WEBVTT
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Welcome once again as MIT professor,
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Paul Samuelson
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discusses the current economic scene.
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This series is produced
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by Instructional Dynamics Incorporated.
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This program was recorded July 30th.
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[Professor Samuelson] Before I analyze
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where we now stand in the American economy
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and where we're likely to be going til the end
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of the year,
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I'd like to try to field two questions that have been
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sent in to me.
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The first is from a retired investment banker.
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The second is from a business school professor.
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Here's the first question.
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What are the arguments against the United States government
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actively intervening to support the dollar?
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Actually in recent times, I've veered over towards
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counseling the treasury and the council reserve
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to agree in principle to such support operations,
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and I've subsequently learned from reading the newspapers
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that we have in fact, changed over to that position.
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The Fed seems in fact already to have engaged
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in some support operations.
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The details are not clear on the actual magnitudes
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of such operations,
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nor is it clear, or at least it's not clear to me,
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whether this is in some kind of formerly agreed upon
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concert, along with support operations by various
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European countries, or whether we're going alone.
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What does seem clear is that we are not now facing
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absolutely clean floating.
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And hence, I suppose, in a sense we can't be sure
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in what directions the winds of unfederated competition
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are really tending to push for an exchange rate.
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For example, it might be the case that the underlying
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speculative forces are still against the dollar.
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But that these forces are being covered up by some amount
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of defensive support.
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Such a fundamental speculative trend, if indeed it does
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exist, must of course be distinguished sharply
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from the underlying basic trend in the balance of payments.
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The basic balance of the United States
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may well be improving,
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as so many experts profess to be the case.
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And yet at the same time, the speculative forces
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could still be pushing in the other direction.
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Well, why my own shift in position?
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It certainly wasn't to accommodate the French,
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or to gain favors with other nations abroad
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that have been urging us to support our dollar.
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This doesn't mean that I agree that giving such
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accommodation in order to gain popularity with ones allies
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is never to be recommended.
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Often we still have good reason to wish to keep
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the good will of Japan and western Europe.
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I myself have never believed in the doctrine
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that you can kick your allies around,
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that you can treat them with benign neglect,
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that you can just forget completely about their wishes,
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and let them unilaterally appreciate their currencies
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if they don't want to accumulate dollars.
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But nonetheless, for a dozen years, I had to warn
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against defending the indefensible.
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When your good friend wants you to support your
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overvalued currency, you must tell him politely
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that this makes no sense.
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No sense for you, the deficit country,
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or for him, the surplus country.
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The reason then for my changing over to the view
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that the US government might now judiciously intervene
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to support a dollar that is being depressed
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only because of Watergate jitters,
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and because of self fulfilling but wrong minded
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speculative hopes and fears, is this-
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there's now accumulating evidence that the dollar
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is no longer overvalued at a long term basis.
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Therefore, the smart long run position, both for the
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speculator and the so called investor,
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is against betting on further depreciation of the dollar.
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I see no reason why our government,
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if it has carefully analyzed the odds,
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should not invest on the right side,
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on the long run profitable side.
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In doing this successfully, it will inflict losses
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on the speculators and on the nervous hedgers.
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But I must say, that couldn't happen to a nicer bunch
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of guys.
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I do not believe that the government has no business
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in principle, in investing or speculating.
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On the contrary, I think it has a duty
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to counter speculate when reason and information
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convince rational and well informed authorities
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that the market is temporarily speculating
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against fundamental economic forces.
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Now of course I do recognize that there's always a danger
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that governments will not act in a well informed
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and reasonable way for clearly legitimate goals.
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Thus, because of political pressures,
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a government may support the price of wheat
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when fundamental economic forces say that its market
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price should be tending downward.
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Maybe doing that just to curry favor with farmers.
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It may be doing that in austriacus, irrational fashion.
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But 1973 support of the dollar does not in my view
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fall into such a category.
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And actually, those among us who favor flexible
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exchange rates, ought to realize that the apparent
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instability of the dollar in the face of what seems
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to be an improving basic balance,
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is itself definitely undermining their good cause
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of greater flexibility in the exchange rates.
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Judicious support that is likely to make the government
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win money in the long run, and is likely to speed up
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the approach to the true emerging nonequilibrium,
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is therefore a desirable thing.
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Now, those are the reasons upon which I would rest
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my case for such support.
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But let me try to be responsive to the question asked.
