WEBVTT
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Instructional Dynamics Incorporated
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welcomes you to another in a continuing series
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of commentaries on the current economic scene.
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With us again for the week of January 20th
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is Dr. Paul Samuelson, professor of economics
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at the Massachusetts Institute of Technology.
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Professor Samuelson, one of our subscribers
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has sent in some questions in the hope
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that you will answer them.
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"We are an investment counseling group,"
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says the this question, "Much interested
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in general economic predictions.
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As we listen to your tapes, and those of Pro. Freedman,
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there is much that you are agreed on.
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But we are occasionally puzzled by
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possible differences in opinion.
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Our first question then is whether you agree
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with Pro. Freedman with floating exchange rates
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in some form are desirable and are likely
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within the next year or two, and also
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do you agree with what seems to be his
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cheerful analysis that the sliding peg
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would encounter no serious difficulties from speculation?
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Let me do my best with this question.
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There are many points of overlap between
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my own analysis and that of most present-day economists.
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And there are many points of overlap
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between my analysis and that of Pro. Freedman.
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There are some differences, I suppose that
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our listeners are most interested
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in the reasons behind our disagreements
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rather than just in the views expressed.
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With respect to the first question,
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I'm very happy that this is a question
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upon with I can express a great deal
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of agreement with Dr. Freedman.
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I do think that the flexibility
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of exchange rates are desirable.
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I think that there was a fatal and fundamental flaw
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in the Bretton Woods Agreements of 1944
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and we have come to recognize that,
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namely that in a world where people will not
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play the rules of the Gold Standard game,
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will not automatically inflate and deflate
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a domestic economy in order to provide flexibility.
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It is anomalous to keep exchange rates inflexible.
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Now, I've expressed this agreement that we need more
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flexibility with Pro. Freedman,
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and I would go farther,
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I'd like to pay a personal tribute to him,
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as he said a couple of weeks ago on his tape,
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he was a lone voice crying in the wilderness,
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in favor of floating exchange rates just a few years ago.
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Well, he's no longer in the wilderness,
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the bulk of the academic economic fraternity
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has gone over to his general view.
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And I think that this is a tribute
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to the cogency of his analysis.
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Now, I say some measure of flexibility is desirable.
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This could be in the form of a crawling peg,
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with widened gold points around the crawling peg.
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I speak of gold points but I mean just import
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and export points even if we had no Gold Standard system.
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And as far as I'm concerned, I would like to see
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more experimentation with floating exchange rates.
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Although I don't insist upon having the practical
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men of the world become converted
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in a short time to that viewpoint.
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However, what I think is desirable,
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and what I think is likely are not always the same thing.
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I believe that the men of affairs
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in the central banks and finance ministries
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of the world are slowly being persuaded
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by events and the logic of academic economists
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toward looking more favorably upon the flexibility,
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but they are riding a tiger,
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and they don't know how to get off that tiger.
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And so as purely betting man I wouldn't be so sanguine
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that what is desirable will come about in the near future,
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which means in a year or two.
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Now I don't say that Canada might not again
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have a floating exchange rate
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or one or another small country,
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let's say Denmark as an example.
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But the question is whether any
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key currencies will be floating.
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My candidate, a year or two ago,
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for a floating exchange rate was the pound, itself.
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But the price that was exacted apparently,
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to support the pound against speculative capital movements
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by the powers that be and the group of ten,
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apparently precluded the pound, the British,
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from having that particular option.
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So, I guess I wouldn't at even odds,
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bet upon floating exchange rates
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within the next year or two.
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That doesn't mean that I disagree with Pro. Freedman,
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in his implied belief that we're going to have
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one or another major crisis in the next year or two,
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I would suppose that in the next two years
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the old Farmer's Almanac's proper odds are
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we're going to have about one and a half crises,
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one of them serious, certainly.
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And probably there'll be some realignment of exchange rates.
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I don't believe the authorities have exhausted
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all the remedies that are available to them.
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For example, the use of exchange controls
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has just been broached and just been begun
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in many of the deficit countries.
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And although it may lack wisdom,
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to push exchange controls harder,
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that certainly is a weapon in the arsenal of the authorities
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and it's the kind of weapon which in emergency times
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becomes very appealing because it does have
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some short run effectiveness.
