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Strategies & Market Trends : ahhaha's ahs
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To: Ahda who wrote (22838)4/6/2013 2:50:14 PM
From: ahhahaRead Replies (1) of 24758
 
The early 1980s recession was a severe recession in the United States which began in July 1981 and ended in November 1982.[2][3] The primary cause of the recession was a contractionary monetary policy established by the Federal Reserve System to control high inflation.[4] In the wake of the 1973 oil crisis and the 1979 energy crisis, stagflation began to afflict the economy of the United States.

Habitual myth. Or, the standard model.

In that model they(just about everyone) equate money supply and inverse interest rates. That model doesn't work now and hasn't for 5 years. It didn't work in the '80s either. When does it work? Interest rate is independent of money supply. FED proved this in the late '80s - early '90s with their now forgotten Friedman experiment when FED left the in process disinflation slow decline in interest rates in place while they let money supply do what it would. At times money supply ran at 18% while concurrently rates gradually declined.

FED didn't "establish" anything. They had to stay out of the money market because lenders didn't trust them. If FED showed up, lenders backed away, and rates rose. FED stayed out from 9/4/79 until 8/13/82.

The inflation of the '70s had nothing to do with factor prices. It had to do with the psychology held by labor who feared they would be paid in inflated(deflated) dollars unless they demanded extra compensation. The extra was passed on to buyers by labor's employers. People don't care much if their compensation adequately exceeds inflation. To this day labor's demand for compensation is the rate determinant quantity that has the highest priority at FED.
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