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What are the arguments against this position of mine?
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Well, first there is the argument that we should
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give clean floating a chance, so that the market
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can prove to doubters that it will rapidly adjust
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its speculative flurries to long run equilibrium trends.
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And in a measure, I suppose that's what we've been doing
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in delaying our support so long.
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But there's not very much interesting that I know
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of to say about that first argument.
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More weighty is the following second argument
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against support of the dollar by the US government.
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We have the recognize that there may be up to
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80 billion dollars of unwanted reserves abroad
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in the hands of the central banks.
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Suppose that every time the dollar improves,
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those unwanted dollars try to come back here
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in exchange for francs, marks, and other currencies.
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Indeed, even in the absence of such improvement
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of the dollar, suppose such unwanted dollars keep
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trying to get converted back into foreign currencies.
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Then the dollar will always tend to sag.
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Indeed, if we include a big item of such returning dollars
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in the basic predictable balance of the next five years,
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then perhaps our basic balance, even though it's improving,
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is still in deficit.
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In other words, taking into account such a predictable
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return flow of several billions of dollars per year,
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the dollar may still be overvalued on a half decade basis.
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In that case, it would indeed be a mistake for us
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to be supporting an overvalued dollar.
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Of course, in that case it's even sillier for France
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and other countries to be objecting to the sagging
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of the dollar.
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The dollar rate should, under this assumption, sag.
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The other countries can't have their cake and eat it too.
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They can't want to redeem dollars,
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and also refuse the United States a whopping surplus
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in its merchandising current accounts
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to give it the where with all to redeem those dollars.
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So in effect, under those circumstances,
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when other countries encourage us to support the dollar
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under the assumption that the 80 billion of past
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overhang is not removed from the picture,
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they are in effect asking us to do surreptitiously
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what we have rightly refused to do on an outright basis.
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Namely, they are asking us to use our support operations
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as a leaver to fund our dollar debts abroad,
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in effect granting them some kind of an exchange rate
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guarantee on those dollar obligations.
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And in effect committing out government
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through the mechanism of swap loan agreements
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to stand behind those dollars in terms of some
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foreign currencies.
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Now, that kind of support I'm not in favor of,
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and if it appears that in the future,
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as we do support the dollar, that the response
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is a return of these past dollars of overhang,
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then I shall counsel cessation of such support.
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Well, after answering the second question,
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if time permits, I'd like to return to the question
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of whether this is not a good time for foreigners
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actually to be buying up our capital,
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to be buying up our stocks, to be buying up our plants,
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and also to be buying up our going concerns.
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Let me turn now to the second question.
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It reads as follows-
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I heard a rumor that you had taken monetarism apart
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at a forecasting conference somewhere this summer.
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How did that analysis go?
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On July 13th I took part in a seminar here in Cambridge
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that dealt with forecasting.
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And my morning's assignment was to conduct a dialog
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on monetaristic methods.
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I believe the members of the seminar had heard
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the case for monetarism on an earlier day.
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I don't think it's quite correct to say that I took
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monetarism apart.
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Actually, I had then the say that the monetarism stock,
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it's quotation in the market as a technique
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of policy analysis, has been depressed so low
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at the present time, that there's danger the people
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will overlook the element of value in the stress
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that among the many factors that forecasters
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and policy advisors must taken account of,
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ought to be given to the behavior of the money supply
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and of the credit markets.
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What I did first was to review the record.
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For a few years, the federal reserve bank of St. Louis
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had pretty good success in its quarter to quarter
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forecasting.
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And then its year to year forecasting.
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And indeed, at that time, it seemed to do better
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than most of the other monetarists.
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Better than the city bank, for example.
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Better than the three leading academic monetaristic
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forecasters, whose forecasts I've informally monitored
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over the years.
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But as I think I must have mentioned before in these tapes,
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in recent years, St. Louis has been running
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into worse luck in its forecast of nominal GNP.
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I'm not now referring to its abandoning of its forecast
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of real GNP, of the breakdown of nominal GNP
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into real end price factor.
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Their phases one, two, three, three and a half, four,
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perhaps have contaminated their record.
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But I'm not referring to that which monetarism
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is supposed to be able to deliver the goods on,
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nominal GNP forecast.
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Indeed, when Professor Fare of Princeton
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did a recent roundup, which I mentioned,
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of ten or so different forecasters,
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the only method that did worse in recent years
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than a straight mechanical computer forecast
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with no adjustment of the coefficients for judgment,
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was the St. Louis reduced form model.