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Let me, finally, go to the last part
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of the international question.
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Do I think that a sliding peg will encounter
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some possible problem from the standpoint
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of speculators?
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We don't have any real experience with this,
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and I won't pretend that I've thought through
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all of the intricate analytical aspects of the question.
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But, let me just think aloud, so to speak,
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off the top of my head and give some views.
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First, I assume that a sliding peg means that
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the exchange rate could adjust downward or upward
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about one percent per year, or two percent per year.
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One and a half percent.
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There are a dozen different devices
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that will determine exactly
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where in that range the peg would move.
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You may say in the beginning,
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"What's the importance of one percent,
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or one and a half percent?"
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Well that isn't very important.
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You'd have to be a real elasticity optimist
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to think that a small change in exchange rates
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of that magnitude will itself have
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great equilibrating efficacy.
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But, that's only one or two percent per year.
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And in a decade, one or two percent per year
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is the equivalent to ten or twenty percent.
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And I don't suppose, most econometricians
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after they think about the problem
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will be of the opinion that,
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in well-run countries at least,
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and mind you, floating exchange rates
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or sliding pegs are no substitutes for discipline
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and for making sure that you do run your country well,
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in any case, that in well-run countries
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the equilibrium change in exchange rates
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needed for equilibration, needed to repair that
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fundamental flaw in the Bretton Woods system
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is probably not more than 10 or 20 percent per decade.
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Now, if you're a country like Chile or Brazil,
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undergoing constant inflation greater
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than the rest of the world
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then obviously this moderate change in the peg
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will not do the trick but nothing will.
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And I don't direct my remarks to such countries.
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I do direct my remarks to countries like Germany,
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and to countries like the United States.
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Germany, in my opinion, has had an over-valued currency,
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excuse me, an under-valued currency.
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And the United States has had for a dozen years
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or so an over-valued currency.
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This relationship between the mark and the dollar
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drifted slowly into this disequilibrium
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and I think the sliding peg could very well
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have handled that particular problem
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as far as the magnitude of the changes concerned.
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How would this have worked if in 1955 we'd had
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a sliding peg between the common market countries
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and the United States?
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We have no experience, but I conjecture that
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this is the way that things would have happened.
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In 1955, we were probably poised between
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the dollar shortage, when the dollar was under-valued,
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and the dollar glut, when the dollar was over-valued.
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And so, if it had been introduced at that time
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that would have been a pretty good time
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perhaps to have made that reform.
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For a year or so, the exchange rate probably
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would have wobbled from day to day
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but within narrow limits,
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just the ordinary brownie in motion
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of good crops and bad crops and this rumor and that
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but with speculators alert to make money,
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by buying a currency when it goes down and is weak,
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because the dollar movement is a temporary operation.
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And this kind of scalping would tend to limit
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the amount of the change.
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However, because of our Cold War commitments abroad,
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because of our private business corporations learning
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that direct investment in the advanced countries
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of the common market in Japan,
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was extremely profitable I think that
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the sliding peg would have come into operation
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with the mark rising and the dollar falling.
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I'd like to leave gold out of this melodrama,
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because people find it more alarming
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if I depart from speaking about relative currency parodies
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and talk about gold but I suppose
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that if we had not had a two-tier price system
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at that time that probably the dollar
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would have declined relative to gold
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that is the $35 price per ounce
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would have gone up a little bit
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and in the case of the mark,
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the price of gold might have gone down,
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you might split the difference so to speak.
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I think this would have been a equilibrating direction,
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it would have been a substitute for many
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of our tyings of foreign aid.
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It would have been a substitute for the
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tying of our military aid,
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It would have been a substitute for the fiats
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which require the American armed services to buy
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things in this country even at a higher price.
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And I think we would have been in a better position today.
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But the force of the question of our subscriber is,
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"Would there be some problems from speculators?"
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Now I assume that if we had let's say
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one and a half percent ratchet on the sliding peg
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that the dollar would always have been
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throughout this period at the low end of that ratchet,
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And I think, therefore, that there would have been
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a slight tendency for speculators to pile on
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to the movement and to make the situation worse.
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The reason is, that that speculators could predict
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probably with considerable confidence,
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which way the peg would move.
