WEBVTT

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<v ->Welcome once again as MIT Professor Paul Samuelson</v>

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discusses the current economic scene.

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This program series is produced

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by Instructional Dynamics Incorporated.

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This recording was made June 28th.

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<v ->We're now in the middle of 1973,</v>

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and this is truly a branching period

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when even the experts are no longer so closely agreed

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on the probabilities with respect to the future.

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The preponderance of opinion still is that

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the American economy will go through a growth recession.

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Indeed, I know people who follow

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the business scene very closely who believe

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on the basis of the preliminary data available

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for April and May that in the second quarter itself

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we dropped well, well, well below the 8% real growth rate

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of the first quarter, that in fact the first

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GNP estimates will show for the second quarter

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less than a 4% real rate of growth.

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Most of those same experts don't believe the numbers

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because as they look at the overtime that still

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is taking place, as they look at the behavior

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of the Federal Reserve Board index of production,

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and as they wet their finger and hold it up

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in the wind, they feel that there still is strength

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in the economy, and they may be right,

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even though the first estimate of the real GNP

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numbers for the second quarter may be on the low side.

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They may be right, and the Department of Commerce

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may come later to revise those numbers upward.

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Still, I think we're being told something

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by the data, and you're a very rash person

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if every time you learn from the newly issued statistics

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something which is not accord with your expectation,

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if you substitute your own a prior judgment

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for the brute facts, you may find yourself

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very much at odds with what's going to happen in the future.

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We have established then I think that

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we are past the inflection point

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of the most rapid rate of growth.

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We don't know whether the drop, substantial as it is,

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is the prelude to a imminent still greater drop,

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but we certainly must face that possibility.

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Is it a good thing or is it a bad thing?

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Well, since I thought that the over-strength

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of the first quarter was a bad thing,

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I should feel somewhat cheered by the relaxation,

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and with qualifications, that is true.

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There is however the possibility that the slow down

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in the rate of growth is not due

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to a healthy relaxation of demand factors.

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Now, I don't mean by this that there has been

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a strong relaxation of demand,

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but it's gone beyond the healthy stage,

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and is actually turning towards

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malignant weakness of demand.

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That is a possibility, but that isn't what

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I have in mind at this point.

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I think there is the alternative hypothesis

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that the weakness of growth in the second quarter

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is because the economy is still running flat out,

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but it is bumping up against strong

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bottlenecks and barriers.

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And so, it's not primarily a demand factor at all,

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but is really a supply factor.

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This is not encouraging from the standpoint

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of controlling inflation.

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This is not encouraging from the standpoint of prolonging

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a health, healthy, prosperous expansion,

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because we know from past experience,

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and from plausible analytical reasoning,

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that coming up against bottlenecks of supply

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tend themselves to be inflationary.

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So, on this possibility, this hypothesis,

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we may be running into even more inflation ahead.

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More than that, and a more subtle point,

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is the fact that many a downturn in the past

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from a period of expansion to a period of recession,

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growth recession and absolute recession,

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has come about because of the economy's bumping

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against the ceiling of full capacity full employment output.

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The economy becomes geared to a sizable rate of growth.

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It becomes geared to it in somewhat the fashion

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that an addict becomes geared at an early stage

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to his habit, and he needs the repeated equal,

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perhaps high, dosages of his opiate

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to continue to feel so well.

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It's like an airplane which must be going

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at a certain speed, or else it'll fall.

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So, it's not enough for the economy

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to level off to a high plateau of prosperity.

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According to what economists call

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the principle of the accelerator,

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or the acceleration principle,

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which says that the rate of growth of final sales

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and of output is one of the important determinants

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of the level of capital formation,

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well, according to this particular principle,

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which goes back at least half a century,

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and which has had a considerable measure

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of empirical verification, the approach

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to full employment when output is no longer expansible

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means that like the airplane which is no longer

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going at the requisite rate and with the requisite

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angle of climb will in fact begin to turn down

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and to fall toward Earth.

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And so, there is a possibility that

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what we're seeing in the second quarter,

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and what we will see in the next two quarters of the year,

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is a classical case of an economy turning around,

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not from an overheated level to a healthfully

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vigorous level, temperature 98.6,

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or if you want to be geared for a really very successful

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games and battles let's make it 99,

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not an ominous temperature,

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but instead we're on our way down.

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On the other hand, you remember those leading indicators

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which in April had turned adverse.