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Not only did Fare's own mechanical computer
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do better than the reduced form of monetarism,
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but so did Epstein at resources they'd incorporated.
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The unkindest blow of all is that even the median
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business forecaster reporting to the national bureau
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did better in at least square sense,
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and the Wharton school and the Chase Evans model
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and the University of Michigan and a number of other
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models which Fare didn't keep track of,
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but which I informally monitor in my own records,
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did better.
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I also cited, and here I had to be very impressionistic,
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from my informal collection of forecasters,
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any monetarists other monetarist forecasts,
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which I've been able to collect over the recent years.
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And indeed I had to report that I couldn't find
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in my records a single monetarist who deviated
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systematically from the consensus for clearly
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monetarist factors, came out with a long run batting
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average as measured by squared error,
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which was very good in recent years.
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But I warned against making the fundamental error
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of some of the monetarists themselves,
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namely trying to judge the worth of a method
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by its crypto positivistic correlation coefficients.
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Although, those who claim to triumph by the sword
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must in a sense be prepared to die by the sword.
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I don't think we can take such rash warriors
263
00:14:48.270 --> 00:14:53.270
at their own word, at their own crude methodology.
264
00:14:56.000 --> 00:14:59.270
Then I described some of the methods used by monetarists
265
00:14:59.270 --> 00:15:02.390
to dig themselves out of the hole of their own making.
266
00:15:02.390 --> 00:15:04.920
As for example, to put in an odd hope trend
267
00:15:04.920 --> 00:15:08.130
into velocity, so as to enable you to lift
268
00:15:08.130 --> 00:15:10.700
the St. Louis kind of estimate to the neighborhood
269
00:15:10.700 --> 00:15:12.103
of the consensus crowd.
270
00:15:12.960 --> 00:15:16.000
Or, you can call yourself a monetarist by putting
271
00:15:16.000 --> 00:15:18.650
enough fudge factors so as to give you the typical
272
00:15:18.650 --> 00:15:20.483
ecclesiastic forecast.
273
00:15:21.490 --> 00:15:25.830
In short, I suggested that recent skepticism
274
00:15:25.830 --> 00:15:29.359
of coincidental empirical irregularities
275
00:15:29.359 --> 00:15:34.359
that lack prior probability ought to be entertained.
276
00:15:35.760 --> 00:15:39.670
Thus, anyone who knows neoclassical economics,
277
00:15:39.670 --> 00:15:44.670
why should he think that one M1 measure, or M2, or M7,
278
00:15:45.567 --> 00:15:50.567
or M39 measure, ought to be in the future, a simple
279
00:15:51.080 --> 00:15:55.636
causal, reversible relationship with nominal GNP
280
00:15:55.636 --> 00:16:00.410
So that it can do better for policy purposes,
281
00:16:00.410 --> 00:16:04.948
for forecasting purposes, then a more complicated model
282
00:16:04.948 --> 00:16:08.060
that takes into account investment intentions,
283
00:16:08.060 --> 00:16:10.903
technical changes, crop phases, and a host of other
284
00:16:10.903 --> 00:16:12.763
dull things?
285
00:16:14.420 --> 00:16:19.420
So, I guess some of my message is that monetarism
286
00:16:19.620 --> 00:16:24.310
is now somewhat subject to overvaluation,
287
00:16:24.310 --> 00:16:27.240
but if you believe in contrary opinion,
288
00:16:27.240 --> 00:16:32.090
if you believe in sticking to value as against price,
289
00:16:32.090 --> 00:16:35.140
maybe a canny investor might in this time
290
00:16:35.140 --> 00:16:40.140
pick up a little of the monetarism stock for his portfolio.
291
00:16:42.360 --> 00:16:47.360
Let me turn to the current situation of business
292
00:16:49.490 --> 00:16:53.980
before I go back to the subject of whether this is or
293
00:16:53.980 --> 00:16:57.040
isn't a good time for foreigners to be buying up
294
00:16:57.040 --> 00:16:58.243
American capital.
295
00:17:00.130 --> 00:17:02.653
We still are in a period of some confusion.
296
00:17:03.760 --> 00:17:08.346
The second quarter, first estimates of GNP
297
00:17:08.346 --> 00:17:10.003
have now come in.