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Now it is true, as I think Pro. Freedman may have said
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in one of his earlier tapes,
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that interest rates differentials
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within the United States could compensate
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for this advantage to the speculators
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in putting their chips on one of the currencies
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rather than the other.
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However, under the circumstances that I'm envisioning
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one of the main purposes of the sliding peg
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is to free domestic policy from the international restraints
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And so, in the sluggish late 1950's,
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it would not have been optimal domestic policy
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for us to have had higher interest rates than Germany.
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And so, I don't think that there is any warm comfort,
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there's only cold comfort in the notion
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that you could off-set the effects on speculators
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on the sliding peg by interest rate changes.
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If those are interest rate changes that we
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don't want for domestic purposes.
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Well, I don't pretend that this is a considered analysis,
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but let me conclude it by saying that
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I'm generally in agreement with Pro. Freedman,
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because this sliding peg with whatever
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little problems it might involve
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that I've just now discussed,
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involves those problems much less
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than a non-sliding peg which then has to give in a big way.
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And which gives the speculators a one-way gamble.
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Let's put it this way,
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under the Bretton Woods arrangements,
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when parodies get out of kilter,
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speculators can hope to make yields
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by bare-rate on a currency that are the order
267
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or magnitude of ten percent a year.
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Under the sliding peg,
269
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the speculator is perhaps guaranteed an easy
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one or two percent but one or two percent
271
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is small compared to what speculators
272
00:14:35.190 --> 00:14:39.740
are out for generally and this is only a minor debit item
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against the notion of the sliding peg.
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Now, I do want to put in a caveat
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after much reconsideration, it's possible
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that I would arrive at a different opinion
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because it just occurs to me as I am talking about it
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that letting a price move in the direction it ought to move
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but keeping it from moving as far as it ought to move
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might actually accentuate the psychological
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destabilizing effects of speculation
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and so a more detailed analysis might
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moderate what I've just now said.
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Our second question then,
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Pro. Samuelson, is what do you think may be wrong
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00:15:29.010 --> 00:15:31.550
about Pro. Freedman's qualitative prediction
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00:15:31.550 --> 00:15:34.700
that the first half of 1969 will be as
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over-exuberant as 1968 was generally?
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00:15:38.190 --> 00:15:40.210
And that the last half of the year's strength
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will depend primarily upon how tough the Fed gets
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00:15:42.950 --> 00:15:44.750
in the next six months?
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Well, this cannot be a complete love-fest here.
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We do develop some real differences of opinion
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between Pro. Freedman and myself.
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00:16:03.020 --> 00:16:08.020
First, I don't think that my reading the facts
296
00:16:09.930 --> 00:16:14.930
would substantiate the view that the last half
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00:16:16.170 --> 00:16:21.170
of 1968 has been as strong as the first half.
298
00:16:21.810 --> 00:16:25.080
I think the fiscal restraint has
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00:16:25.080 --> 00:16:27.733
been working in some measure.
300
00:16:28.900 --> 00:16:33.900
Just this last week, we got the first estimates
301
00:16:35.020 --> 00:16:38.660
for the fourth quarter and they are higher
302
00:16:38.660 --> 00:16:43.000
than the estimates that the econometricians made in June,
303
00:16:43.000 --> 00:16:47.490
but they are statistically significantly lower
304
00:16:47.490 --> 00:16:52.490
than the actual facts as of last June.
305
00:16:53.120 --> 00:16:58.120
The GMP has increase 16.8 billion in the fourth quarter.
306
00:17:00.630 --> 00:17:04.390
If anything that's a bit weaker than I myself had expected.
307
00:17:04.390 --> 00:17:06.330
It's undoubtedly due to the fact
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00:17:06.330 --> 00:17:09.460
that the poor Christmas retail sales
309
00:17:10.500 --> 00:17:15.240
turned out to be verified in the actual statistics.
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Consumptions was surprisingly weak.
311
00:17:18.480 --> 00:17:23.480
The savings ratio which I will remind you had been
312
00:17:23.770 --> 00:17:26.350
seven and a half percent of disposable income
313
00:17:26.350 --> 00:17:30.240
prior to the surcharge and which had mystified
314
00:17:30.240 --> 00:17:32.590
some of the experts by going down so much
315
00:17:32.590 --> 00:17:36.630
in the third quarter just six and a quarter percent,
316
00:17:36.630 --> 00:17:38.063
has now moved back.
