for market share, the requirements for loan conditions are correspondingly much looser. Borrowing countries provide very little information necessary to obtain loans, and some lending banks do not even know how much the loan recipients have borrowed elsewhere. In this way, the entire international credit market developed rapidly. The development of international credit markets came to an end in 1982 after the Mexican debt crisis broke out. Only beginning in the 1990s did private capital begin to flow significantly into emerging markets. How does the United States get out of "stagflation"?
In the past, when an economic recession occurred, production declined and unemployment increased, which was often accompanied by a fall in price levels. It was backed by this actual situation that the unemployment rate was exchanged for the inflation rate. Descending Keynesian economic policies can prevail. However, at this time the situation changed. During the stagflation period, abnormal inflation and unemployment occurred at the same time, putting the U.S. government in a dilemma. Gradual Economic Recovery Policies
Both the Ford and Carter administrations implemented gradual economic recovery policies. In January 1976, the unemployment rate was 7.9, and the Ford government set an economic path to suppress the unemployment rate to 5.2 by 1980. This means that during this period, the unemployment rate needs to decrease by 0.6 per year. President Carter also followed this goal path during his tenure. The specific measures are: First, reduce taxes to stimulate economic growth; second, allocate funds for public services; to increase temporary job positions.
Although the former measure had a certain positive effect, it expanded the budget deficit, thereby exacerbating the inflation that still existed in the United States, so that "double-digit" inflation appeared again in 1978 rate; the latter measure has little effect due to limited allocations. The rise in inflation forced the Carter administration to shift its focus back to controlling inflation and adopt a tightening monetary policy. The federal funds rate even exceeded 10 in the late 1970s. As the Carter administration wavered between controlling inflation and stimulating economic growth, monetary policy was sometimes tightened and sometimes loosened, and it did not implement a coherent strategy. In the end, the Carter administration also stepped down in the shadow of "stagflation." Stabilizing the money supply and structural fiscal policy
In 1979, Volcker became chairman of the Federal Reserve and strongly raised U.S. dollar interest rates. The strong dollar policy of high interest rates has attracted a large amount of foreign capital to flow into the United States, pushing the United States into the era of strong dollar. In 1981, Ronald Reagan came to the White House. The Reagan administration believed that excessive state intervention in the economy restricted economic vitality and was the fundamental cause of a vicious economic cycle. In order to deal with "stagflation", the Reagan administration changed course and adopted four measures: stabilizing the money supply, reducing taxes, cutting expenditures, and reducing government intervention. The two most effective ones are stabilizing the money supply and reducing government intervention.
First of all, the Reagan administration took control of the money supply as its main goal and would not give up tight monetary policy even if interest rates were too high and triggered an economic crisis. Although the Reagan administration encountered a serious economic crisis in the early days of taking office, the stable money supply suppressed inflation, causing inflation to gradually decline. By 1984 it had dropped to 3.8. Secondly, Reagan's accelerated depreciation policy and the original investment tax deduction and other preferential policies implemented by Reagan increased the cash flow in the hands of enterprises, which played a great role in stimulating the updating of equipment in traditional industries; in addition, as the price of production materials rose below In the early stage, corporate investment was also encouraged. In addition, changes in the energy consumption structure have caused a drop in oil prices; the appreciation of the US dollar has also caused a decrease in the price of imported products; objective reasons such as labor unions giving up their demands for higher wages to ensure workers' employment have also caused inflation to decline. After the continuous efforts of the Reagan administration, the United States finally ushered in a new peak of economic growth in 1983. This round of economic stagflation lasted for 13 years.