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On revision, those April leading indicators

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turned even more adverse.

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But I see from the morning newspaper that

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the May figures have bounced back,

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and the leading indicator is something

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like six out of eight that are available at this time,

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have again gone towards the green light signal,

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and away from the orange and red light signal.

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It just shows of course that one month's observations

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are not enough upon which to base any changed view

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of the economy.

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We have to look at the broad picture.

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Before, however, accepting the hypothesis

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which I've just enunciated, that it is

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supply conditions primarily that explain the slow down

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in the second quarter, I ought to point out

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that there has been some relaxation of consumers' demand

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at the retail level.

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This is true at the durable goods level,

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and there has been some relaxation of automobile sales.

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And there has been some relaxation of housing.

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Housing starts, it's true, in May again went up,

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and not insignificantly.

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But still, the general profile of housing expenditure

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is on the down side.

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We're still living on the backlog of building permits.

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They are not going up.

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They are being used off the shelf,

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and we're still completing housing

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started at an earlier time.

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Now, I don't mean to suggest that the vacancy rate

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for single homes is ominous.

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It's not all that high, nor is the vacancy rate

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for multiple apartments, townhouses, so-called.

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What we used to call row houses we now

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euphemistically call townhouses,

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and we seem to want them.

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Well, we had better because with the cost of building

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so high, very many of us cannot afford

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single detached dwellings in the previous fashion,

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and we feel we get a better buy for our money,

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even though we have less privacy and less space,

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less serenity, less garden, in multiple dwellings.

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Well, that picture is still pretty good,

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but when you take into account that the flow

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of funds to the savings and loan associations

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is definitely off, off to the mutual savings banks,

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these are the prime sources of housing finance,

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then you will not be surprised to see housing go down.

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I think we had one month in which inventories

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grew faster than sales, but that was a fluke,

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and it was a fluke which upon examination

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resulted not from the fact that

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inventories were growing very fast.

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Indeed, they were growing very slowly,

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more slowly than is credible, more slowly

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than is par for the course, but in that particular month

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sales as reported, net grew even more slowly,

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and I don't think that we have come anywhere

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near the inventory orgasm which many of the forecasters

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who expect a real recession in 1974 are anticipating

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will happen late in the year.

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We haven't had that upswing in the rate

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of inventory accumulation to 12, 15, $20 billion per year,

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which will, when it happens, and after it's happened

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for some time, lead to an accumulation

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of a stock of inventories that grows relative

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to the sales of business, and which leads,

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if past experience is a guide, to a surplus

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of inventory on the part of business.

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So, they have to get rid of it,

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which means forced sales, which means low profits,

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which means cutting down on the production line,

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because in the last analysis the only way

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you can get rid of inventory is by producing

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less than you are selling.

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Well, that inventory accumulation hasn't yet happened.

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I've commented I think before on the fact that the official

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SEC Department of Commerce estimate of plant

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and equipment expenditure for the quarters ahead

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is on the more modest side, from the McGraw Hill survey.

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Instead of the 19% increase expected in the McGraw Hill

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survey I think we have something like a 13% increase

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reported by the SEC and the Department of Commerce.

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It's hard to reconcile that last

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writing down with the capital appropriations data

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which are coming into us from the conference board

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and from other sources, and it's been suggested to me

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that actually what McGraw Hill picked up

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in the way of empirical seismographic readings

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and what the Department of Commerce picked up

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in empirical seismographic readings

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are essentially the same.

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The only difference is that the Department of Commerce

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has adjusted differently the raw data

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which it picked up from the way McGraw Hill adjusted them.

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What the Department of Commerce has done,

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and I by the way approve of this,

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is that it second guessed the raw numbers

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on the basis of past patterns of experience.

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If in the past in this phase of the business cycle

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businessmen said they were going to accomplish

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more investment than three out of four times

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they were able to accomplish or succeeded and accomplished

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or did accomplish then the Department of Commerce

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adjusts the number saying this time too

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they probably will not achieve the capital formation

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which they say they want to achieve.

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So, it's a difference in adjustment that is involved,

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and I think we must still look upon plant

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and equipment expenditure as a plus.

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Another warning against looking at any one

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month's straw in the wind and forming a strong view

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or changing your view on that basis comes to us

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from the international counts.

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We've had lots of good news.

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We had an improvement in March of our balance

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of merchandise trade.

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It went from a sizable deficit to a smaller deficit.