298
00:17:11.300 --> 00:17:16.300
They're even lower than the forecast I gave you
299
00:17:16.420 --> 00:17:21.400
which was to take the eight percent first quarter
300
00:17:21.400 --> 00:17:25.720
rate of growth and bring it down to three and a half
301
00:17:25.720 --> 00:17:27.020
percent.
302
00:17:27.020 --> 00:17:30.893
The first estimate actually is, there's only two point six
303
00:17:30.893 --> 00:17:35.223
percent a real growth in the second quarter.
304
00:17:36.350 --> 00:17:39.610
But I want to warn you against attaching too much
305
00:17:39.610 --> 00:17:43.420
importance to that weak number
306
00:17:43.420 --> 00:17:45.520
because there's quite a debate going on among
307
00:17:45.520 --> 00:17:47.963
the experts as to whether it's really credible.
308
00:17:50.110 --> 00:17:53.010
We may be running into a problem here
309
00:17:53.010 --> 00:17:55.093
involved in seasonal correction.
310
00:17:56.330 --> 00:18:01.140
It's proper I think to seasonally adjust economic data
311
00:18:01.140 --> 00:18:06.140
so we can get out of them the mirror vicissitudes
312
00:18:06.580 --> 00:18:09.440
of the changing weather.
313
00:18:09.440 --> 00:18:12.090
We expect retail sales to be up at Christmas,
314
00:18:12.090 --> 00:18:14.160
and if retail sales are up that doesn't mean we're
315
00:18:14.160 --> 00:18:16.850
in a boom, it just means that the snow is beginning
316
00:18:16.850 --> 00:18:19.920
to fall and Santa Claus will soon be here,
317
00:18:19.920 --> 00:18:24.920
so we properly deflate as best we can for seasonal trends.
318
00:18:25.330 --> 00:18:28.200
But I want to emphasize that as best we can.
319
00:18:28.200 --> 00:18:31.077
We're not dealing here with something here like
320
00:18:31.077 --> 00:18:33.740
Plutonian tide tables.
321
00:18:33.740 --> 00:18:37.140
You can predict the position of a comet
322
00:18:37.140 --> 00:18:40.410
several centuries ahead.
323
00:18:40.410 --> 00:18:44.410
You can predict tides with great accuracy.
324
00:18:44.410 --> 00:18:47.920
You can predict the way a pendulum will osculate
325
00:18:47.920 --> 00:18:51.760
to a microsecond of precision,
326
00:18:51.760 --> 00:18:56.710
but you cannot by fore analysis or spectral analysis
327
00:18:56.710 --> 00:19:01.710
or by any method known to mankind
328
00:19:02.366 --> 00:19:06.253
get accurately the seasonal element out.
329
00:19:07.660 --> 00:19:09.500
Now, what I've been saying of course should be
330
00:19:09.500 --> 00:19:10.480
remembered at all times,
331
00:19:10.480 --> 00:19:12.690
but it's especially appropriate now
332
00:19:12.690 --> 00:19:14.960
because here's how the argument goes.
333
00:19:14.960 --> 00:19:17.910
Your argument goes that the weakening in the second
334
00:19:17.910 --> 00:19:21.034
quarter, part of which is certainly genuine,
335
00:19:21.034 --> 00:19:26.034
may be due to reasons of supply and not to a weakening
336
00:19:26.900 --> 00:19:27.780
of demand.
337
00:19:27.780 --> 00:19:30.420
I've already commented on that view,
338
00:19:30.420 --> 00:19:33.468
in my last tape I mentioned the view of
339
00:19:33.468 --> 00:19:37.670
Al Summers of the conference board,
340
00:19:37.670 --> 00:19:42.410
and I think of Greenspan and some others,
341
00:19:42.410 --> 00:19:45.130
as against the view of data resources
342
00:19:45.130 --> 00:19:47.670
that there was a substantial weakening in demand,
343
00:19:47.670 --> 00:19:51.870
these authorities have argued that the economy
344
00:19:51.870 --> 00:19:55.170
is still running flat out, but we are pressing up
345
00:19:55.170 --> 00:19:57.580
against capacity limitations.
346
00:19:57.580 --> 00:20:01.370
Good man power is no longer available.
