There is an "invisible hand" in economic activities, I believe everyone has heard of this, this is a metaphor put forward by Adam Smith, the father of economics, in his "Theory of Moral Sentiments" and "The Wealth of Nations", which refers to the ** mechanism and market mechanism that are not interfered with by external forces, that is, the country's income, output, employment, etc., with people's emotions and expectations There are periodic fluctuations, regular expansion and contraction. For example, when people expect the economy to improve, they will expand production capacity, and slowly become oversupplied, and the inventory will be excessive, and then they will begin to destock, the economy will begin to decline, and enterprises will begin to reduce production. Under the action of this "invisible hand", the economy is moving forward in fluctuations like the change of seasons and the ebb and flow of the tide, forming round after round of economic cycles.
The "invisible hand" is the embodiment of the early capitalist free market economy, which believed that the market was omnipotent, did not intervene in the economy, and adopted the principle of laissez-faire to the market, which greatly promoted the economic development of the early capitalist world. But by the thirties of the twentieth century, when the Great Depression swept the capitalist world, the productive forces were severely damaged, people lost a lot of jobs, living standards fell sharply, the myth of a free market economy was shattered, and the "invisible hand" seemed to be out of order.
People found that the self-regulation mechanism of the market can not maintain the sustained prosperity of the economy, relying on the market itself to get out of the depression, towards recovery, it takes a long time, so a Briton named Keynes stood up and proposed in the book "General Theory of Employment, Interest and Money" that the state should use fiscal policy to intervene and regulate the economy, which is the famous "Keynesian" theory, that is, the central bank controls the amount of money, raises interest rates, cuts interest rates and other means, and uses a "visible hand" to fight against that The Invisible Hand".
For example, when the economy is overheated, the central bank will raise interest rates to curb inflation; When there is a recession, the central bank cuts interest rates, freeing up liquidity and stimulating an upturn. Roosevelt's New Deal of 1933 was the product of this "visible hand" that helped the United States emerge from the Great Depression and continue to prosper to this day. However, it is necessary to be vigilant that the "visible hand" is often abused in some emerging economies, and the "visible hand" has become an "idle hand", and if it is not restrained and restrained, it will inevitably have a counterproductive effect on economic development.
Under the action of the "invisible hand", four major economic cycles have been formed, namely: recession, recovery, overheating and stagflation. In order to contend with it, the central bank stretched out a "visible hand", and under the role of monetary policy and credit policy, four major financial cycles have been formed, namely: easy money and tight credit, easy money and easy credit, tight money and easy credit, and tight money and tight credit.
For investors, being able to identify and locate the cycle can grasp the pulse of the market and improve the winning rate of our investment decisions. Understanding the cycle is equivalent to having a navigation map in your hand, and always knowing where your next step is to go, such as investing in bonds in the wide monetary cycle and investing in the wide credit cycle.