317
00:17:38.940 --> 00:17:41.590
It has not moved back to seven and a half percent
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00:17:41.590 --> 00:17:43.270
but those experts did not expect it to
319
00:17:43.270 --> 00:17:44.700
move back to seven and a half percent.
320
00:17:44.700 --> 00:17:46.770
It has moved back according to the preliminary figures
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00:17:46.770 --> 00:17:50.597
to seven percent and that suggests that
322
00:17:50.597 --> 00:17:55.450
the fiscal restraint is having an effect
323
00:17:55.450 --> 00:17:59.010
even distinct from the rate of change of the money supply.
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00:17:59.010 --> 00:18:03.280
So you know that mine is the more eclectic position.
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00:18:03.280 --> 00:18:05.910
There is a measure of disagreement.
326
00:18:05.910 --> 00:18:10.910
Now similarly, I would expect going into the first
327
00:18:11.820 --> 00:18:15.650
and second quarter, well let me put it differently,
328
00:18:15.650 --> 00:18:19.056
I should be astonished if the first and second quarter
329
00:18:19.056 --> 00:18:22.680
of this coming year are as strong as the first
330
00:18:22.680 --> 00:18:25.910
and second quarter of the last year.
331
00:18:25.910 --> 00:18:30.780
And yet by looking at the rate of change of the money supply
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using any of the measures of the money supply
333
00:18:34.790 --> 00:18:36.706
which you cared to use,
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00:18:36.706 --> 00:18:41.490
I see no qualitative rough method of estimation
335
00:18:42.400 --> 00:18:47.400
which would not justify a forecast qualitatively
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00:18:48.840 --> 00:18:52.660
that the first half of 1969 would be at least
337
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as strong as the first half of 1968.
338
00:18:57.360 --> 00:18:59.770
I think at Las Vegas or down at
339
00:18:59.770 --> 00:19:01.230
the First National City Bank
340
00:19:01.230 --> 00:19:04.160
or at the the Harris's Trust Bank in Chicago
341
00:19:04.160 --> 00:19:08.763
you can get very good odds that will not be the case.
342
00:19:09.710 --> 00:19:12.930
In other words, those analysts who follow
343
00:19:12.930 --> 00:19:16.510
the data very closely and who generally lean
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towards monetarism, that is great weight
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00:19:20.240 --> 00:19:21.476
upon the money supply,
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00:19:21.476 --> 00:19:25.280
in fact are not betting in terms of monetarism.
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00:19:25.280 --> 00:19:30.280
I saw the official forecast of the Harris Trust
348
00:19:32.210 --> 00:19:35.550
of which Dr. Barrell Sprinkle is Vice President,
349
00:19:35.550 --> 00:19:38.620
and that forecast for the year is a good deal
350
00:19:38.620 --> 00:19:41.510
lower than my own forecast.
351
00:19:41.510 --> 00:19:46.510
The private forecast of Dr. Sprinkle,
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00:19:48.773 --> 00:19:52.650
who is not the economist in charge of the official forecast
353
00:19:52.650 --> 00:19:54.440
I understand to be a little bit higher than
354
00:19:54.440 --> 00:19:59.360
the official forecast but he is still, I believe, below me.
355
00:19:59.360 --> 00:20:04.360
Now concretely, I don't see how in making a judgment about
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00:20:05.610 --> 00:20:08.220
the first and second quarter of next year,
357
00:20:08.220 --> 00:20:12.100
I can as a confirmed eclectic,
358
00:20:12.100 --> 00:20:15.180
fail to take account of the fact that
359
00:20:15.180 --> 00:20:17.550
the fourth quarter has shown an increase in inventory
360
00:20:17.550 --> 00:20:21.680
to ten billion annual rate from seven and a half billion
361
00:20:21.680 --> 00:20:23.130
in the third quarter.
362
00:20:23.130 --> 00:20:25.350
The strength of final demand,
363
00:20:25.350 --> 00:20:28.930
that is the strength of GMP after you purge it
364
00:20:28.930 --> 00:20:31.878
of temporary inventory changes
365
00:20:31.878 --> 00:20:36.878
declined considerably in the fourth quarter of the year.