347
00:20:01.370 --> 00:20:04.830
The federal reserve index of surplus capacity
348
00:20:04.830 --> 00:20:09.310
isn't to be trusted, according to this group of observers,
349
00:20:09.310 --> 00:20:13.440
and you better look at the Wharton measures of capacity,
350
00:20:13.440 --> 00:20:16.033
which show very little surplus.
351
00:20:17.240 --> 00:20:20.423
Now if the economy is running flat out,
352
00:20:21.260 --> 00:20:25.221
that means that the normal ups and downs
353
00:20:25.221 --> 00:20:29.905
of production, which can be associated
354
00:20:29.905 --> 00:20:33.380
with the first quarter and the second quarter,
355
00:20:33.380 --> 00:20:36.000
with the third quarter, and with the fourth quarter,
356
00:20:36.000 --> 00:20:37.280
can't work themselves out,
357
00:20:37.280 --> 00:20:40.040
because you're right up against the ceiling.
358
00:20:40.040 --> 00:20:43.680
And so, the second quarter generally shows a whopping
359
00:20:43.680 --> 00:20:45.933
increase for purely seasonal reasons.
360
00:20:46.930 --> 00:20:49.960
And generally, we sensibly correct for that,
361
00:20:49.960 --> 00:20:52.560
and take out the seasonal influence.
362
00:20:52.560 --> 00:20:54.860
But if, at the end of the first quarter,
363
00:20:54.860 --> 00:20:57.110
we already were up against the ceiling,
364
00:20:57.110 --> 00:21:01.323
how can that normal seasonal factor show itself?
365
00:21:02.500 --> 00:21:05.923
And so, it's argued by these experts, it couldn't.
366
00:21:07.700 --> 00:21:11.160
If you use unseasonably corrected data,
367
00:21:11.160 --> 00:21:13.360
we had one of the biggest output increases
368
00:21:13.360 --> 00:21:15.730
in the second quarter on record.
369
00:21:15.730 --> 00:21:18.833
And it's only this artificial tinkering with the data,
370
00:21:19.970 --> 00:21:22.634
normally appropriate but not appropriate
371
00:21:22.634 --> 00:21:27.634
in this 1973 phase of the business cycle
372
00:21:27.710 --> 00:21:30.620
that made this look like slow growth,
373
00:21:30.620 --> 00:21:33.010
so goes the argument.
374
00:21:33.010 --> 00:21:34.890
Now if that's the case,
375
00:21:34.890 --> 00:21:38.800
we should see in the third quarter the opposite happening.
376
00:21:38.800 --> 00:21:41.680
Because what's the normal pattern in the third quarter?
377
00:21:41.680 --> 00:21:44.980
Normal pattern in the third quarter is you're in summer,
378
00:21:44.980 --> 00:21:46.410
people are taking vacations,
379
00:21:46.410 --> 00:21:49.700
there's an easing up, there isn't any occasion
380
00:21:49.700 --> 00:21:51.460
for overtime.
381
00:21:51.460 --> 00:21:53.070
But according to this hypothesis,
382
00:21:53.070 --> 00:21:55.484
the economy is still very strong, is still running
383
00:21:55.484 --> 00:22:00.484
flat out, it's still bumping right up there against
384
00:22:00.570 --> 00:22:01.900
the ceiling.
385
00:22:01.900 --> 00:22:04.070
Then, according to this hypothesis,
386
00:22:04.070 --> 00:22:06.550
we should not see that normal relaxation,
387
00:22:06.550 --> 00:22:10.530
and therefore, they're saying, don't be surprised
388
00:22:10.530 --> 00:22:14.870
if real output bounces back from allegedly only being
389
00:22:14.870 --> 00:22:17.130
two point six percent rate of real growth
390
00:22:17.130 --> 00:22:21.150
in the second quarter to something like say
391
00:22:21.150 --> 00:22:25.143
five and a half or six percent in the third quarter.
392
00:22:27.480 --> 00:22:32.480
In any case, without my trying to adjudicate the matter,
393
00:22:33.010 --> 00:22:37.190
I would say that it's best to not go by any one quarter,
394
00:22:37.190 --> 00:22:40.900
smooth out your data by using two or three quarters,
395
00:22:40.900 --> 00:22:43.483
an then see where we stand.
396
00:22:47.090 --> 00:22:49.540
And from that viewpoint, I must say,
397
00:22:49.540 --> 00:22:51.733
the situation is still a bit clouded.
398
00:22:52.590 --> 00:22:56.240
For example, it looks as if retail sales were very good
399
00:22:56.240 --> 00:22:57.573
in the first part of July.