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Then, glory be, in April, I think it was,

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we actually went into surplus

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in the merchandise balance of trade.

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This isn't the whole picture, just the merchandise.

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We get those numbers on a monthly basis.

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Well, we were all feeling very happy.

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We were all saying, yes, it's true.

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The Smithsonian depreciation of the dollar

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is a medicine that finally has begun to do its work,

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and the depreciation of the dollar in February

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and in March of this year, that's more of that

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same medicine, and by gosh,

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the medicine seems to be working.

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The balance of payments is improving the way it should.

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Japanese goods have become expensive.

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By the way, Japanese exports to the United States,

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our imports from them are definitely down.

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Go to your friendly Sony dealer, or your friendly

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Toyota dealer and you'll find that to be the case.

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So, we were kind of congratulating ourselves that

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although the crazy speculators in Europe

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who are buying gold as if it was going out of existence

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and who've been having a bear rate against the dollar,

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trying to get into marks and francs and anything else,

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and we've been saying, boy,

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they're really moving into a noose, an ambush.

264
00:15:04.050 --> 00:15:07.550
They're going to be sandbagged because although the dollar

265
00:15:07.550 --> 00:15:10.700
used to be overvalued it now is correctly valued,

266
00:15:10.700 --> 00:15:15.700
or maybe even undervalued, and speculation in a regime

267
00:15:15.780 --> 00:15:17.820
of floating currencies is a two way street,

268
00:15:17.820 --> 00:15:19.150
and they're putting their head in the noose

269
00:15:19.150 --> 00:15:21.380
and they're gonna lose it, and of course many people

270
00:15:21.380 --> 00:15:24.620
have said it couldn't happen to a nicer bunch of guys.

271
00:15:24.620 --> 00:15:28.120
Well, along came the first quarter comprehensive data

272
00:15:28.120 --> 00:15:32.410
from the government, and by gosh,

273
00:15:32.410 --> 00:15:37.410
when you went beyond the merchandise balance of payments

274
00:15:38.100 --> 00:15:42.130
to the basic deficit, I'm leaving out the speculative

275
00:15:42.130 --> 00:15:44.200
cool and hot money as it flows around.

276
00:15:44.200 --> 00:15:46.352
It's very hard to keep track of those

277
00:15:46.352 --> 00:15:50.050
volatile people, but look at the basic deficit

278
00:15:50.050 --> 00:15:55.050
in terms of not only our merchandise exports and imports,

279
00:15:55.100 --> 00:16:00.100
but our services exports and imports, our invisible items,

280
00:16:01.360 --> 00:16:04.380
our earnings from abroad in the form of royalties,

281
00:16:04.380 --> 00:16:08.470
in the form of dividends, in the form of repatriated

282
00:16:08.470 --> 00:16:10.940
corporate earnings, multi-national corporations

283
00:16:10.940 --> 00:16:15.940
and otherwise, and when you add to this the long term

284
00:16:16.630 --> 00:16:19.580
foreign investment which business enterprise wants to make

285
00:16:19.580 --> 00:16:22.170
net counting of the amount of money that comes in here

286
00:16:22.170 --> 00:16:27.170
as Sony begins to assemble their goods in this country,

287
00:16:27.240 --> 00:16:29.080
and as Volkswagen begins to think, gee,

288
00:16:29.080 --> 00:16:31.100
maybe we'd better get a toehold and have an assembly line

289
00:16:31.100 --> 00:16:33.870
in America because that may be the cheapest place

290
00:16:33.870 --> 00:16:37.910
to produce cars in the future, well, taking into account

291
00:16:37.910 --> 00:16:41.750
all of those things, there was a very comforting

292
00:16:41.750 --> 00:16:44.410
improvement in the balance of payments

293
00:16:44.410 --> 00:16:47.323
basic deficit in the first quarter.

294
00:16:48.490 --> 00:16:50.500
Well, just as that was happening

295
00:16:50.500 --> 00:16:52.080
I see the latest figures are in.

296
00:16:52.080 --> 00:16:53.900
I guess those are the figures for May,

297
00:16:53.900 --> 00:16:56.850
and the (mumbles) they have turned

298
00:16:56.850 --> 00:17:01.620
not only lackluster but they've turned somewhat bad,

299
00:17:01.620 --> 00:17:05.310
and I think that the deficit on merchandise account

300
00:17:05.310 --> 00:17:10.310
has worsened to the tune of somewhere between

301
00:17:10.720 --> 00:17:12.753
100 and $200 million.