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00:20:37.610 --> 00:20:41.400
It declined, if I remember correctly, to something
367
00:20:41.400 --> 00:20:46.360
like 13, to 14 and a quarter billion
368
00:20:46.360 --> 00:20:49.270
from a previous quarter of 21 and a half billion.
369
00:20:49.270 --> 00:20:53.100
Now that has no certain implications for
370
00:20:53.100 --> 00:20:56.370
the first two quarters of the coming year,
371
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but I think it has certain probability hunches.
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00:21:00.580 --> 00:21:05.580
And that is that this inventory was in part unwanted,
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it was accumulated because the retail sales were
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00:21:10.780 --> 00:21:14.630
a little bit on the soft side in part at least.
375
00:21:14.630 --> 00:21:19.630
And therefore in a sense it is hanging over the market
376
00:21:20.140 --> 00:21:24.940
and it augers in the first half of the year,
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00:21:24.940 --> 00:21:29.476
we may, we may I say, see inventory accumulation
378
00:21:29.476 --> 00:21:31.821
going to a lower rate.
379
00:21:31.821 --> 00:21:35.400
In any case, I put great store if you remember
380
00:21:35.400 --> 00:21:40.400
on the spread on the likely GMP increase of all the experts.
381
00:21:41.540 --> 00:21:44.180
And I said I was between 12 and 18 billion
382
00:21:44.180 --> 00:21:45.300
for the fourth quarter,
383
00:21:45.300 --> 00:21:48.223
this was befor the fourth quarter.
384
00:21:49.130 --> 00:21:51.290
And expressed my own view that it would be
385
00:21:51.290 --> 00:21:53.623
towards the upper end of that range.
386
00:21:53.623 --> 00:21:58.623
And justify my eclectic position said I would
387
00:21:58.960 --> 00:22:03.510
find it fantastic if it were to be 22 billion
388
00:22:03.510 --> 00:22:08.510
or more as a simplest reading of the money supply
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00:22:09.870 --> 00:22:12.860
of figures would perhaps suggest.
390
00:22:12.860 --> 00:22:15.960
Well, we never have controlled experiments
391
00:22:15.960 --> 00:22:18.540
and we never can confirm and prove anything
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00:22:18.540 --> 00:22:21.520
in economics by waiting until a quarter is over.
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00:22:21.520 --> 00:22:24.270
We just have to take the bulk of a man's experience
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00:22:24.270 --> 00:22:26.458
over a lifetime to form his judgment
395
00:22:26.458 --> 00:22:31.270
but such as it is we were well within that range
396
00:22:31.270 --> 00:22:36.270
of expert guesses and I think we'll be
397
00:22:36.550 --> 00:22:40.760
within the range of expert guesses for the current quarter.
398
00:22:40.760 --> 00:22:45.100
Now what are the range of expert
399
00:22:45.100 --> 00:22:47.200
guesses for the current quarter?
400
00:22:47.200 --> 00:22:52.200
I would suppose that it goes something like 8 to 16 billion.
401
00:22:55.600 --> 00:23:00.600
My own would be that we would probably be
402
00:23:00.810 --> 00:23:04.100
a little over the middle of that range.
403
00:23:04.100 --> 00:23:09.100
And I don't think that I could arrive at this view
404
00:23:09.170 --> 00:23:14.170
except by giving weight to non-money supply factors.
405
00:23:17.320 --> 00:23:22.320
Let me go on though, to soft pedal the disagreement
406
00:23:27.410 --> 00:23:30.230
by saying that I quite agree that what
407
00:23:30.230 --> 00:23:33.720
the Federal Reserve does in the next few months
408
00:23:33.720 --> 00:23:37.470
will be extremely important in connection
409
00:23:37.470 --> 00:23:39.020
with what happens in the of the year.
410
00:23:39.020 --> 00:23:41.930
But it is something that can be off-set
411
00:23:41.930 --> 00:23:46.930
by a fiscal policy and I think quite possibly would be.
412
00:23:49.810 --> 00:23:51.660
I may mention that we've had the
413
00:23:51.660 --> 00:23:54.170
State of the Union message by Pres. Johnson.