400
00:22:59.030 --> 00:23:00.650
Extremely strong.
401
00:23:00.650 --> 00:23:04.940
Any beginning weakness or letup earlier.
402
00:23:04.940 --> 00:23:09.510
Now, this may be due to the fact, one of those factors
403
00:23:09.510 --> 00:23:11.490
which an ecclecticist would take into account
404
00:23:11.490 --> 00:23:14.700
in making his forecast and interpreting the passing scene.
405
00:23:14.700 --> 00:23:17.700
It may be due to the fact that the freeze of
406
00:23:17.700 --> 00:23:21.610
of phase three and a half presented itself
407
00:23:21.610 --> 00:23:24.330
to consumers as a very good time to buy
408
00:23:24.330 --> 00:23:27.310
because they could figure that after the freeze
409
00:23:27.310 --> 00:23:30.090
was suspended, after we moved into phase four,
410
00:23:30.090 --> 00:23:32.570
you wouldn't be able to buy at such favorable prices,
411
00:23:32.570 --> 00:23:35.190
and that could explain some of the strength in demand,
412
00:23:35.190 --> 00:23:37.190
and it may be borrowing against the future.
413
00:23:37.190 --> 00:23:40.340
On the other hand, we have to take the straws as they are,
414
00:23:40.340 --> 00:23:44.570
and the straws were that in July, automobile sales
415
00:23:44.570 --> 00:23:48.050
were very good and retail sales generally seemed
416
00:23:49.171 --> 00:23:50.004
to have been quite strong,
417
00:23:50.004 --> 00:23:53.960
so it maybe be that we have not yet really turned
418
00:23:53.960 --> 00:23:56.680
the corner towards that growth recession,
419
00:23:56.680 --> 00:24:01.200
which all the camps, generally speaking,
420
00:24:01.200 --> 00:24:06.180
tend to agree is waiting for us around the end of the year.
421
00:24:06.180 --> 00:24:09.140
The main differences of opinion have to do
422
00:24:09.140 --> 00:24:10.710
with whether that growth recession
423
00:24:10.710 --> 00:24:13.716
is going to move into a genuine recession,
424
00:24:13.716 --> 00:24:18.160
measured let's say by the Krudos national bureau
425
00:24:18.160 --> 00:24:23.160
criterion of two fold quarters of negative growth
426
00:24:23.600 --> 00:24:25.973
in the real GNP.
427
00:24:27.440 --> 00:24:32.260
I don't want to spend more time in detailed analysis
428
00:24:32.260 --> 00:24:37.260
of the second quarter data and what they may be telling us,
429
00:24:39.000 --> 00:24:42.810
but I should point out to you what the towns in Greenspan
430
00:24:42.810 --> 00:24:44.130
has pointed out,
431
00:24:44.130 --> 00:24:47.780
namely that there was a whopping price increase
432
00:24:47.780 --> 00:24:50.516
as measured by the GNP deflator,
433
00:24:50.516 --> 00:24:53.730
that tends to reduce the real component,
434
00:24:53.730 --> 00:24:57.130
and the question is whether all of that is genuine.
435
00:24:57.130 --> 00:25:02.130
Now, part of it is undoubtedly due to a weight shift
436
00:25:02.403 --> 00:25:07.050
towards goods which there isn't a lot in prices.
437
00:25:07.050 --> 00:25:09.130
I'm not sure that is asperious effect,
438
00:25:09.130 --> 00:25:11.480
but in case you think it is asperious effect
439
00:25:11.480 --> 00:25:14.750
and want to rule it out,
440
00:25:14.750 --> 00:25:19.670
you can make a computation using a chain index
441
00:25:19.670 --> 00:25:23.320
with the same weights of the GNP prices.
442
00:25:23.320 --> 00:25:27.570
And if you do that, that will raise the two point six
443
00:25:27.570 --> 00:25:30.180
percent to eight percent.
444
00:25:30.180 --> 00:25:35.070
Now, I've heard even stronger reasons for withholding
445
00:25:35.070 --> 00:25:38.196
judgment that the first quarter data may
446
00:25:38.196 --> 00:25:40.676
a year from this July,
447
00:25:40.676 --> 00:25:45.676
well a year from, July in '74, be revised downward,
448
00:25:45.900 --> 00:25:50.259
and the second quarter revised upward.