302
00:17:14.020 --> 00:17:18.220
Mean time, we still have Watergate with us

303
00:17:18.220 --> 00:17:21.870
every week with arrests,

304
00:17:21.870 --> 00:17:24.900
but during the Brezhnev visit,

305
00:17:24.900 --> 00:17:29.900
there are new revelations on network time TV.

306
00:17:32.170 --> 00:17:36.130
These revelations are known and followed

307
00:17:36.130 --> 00:17:38.900
on the continent, they're followed abroad,

308
00:17:38.900 --> 00:17:43.900
and there can't be much doubt that

309
00:17:43.960 --> 00:17:46.360
this political factor is one factor

310
00:17:46.360 --> 00:17:48.940
in the weakness of the dollar abroad.

311
00:17:48.940 --> 00:17:53.480
In my judgment it is a factor having to do

312
00:17:53.480 --> 00:17:56.450
with the buoyancy of the equity markets.

313
00:17:56.450 --> 00:17:57.970
How much you want to give in the way

314
00:17:57.970 --> 00:18:02.610
of a price earnings multiple to whatever

315
00:18:02.610 --> 00:18:06.360
profile of earnings you expect does depend in part

316
00:18:06.360 --> 00:18:09.060
upon how you feel other people with money

317
00:18:09.060 --> 00:18:13.020
are going to feel in terms of buoyancy.

318
00:18:13.020 --> 00:18:16.700
If you had been relying on the mandate

319
00:18:16.700 --> 00:18:20.750
of President Nixon at the 1972 election

320
00:18:20.750 --> 00:18:25.483
to reverse the trend of humanitarian legislation

321
00:18:27.150 --> 00:18:30.270
on the part of the government, reverse the trend

322
00:18:30.270 --> 00:18:32.640
of expenditure patterns on the part

323
00:18:32.640 --> 00:18:36.093
of the federal government, and if you had built that

324
00:18:36.093 --> 00:18:39.134
into the price earnings multiple that you felt

325
00:18:39.134 --> 00:18:44.134
ought to be applied to your typical General Motors, Ford,

326
00:18:44.450 --> 00:18:49.450
IBM, Xerox, Avon products stock,

327
00:18:49.530 --> 00:18:51.930
notice I've only mentioned the blue chips here.

328
00:18:51.930 --> 00:18:56.330
There are, what shall I say, purple chips

329
00:18:56.330 --> 00:19:00.240
that don't qualify for the adjective blue,

330
00:19:00.240 --> 00:19:02.030
which you can buy today at four

331
00:19:02.030 --> 00:19:04.610
and five times price earnings.

332
00:19:04.610 --> 00:19:07.340
Well, if you had built in that

333
00:19:08.730 --> 00:19:13.376
favorable political factor, favorable in your mind,

334
00:19:13.376 --> 00:19:17.010
into your evaluation, then it seems to me

335
00:19:17.010 --> 00:19:18.400
it would not be a rational view

336
00:19:18.400 --> 00:19:22.980
to call up your friendly broker and say let's unload some

337
00:19:22.980 --> 00:19:26.140
and let's sell down to the sleeping point

338
00:19:26.140 --> 00:19:27.790
where we're not gonna be so worried about

339
00:19:27.790 --> 00:19:30.270
the political events.

340
00:19:30.270 --> 00:19:35.270
As far as any sober econometrician's estimate

341
00:19:36.320 --> 00:19:39.760
of what the rate of growth

342
00:19:39.760 --> 00:19:42.400
of real product will be throughout the decade

343
00:19:42.400 --> 00:19:47.070
of the 1970s and what the general share

344
00:19:47.070 --> 00:19:50.720
of that national product will be that goes to wages

345
00:19:50.720 --> 00:19:54.330
and goes to profits, I don't think that

346
00:19:54.330 --> 00:19:57.600
Watergate is an important factor.

347
00:19:57.600 --> 00:20:01.500
If I were jotting down some regression equations,

348
00:20:01.500 --> 00:20:06.450
or some judgmental relations to form a judgment on this,

349
00:20:06.450 --> 00:20:10.740
and this by the way is what explicitly or implicitly

350
00:20:10.740 --> 00:20:14.940
every rational, thoughtful investor should be doing,

351
00:20:14.940 --> 00:20:18.020
if he's not capable of doing it for himself,

352
00:20:18.020 --> 00:20:21.550
then he should be having somebody invest his money

353
00:20:21.550 --> 00:20:26.150
and advise him who is capable of having a reasoned judgment.