414
00:23:54.170 --> 00:23:58.950
It has confirmed the forecast that I made
415
00:23:58.950 --> 00:24:01.840
as to what he would have to recommend.
416
00:24:01.840 --> 00:24:04.470
There was a problem of political jockeying
417
00:24:04.470 --> 00:24:09.470
as to whether Pres. Johnson who was told by
418
00:24:09.670 --> 00:24:12.440
nine out ten of the experts he consulted
419
00:24:12.440 --> 00:24:17.440
that it was only prudent at this time to indicate that the
420
00:24:17.650 --> 00:24:20.200
ten percent of the surcharge probably should be
421
00:24:20.200 --> 00:24:23.790
maintained after the six month period,
422
00:24:23.790 --> 00:24:25.970
but he had the problem of politics
423
00:24:25.970 --> 00:24:30.220
that he didn't want to make that prudent suggestion
424
00:24:30.220 --> 00:24:33.940
and then to find that the facts had gone
425
00:24:33.940 --> 00:24:37.370
the other way and to have the new president
426
00:24:37.370 --> 00:24:41.660
make capitol that he had come in and he had managed
427
00:24:41.660 --> 00:24:44.680
to reduce taxes compared to the outgoing president.
428
00:24:44.680 --> 00:24:49.030
Mr. Nixon at this point had to make an agonizing decision,
429
00:24:49.030 --> 00:24:51.350
he had to call in all of his experts
430
00:24:51.350 --> 00:24:54.050
because one suspects Pres. Johnson put him
431
00:24:54.050 --> 00:24:56.963
on the spot behind the scenes and said,
432
00:24:58.867 --> 00:25:00.820
"My recommendation is going to be perhaps
433
00:25:00.820 --> 00:25:04.650
an imprudent one unless I get some backing from you."
434
00:25:04.650 --> 00:25:08.160
Well you can be sure that the measured backing
435
00:25:08.160 --> 00:25:11.160
for continuation of the surcharge unless
436
00:25:11.160 --> 00:25:13.240
we learn some important facts of the contrary
437
00:25:13.240 --> 00:25:15.880
which I understand President-Elect Nixon
438
00:25:15.880 --> 00:25:18.184
has been announced to have given,
439
00:25:18.184 --> 00:25:22.270
was given by Pres. Nixon only after let's say
440
00:25:22.270 --> 00:25:26.774
8 out of 10 of his advisors told him that the
441
00:25:26.774 --> 00:25:30.370
outlook does call for this.
442
00:25:30.370 --> 00:25:34.360
And their analysis was based on the premise that it does
443
00:25:34.360 --> 00:25:36.550
make the difference for overall inflation
444
00:25:37.440 --> 00:25:41.793
whether the taxes go up.
445
00:25:42.628 --> 00:25:43.920
In other words, they wouldn't agree
446
00:25:43.920 --> 00:25:46.020
with the analysis in the November
447
00:25:46.020 --> 00:25:48.960
St. Louis Federal Reserve letter
448
00:25:48.960 --> 00:25:52.680
which by statistical estimation
449
00:25:52.680 --> 00:25:53.980
came out with the conclusion that
450
00:25:53.980 --> 00:25:56.466
tax rates have no predictable affect
451
00:25:56.466 --> 00:26:00.170
upon the rate of increase of the GMP.
452
00:26:00.170 --> 00:26:02.870
I think we'll have to leave to another time
453
00:26:02.870 --> 00:26:06.633
the deeper economic analysis of why
454
00:26:07.670 --> 00:26:11.700
I think that fiscal policy variables have to
455
00:26:11.700 --> 00:26:16.620
regarded as having a predictable effect on the
456
00:26:16.620 --> 00:26:20.370
average on the state of aggregate demand.
457
00:26:20.370 --> 00:26:23.030
Thank you, Pro. Paul Samuelson of MIT.
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00:26:23.030 --> 00:26:25.670
If you have questions, comments, or suggestions
459
00:26:25.670 --> 00:26:26.730
please write us at:
460
00:26:26.730 --> 00:26:28.710
Instructional Dynamics Incorporated
461
00:26:28.710 --> 00:26:32.680
166 East Superior Street, Chicago, 60611