449
00:25:50.259 --> 00:25:55.259
I guess then all that we really can conclude
450
00:25:56.840 --> 00:26:01.840
is that there does seem to be a beginning of a weakening
451
00:26:02.780 --> 00:26:07.428
of real growth, but it's premature to know
452
00:26:07.428 --> 00:26:10.320
whether it is primarily due to supply reasons
453
00:26:10.320 --> 00:26:11.330
or demand reasons,
454
00:26:11.330 --> 00:26:15.543
and until you can resolve that last question,
455
00:26:16.420 --> 00:26:19.070
you of course aren't in a position to make
456
00:26:19.070 --> 00:26:21.110
policy recommendations.
457
00:26:21.110 --> 00:26:24.170
When I am asked, for example, whether it is still
458
00:26:24.170 --> 00:26:28.060
time to have a tax increase,
459
00:26:28.060 --> 00:26:30.880
you know there's quite an authoritative rumor
460
00:26:30.880 --> 00:26:32.970
that the President's advisors
461
00:26:33.812 --> 00:26:38.812
both inside the administration and in some of the other
462
00:26:39.530 --> 00:26:42.400
non executive agencies,
463
00:26:42.400 --> 00:26:44.070
I won't be more specific,
464
00:26:44.070 --> 00:26:46.610
did advise him to ask for a tax increase
465
00:26:46.610 --> 00:26:49.210
but because of Watergate and other problems
466
00:26:49.210 --> 00:26:54.210
which he has, he overruled them, and put in the phase
467
00:26:54.510 --> 00:26:58.133
three and a half, and the phase four.
468
00:26:59.470 --> 00:27:02.680
Well, I think I have just a few minutes
469
00:27:02.680 --> 00:27:07.400
to begin to comment on the question as to whether
470
00:27:07.400 --> 00:27:12.210
the United States is a happy hunting ground now
471
00:27:12.210 --> 00:27:13.860
for foreign capital.
472
00:27:13.860 --> 00:27:17.860
I spoke of the 80 billion dollars that are abroad.
473
00:27:17.860 --> 00:27:19.540
Well of course those are in the central banks,
474
00:27:19.540 --> 00:27:23.140
but there's a counter part of those in the hands
475
00:27:23.140 --> 00:27:25.660
of individuals abroad,
476
00:27:25.660 --> 00:27:28.670
and it seems to me that it might well be rational
477
00:27:28.670 --> 00:27:33.500
for a typical corporation or a typical investment trust
478
00:27:33.500 --> 00:27:38.500
or a typical person of means in Japan, in Germany,
479
00:27:39.980 --> 00:27:42.820
in Holland, in western Europe, generally,
480
00:27:42.820 --> 00:27:47.640
to want to have a bigger stake in the American economy
481
00:27:47.640 --> 00:27:50.270
than he now has.
482
00:27:50.270 --> 00:27:53.240
First, the American economy is about 25 percent
483
00:27:53.240 --> 00:27:56.810
of the world GNP, a bit more than that still perhaps.
484
00:27:56.810 --> 00:28:01.810
And if you believe in risk aversion and diversification,
485
00:28:02.130 --> 00:28:04.594
then I don't think that most investors abroad
486
00:28:04.594 --> 00:28:09.270
are as fully invested in the American economy
487
00:28:09.270 --> 00:28:10.750
as they ought to be.
488
00:28:10.750 --> 00:28:13.490
I could have made this remark at any time
489
00:28:13.490 --> 00:28:15.180
in recorded history,
490
00:28:15.180 --> 00:28:17.340
certainly any time in the last 15 years,
491
00:28:17.340 --> 00:28:19.473
and it's always in season.
492
00:28:20.840 --> 00:28:21.673
That's point number one.
493
00:28:21.673 --> 00:28:24.640
Particularly you see a foreign investor who has all
494
00:28:24.640 --> 00:28:27.748
his eggs, let's say, in the French market,
495
00:28:27.748 --> 00:28:30.890
should want to get something which will have independent
496
00:28:30.890 --> 00:28:35.140
movements, because in independent probability movements
497
00:28:35.140 --> 00:28:39.160
you get diversification and a reduction of variants.
498
00:28:39.160 --> 00:28:42.023
Well that's a long run factor.
499
00:28:43.470 --> 00:28:47.316
Second, our price earning ratios are cheap.