354
00:20:26.150 --> 00:20:31.150
I don't say that he should find somebody with a glass ball

355
00:20:31.630 --> 00:20:33.730
that reveals the future.

356
00:20:33.730 --> 00:20:35.570
There doesn't exist any such person,

357
00:20:35.570 --> 00:20:39.790
but he should be well informed in weighing the odds,

358
00:20:39.790 --> 00:20:43.010
and I don't think that Watergate has any great importance

359
00:20:43.010 --> 00:20:45.730
in terms of such a calculation.

360
00:20:45.730 --> 00:20:48.470
But we know that the ups and downs of Wall Street

361
00:20:48.470 --> 00:20:51.980
going above the trend of so-called value and below

362
00:20:51.980 --> 00:20:53.707
is a much more volatile thing than that,

363
00:20:53.707 --> 00:20:57.730
and it does depend on what people of means,

364
00:20:57.730 --> 00:20:59.930
people of some affluence are thinking,

365
00:20:59.930 --> 00:21:03.000
and how well they're feeling with their world,

366
00:21:03.000 --> 00:21:07.160
and I don't suppose that too many of such people

367
00:21:07.160 --> 00:21:11.640
are feeling all that great in these weeks

368
00:21:11.640 --> 00:21:15.743
of the summer of 1973, and I think it's taken its toll.

369
00:21:17.100 --> 00:21:22.100
Let's ask, what about some of the objective factors

370
00:21:22.210 --> 00:21:23.830
that operate upon the economy?

371
00:21:23.830 --> 00:21:25.170
What about the money market?

372
00:21:25.170 --> 00:21:26.540
What about the interest rate?

373
00:21:26.540 --> 00:21:29.840
What about that money crunch that Albert Wolgenhauer

374
00:21:29.840 --> 00:21:32.300
and Henry Kaufman each in their differing

375
00:21:32.300 --> 00:21:34.270
degrees had forecast?

376
00:21:34.270 --> 00:21:38.260
I want to remind you that I spoke about

377
00:21:38.260 --> 00:21:42.610
Wolgenhauer's speech before the Boston Economics Club

378
00:21:42.610 --> 00:21:46.500
and I described to you his belief that it would be

379
00:21:46.500 --> 00:21:49.220
necessary and in fact was inevitable that there would be

380
00:21:49.220 --> 00:21:52.010
a money crunch in the middle of the year,

381
00:21:52.010 --> 00:21:54.660
and I wrote down in my little black book I just looked

382
00:21:54.660 --> 00:21:57.180
at this morning to be sure that my memory was correct

383
00:21:57.180 --> 00:22:00.550
that this would start some time around May 15th.

384
00:22:00.550 --> 00:22:02.490
This was about a month before that

385
00:22:02.490 --> 00:22:06.610
that the speech took place, and would develop

386
00:22:06.610 --> 00:22:08.250
into the 4th of July period.

387
00:22:08.250 --> 00:22:11.470
Well, according to my calendar we're now at June 28th.

388
00:22:11.470 --> 00:22:15.870
The 4th of July is just next Wednesday,

389
00:22:15.870 --> 00:22:19.530
and I don't think that one can hold one's breath

390
00:22:19.530 --> 00:22:22.360
for the money crunch having developed.

391
00:22:22.360 --> 00:22:26.150
Now, it's possible that all of our throats have been slit,

392
00:22:26.150 --> 00:22:27.890
and we haven't yet turned our heads,

393
00:22:27.890 --> 00:22:30.770
and we don't realize that we are the victims

394
00:22:30.770 --> 00:22:34.500
of a money crunch, but I don't think that the,

395
00:22:34.500 --> 00:22:37.130
a feel of the situation will bear that out.

396
00:22:37.130 --> 00:22:41.730
Now, I shouldn't be overly critical here,

397
00:22:41.730 --> 00:22:46.370
because nobody can be held to fine tuning

398
00:22:46.370 --> 00:22:51.080
and to nice picking of the exact moment of the money crunch

399
00:22:51.080 --> 00:22:55.550
and there was a safety valve which Dr. Wolgenhauer

400
00:22:55.550 --> 00:22:57.610
very properly introduced into

401
00:22:57.610 --> 00:22:59.040
his discussion and qualification.