500
00:28:47.316 --> 00:28:52.316
And if you believe that there has not been a long term
501
00:28:53.180 --> 00:28:56.490
erosion of profitability in American corporations,
502
00:28:56.490 --> 00:28:58.721
then they are indeed bargains.
503
00:28:58.721 --> 00:29:01.440
If you're a foreign investor and you have equity
504
00:29:01.440 --> 00:29:05.770
investment, you can apply even a less stringent task,
505
00:29:05.770 --> 00:29:10.170
namely, if there's an erosion of profitability here
506
00:29:10.170 --> 00:29:14.320
in America, then there probably is one also abroad
507
00:29:14.320 --> 00:29:18.650
because capital competes with capital by international trade
508
00:29:18.650 --> 00:29:22.340
across boundaries of nations.
509
00:29:22.340 --> 00:29:27.090
And so, it could be that the American earnings,
510
00:29:27.090 --> 00:29:30.932
price ratios, are more depressed from a long run viewpoint
511
00:29:30.932 --> 00:29:34.370
than foreign markets,
512
00:29:34.370 --> 00:29:36.410
particularly those foreign markets which have done better
513
00:29:36.410 --> 00:29:41.410
in the last boom, than the American market.
514
00:29:42.500 --> 00:29:46.084
Thirdly, you may find yourself with a reversal
515
00:29:46.084 --> 00:29:49.920
of the adverse experience which foreigners have been having
516
00:29:49.920 --> 00:29:51.230
in recent months.
517
00:29:51.230 --> 00:29:54.080
Let's take a typical foreigner who had a good eye
518
00:29:54.080 --> 00:29:55.380
for picking American stocks,
519
00:29:55.380 --> 00:29:56.780
he's a rare bird by the way.
520
00:29:57.970 --> 00:29:59.690
I don't want to go into details on how a foreigner
521
00:29:59.690 --> 00:30:03.900
ought to invest, I don't have time in this tape.
522
00:30:03.900 --> 00:30:06.150
But suppose he had a good eye and he picked good stocks
523
00:30:06.150 --> 00:30:07.900
which held up better than the American market
524
00:30:07.900 --> 00:30:11.360
in which in fact held up and are equal now
525
00:30:11.360 --> 00:30:13.483
to their early January levels.
526
00:30:15.188 --> 00:30:19.230
To this foreigner, given the depreciation of the dollar,
527
00:30:19.230 --> 00:30:21.640
if he reckons, as undoubtedly he does,
528
00:30:21.640 --> 00:30:24.370
his net worth in terms of his own currency,
529
00:30:24.370 --> 00:30:26.230
because that's where he's gonna spend the rest of his life,
530
00:30:26.230 --> 00:30:29.270
that's where his expenses come,
531
00:30:29.270 --> 00:30:32.820
then he finds himself with the rather considerable loss
532
00:30:32.820 --> 00:30:35.540
due just to the depreciation of the dollar.
533
00:30:35.540 --> 00:30:36.670
But my time is just about up,
534
00:30:36.670 --> 00:30:41.330
but you see, once you form a judgment and you must form
535
00:30:41.330 --> 00:30:44.280
that judgment as to whether the dollar has hit rock bottom,
536
00:30:45.240 --> 00:30:49.760
then after you've formed the judgment that Wall Street
537
00:30:49.760 --> 00:30:51.760
has hit rock bottom,
538
00:30:51.760 --> 00:30:55.610
and that rock bottom has not recognized the inflation
539
00:30:55.610 --> 00:30:57.230
which has been going on in the American economy
540
00:30:57.230 --> 00:30:58.280
for the last few years,
541
00:30:58.280 --> 00:31:01.570
and has discounted all the adverse news that could
542
00:31:01.570 --> 00:31:02.960
possibly happen,
543
00:31:02.960 --> 00:31:05.930
then that would be a great time for foreigners
544
00:31:05.930 --> 00:31:09.130
to invest in good American stocks if they know
545
00:31:09.130 --> 00:31:11.520
how to pick good American stocks.
546
00:31:11.520 --> 00:31:13.020
If you have any comments or questions
547
00:31:13.020 --> 00:31:14.810
for Professor Samuelson, address them to
548
00:31:14.810 --> 00:31:16.840
Instructional Dynamics Incorporated
549
00:31:16.840 --> 00:31:21.593
166 East Superior Street, Chicago, Illinois, 60611.