402
00:22:59.040 --> 00:23:00.700
He said, well, if it won't be the 4th of July,

403
00:23:00.700 --> 00:23:05.700
then make it Labor Day, and Labor Day's a good time off,

404
00:23:05.870 --> 00:23:10.870
and we can by Labor Day have a much tighter money market

405
00:23:11.370 --> 00:23:13.150
than we now have.

406
00:23:13.150 --> 00:23:17.070
As a matter of fact, Dr. Otto Eckstein

407
00:23:17.070 --> 00:23:19.840
of Harvard University and Data Resources Incorporated

408
00:23:20.740 --> 00:23:23.453
has made a study of all past crunches.

409
00:23:24.340 --> 00:23:28.820
And we've had about three or four money crunches

410
00:23:28.820 --> 00:23:33.820
in the postwar period, post World War II period.

411
00:23:34.030 --> 00:23:37.970
I believe he traces one in 1957.

412
00:23:37.970 --> 00:23:40.930
I would say by the way that

413
00:23:40.930 --> 00:23:43.130
I think there was a little money crunch in April

414
00:23:43.130 --> 00:23:44.660
and May of 1953.

415
00:23:44.660 --> 00:23:47.220
There was a day there when all the people

416
00:23:47.220 --> 00:23:49.600
in the big banks and the big insurance companies

417
00:23:49.600 --> 00:23:52.010
were calling each other up and saying, by God,

418
00:23:52.010 --> 00:23:54.050
we can't let the credit of the United States government

419
00:23:54.050 --> 00:23:55.160
go down the drain.

420
00:23:55.160 --> 00:23:57.780
We can't let there be a panic in the money market.

421
00:23:57.780 --> 00:24:01.498
This was in the first flush of the Eisenhower

422
00:24:01.498 --> 00:24:06.498
first administration when you may remember

423
00:24:06.900 --> 00:24:10.520
Secretary of the Treasury George Humphrey was

424
00:24:10.520 --> 00:24:14.240
in the cabinet and W. Randolph Burgess

425
00:24:14.240 --> 00:24:18.040
was his under secretary, and the Burgesses

426
00:24:18.040 --> 00:24:22.943
which were issued really went to a great discount.

427
00:24:24.330 --> 00:24:27.070
Well, there are certain features in common,

428
00:24:27.070 --> 00:24:30.220
namely the crunches don't happen overnight.

429
00:24:30.220 --> 00:24:32.750
They always come as a surprise to everybody.

430
00:24:32.750 --> 00:24:35.380
They certainly come according to Dr. Eckstein's analysis

431
00:24:35.380 --> 00:24:37.550
as a surprise to the Federal Reserve,

432
00:24:37.550 --> 00:24:39.840
and not only are they a surprise to the Federal Reserve

433
00:24:39.840 --> 00:24:43.160
before the event, but after the event the Federal Reserve

434
00:24:43.160 --> 00:24:47.840
never admits that it had anything to do with the situation.

435
00:24:47.840 --> 00:24:49.340
The worst of these crunches, by the way,

436
00:24:49.340 --> 00:24:53.660
I think has to be thought of as 1966 in,

437
00:24:53.660 --> 00:24:56.810
July 1st, and we're coming right to another July 1st,

438
00:24:56.810 --> 00:25:00.100
there was tremendous fear that when all the savings

439
00:25:00.100 --> 00:25:02.830
and loan associations, particularly in California,

440
00:25:02.830 --> 00:25:05.640
would pay their July 1 interest that

441
00:25:05.640 --> 00:25:08.340
an awful lot of people were gonna take their marbles and run

442
00:25:08.340 --> 00:25:13.270
because by government fiat the savings banks

443
00:25:13.270 --> 00:25:16.030
do not let us poor people get a very high rate of interest.

444
00:25:16.030 --> 00:25:18.090
You can get 6% and that's the most you can get,

445
00:25:18.090 --> 00:25:20.520
and that's only for a very special kind of account.

446
00:25:20.520 --> 00:25:22.750
Well, in the regular money market

447
00:25:23.760 --> 00:25:28.550
you can these days get 7% and 8%

448
00:25:28.550 --> 00:25:30.690
if you're a man of any means at all,

449
00:25:30.690 --> 00:25:32.020
or if you're a corporation of any means.

450
00:25:32.020 --> 00:25:35.980
Well, individuals aren't so foolish that you can keep

451
00:25:35.980 --> 00:25:38.410
fooling them all the time, and so the smart money

452
00:25:38.410 --> 00:25:42.570
did in '66 leave the S and L's,

453
00:25:42.570 --> 00:25:44.050
really never to return.

454
00:25:44.050 --> 00:25:46.720
Well, the government I know, because I was an advisor

455
00:25:46.720 --> 00:25:50.940
to it at that time, was very fearful

456
00:25:50.940 --> 00:25:52.980
that there would be a big runoff,

457
00:25:52.980 --> 00:25:57.790
and the Under Secretary of the Treasury Joseph Barr,

458
00:25:57.790 --> 00:25:59.550
later to be secretary of the treasury,

459
00:25:59.550 --> 00:26:02.520
had a kitty, a rescue fund,

460
00:26:02.520 --> 00:26:04.690
or some several billions of dollars

461
00:26:04.690 --> 00:26:06.800
to tie the situation over.

462
00:26:06.800 --> 00:26:09.280
Well, we just got over that situation

463
00:26:09.280 --> 00:26:11.060
without undue intermediation.

464
00:26:11.060 --> 00:26:14.390
But there was a time in August of 1968

465
00:26:14.390 --> 00:26:18.000
when the Mellon Bank in Pittsburgh finally

466
00:26:18.000 --> 00:26:20.680
hard pressed for reserves, said, we're just gonna dump

467
00:26:20.680 --> 00:26:23.560
our municipal bonds for whatever they can bring,

468
00:26:23.560 --> 00:26:27.130
and you had a really sticky period in the money market

469
00:26:27.130 --> 00:26:27.970
for a couple of days.

470
00:26:27.970 --> 00:26:30.210
In fact, the Federal Reserve had to act very strongly

471
00:26:30.210 --> 00:26:31.900
by sending a letter out to everybody that they would

472
00:26:31.900 --> 00:26:34.510
provide the money and not to panic.

473
00:26:34.510 --> 00:26:35.500
It was a good act.

474
00:26:35.500 --> 00:26:39.610
It was successful in ending the crunch,

475
00:26:39.610 --> 00:26:40.950
in turning the crunch around.

476
00:26:40.950 --> 00:26:44.993
I can only compare it with the forceful action

477
00:26:47.260 --> 00:26:51.040
by the present Chairman of the Board of Governance

478
00:26:51.040 --> 00:26:52.640
of the Federal Reserve System Arthur Burns

479
00:26:52.640 --> 00:26:54.820
at the time of the Penn Central failure.

480
00:26:54.820 --> 00:26:57.510
When Penn Central failed in the background

481
00:26:57.510 --> 00:27:00.312
there was quite a tottering of the whole

482
00:27:00.312 --> 00:27:02.480
house of cards.

483
00:27:02.480 --> 00:27:06.659
It was shaking, and even companies like Chrysler

484
00:27:06.659 --> 00:27:10.130
found that in the money market their commercial paper

485
00:27:10.130 --> 00:27:12.095
was becoming suspect.

486
00:27:12.095 --> 00:27:17.095
So, the president, this was President Nixon,

487
00:27:19.670 --> 00:27:23.000
called a lot of money people down to Washington,

488
00:27:23.000 --> 00:27:25.120
and Arthur Burns talked to them and said that he was

489
00:27:25.120 --> 00:27:28.080
gonna provide the money, and that they shouldn't panic,

490
00:27:28.080 --> 00:27:33.080
and actually no macroeconomic panic resulted.

491
00:27:33.870 --> 00:27:36.170
If this had been 1907 or 1903

492
00:27:36.170 --> 00:27:39.760
or if it had been the bad old days of 1929

493
00:27:39.760 --> 00:27:41.990
I think that it might have been another story.

494
00:27:41.990 --> 00:27:44.610
There's a book I believe by a man named Ellis

495
00:27:44.610 --> 00:27:47.410
on the second stock market crash.

496
00:27:47.410 --> 00:27:49.840
It's a hypothetical book.

497
00:27:49.840 --> 00:27:51.560
It's about the crash that didn't happen,

498
00:27:51.560 --> 00:27:53.970
but which could have happened, and it documents

499
00:27:53.970 --> 00:27:57.010
in great detail exactly what happened

500
00:27:57.010 --> 00:28:01.480
as we had a rerun, a very painful, catastrophic rerun

501
00:28:01.480 --> 00:28:04.580
of 1929, I guess with all the brokers jumping

502
00:28:04.580 --> 00:28:08.590
out the windows and all the multimillionaires saying

503
00:28:08.590 --> 00:28:11.900
this is a good time for my sons and I to be

504
00:28:11.900 --> 00:28:13.540
accumulating good common stocks.

505
00:28:13.540 --> 00:28:15.010
So, the sort of thing we always hear

506
00:28:15.010 --> 00:28:17.279
from government officials.

507
00:28:17.279 --> 00:28:19.560
The Secretary of the Treasury George Shultz said

508
00:28:19.560 --> 00:28:22.110
that if he had any money he'd be buying stocks now.

509
00:28:23.320 --> 00:28:26.060
He was in a good precedent, because that's what

510
00:28:26.060 --> 00:28:29.280
Secretary of the Treasury Dillon had said.

511
00:28:29.280 --> 00:28:33.430
By the way, he had some money I think at that time.

512
00:28:33.430 --> 00:28:36.410
It's kind of comical that a government official

513
00:28:36.410 --> 00:28:38.920
would know what the proper price earnings ratio is,

514
00:28:38.920 --> 00:28:41.650
but I believe President Nixon on several occasions

515
00:28:41.650 --> 00:28:43.270
has said this is a good time to buy stock,

516
00:28:43.270 --> 00:28:45.970
and if you had bought stock at the time he said so

517
00:28:45.970 --> 00:28:48.780
probably at least until recently you'd be ahead of the game.

518
00:28:48.780 --> 00:28:51.610
Maybe you still would be ahead of the game.

519
00:28:51.610 --> 00:28:56.610
Well, I don't know whether there's gonna be a money crunch.

520
00:28:56.960 --> 00:28:58.480
I think we have a much more sophisticated

521
00:28:58.480 --> 00:29:01.240
Federal Reserve board this time,

522
00:29:01.240 --> 00:29:04.370
and I don't think it's important for us

523
00:29:04.370 --> 00:29:07.680
to try to work out the odds of that.

524
00:29:07.680 --> 00:29:10.260
What I think is true is that the Federal Reserve

525
00:29:10.260 --> 00:29:11.960
has definitely been tightening up.

526
00:29:12.830 --> 00:29:14.940
It's been slowing down the rate of growth

527
00:29:14.940 --> 00:29:19.200
to the money supply over what would be needed

528
00:29:19.200 --> 00:29:22.890
to keep interest rates from floating upward,

529
00:29:22.890 --> 00:29:25.020
and interest rates have been floating upward.

530
00:29:25.020 --> 00:29:27.180
The short term interest rates are very high,

531
00:29:27.180 --> 00:29:31.300
federal funds rate above 8% much of the time.

532
00:29:31.300 --> 00:29:33.393
Treasury Bill rates are up.

533
00:29:34.670 --> 00:29:37.290
Acceptance rates are up.

534
00:29:37.290 --> 00:29:42.110
I think that long term rates will still be hardening.

535
00:29:42.110 --> 00:29:45.270
The notion that the peaking out would take place

536
00:29:46.180 --> 00:29:49.240
early in the year, or early in the middle of the year

537
00:29:49.240 --> 00:29:52.990
it seems to me is wishful thinking.

538
00:29:52.990 --> 00:29:56.750
Until we know more where we stand on the question

539
00:29:56.750 --> 00:29:58.650
of inflation, how the freeze works out

540
00:29:58.650 --> 00:30:01.130
and how it succeeded, and until we know more

541
00:30:01.130 --> 00:30:03.450
whether we're definitely in that growth recession,

542
00:30:03.450 --> 00:30:06.710
in that mini-recession, or even in a real recession,

543
00:30:06.710 --> 00:30:09.370
then I don't think you can expect the Federal Reserve

544
00:30:09.370 --> 00:30:13.390
to swing around and to begin to lean against the winds

545
00:30:13.390 --> 00:30:18.170
of stagnation and of slow growth.

546
00:30:18.170 --> 00:30:20.803
We still are in a period of watchful waiting.

547
00:30:23.000 --> 00:30:24.650
<v ->If you have any comments or questions</v>

548
00:30:24.650 --> 00:30:26.280
for Professor Samuelson address them

549
00:30:26.280 --> 00:30:28.670
to Instructional Dynamics Incorporated,

550
00:30:28.670 --> 00:30:33.263
166 East Superior Street, Chicago, Illinois, 60611.