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- | What's new in the world of economics | 0:02 |
both home and abroad? | 0:03 | |
Listen now as Instructional Dynamics Incorporated | 0:05 | |
brings you Dr Paul Sameulson, | 0:07 | |
MIT Professor of Economics | 0:10 | |
with his bi-weekly analysis. | 0:11 | |
Professor Sameulson, this is the week of July 7, | 0:13 | |
which means the first half of 1969 is history. | 0:16 | |
How would you analyze the past six months? | 0:20 | |
- | The first half of the year, has been strong. | 0:23 |
I have not yet seen any official estimates | 0:28 | |
of the second quarter GNP, but we did have a release | 0:31 | |
from the Department of Commerce indicating | 0:35 | |
that the figures will show a continued strong growth. | 0:38 | |
I don't know exactly what that means, | 0:44 | |
but piecing together what we do know, | 0:47 | |
the upsurge in the Federal Reserve Board Index of Production | 0:50 | |
in May, I believe it was, | 0:55 | |
the general expectation, I think, must be | 0:58 | |
that the second quarter showed | 1:03 | |
something like a $15,5 billion Dollar increase in GNP. | 1:06 | |
Call it 15, call it 16 billion. | 1:11 | |
That's fully as great as the increase in the first quarter. | 1:16 | |
Indeed, | 1:25 | |
this vague estimate that I'm giving you | 1:27 | |
could be wrong in two ways. | 1:31 | |
It could be a couple of billion above $15 billion | 1:33 | |
or it could be a couple of billion below $15 billion. | 1:37 | |
If I were required to bet my own money | 1:41 | |
on which of those two outcomes might materialize, | 1:44 | |
I'd feel safer betting that we may be in | 1:49 | |
for a shock and a surprise | 1:52 | |
in learning that the numbers | 1:55 | |
were a couple of billion above $15 billion | 1:57 | |
and I would be very much astonished and surprise to learn | 2:00 | |
that the GNP had increase by only a $13 billion Dollars. | 2:05 | |
Now, why do I linger over this problem. | 2:09 | |
I linger over the problem because | 2:12 | |
the most pessimistic event that could happen | 2:15 | |
would be for the second quarter to turn out | 2:19 | |
to have been abnormally strong. | 2:24 | |
Let me reiterate, the problem that we face at this time, | 2:28 | |
I think, is over exuberance, not over kill. | 2:32 | |
And anything which | 2:37 | |
accentuates that over exuberance | 2:42 | |
or confirms that over exuberance, | 2:44 | |
has to be put down as a bad omen for the American economy. | 2:47 | |
Usually in these tapes I try to be judicious, | 2:52 | |
I try to weigh all the factors, pro and con, | 2:56 | |
and give you my best resolution of those factors. | 3:01 | |
The result is sometimes bland, | 3:06 | |
but the result is gauged to minimize | 3:08 | |
the squared error of my predictions. | 3:12 | |
I think that's a good thing to do | 3:17 | |
and if I had to stick to one style, | 3:18 | |
that's the style that I would stick to. | 3:21 | |
But there is room, plenty of room, | 3:24 | |
for change of pace. | 3:27 | |
So I thought that today, I might do a little brain storming. | 3:29 | |
Why don't I, just for a few minutes, | 3:33 | |
try to conjure up some | 3:36 | |
possible pessimistic | 3:40 | |
events and outcomes. | 3:44 | |
It's not that I wanna scare you or scare myself, | 3:46 | |
and it certainly is not that I'm predicting | 3:50 | |
that my best estimate is | 3:53 | |
that these pessimistic events will materialize, | 3:54 | |
but rather, if one is to be creative in this align, | 3:57 | |
one likes to through out hints | 4:02 | |
of things that ought to be watched and that may develop. | 4:06 | |
So that two or three months from now | 4:09 | |
that grade judicious analyst | 4:13 | |
will take this fact, which at the moment | 4:16 | |
is no bigger than a man's hand on the horizon, | 4:21 | |
and regarded as the standard thing | 4:24 | |
which was to have been expected perhaps all along. | 4:28 | |
Well, what would a pessimist | 4:31 | |
conjure up as something that | 4:35 | |
an observer of the American economy might watch out for. | 4:39 | |
One, it seems to me, that what we can not rule out, | 4:43 | |
the possibility of a | 4:47 | |
an acceleration of the creeping inflation | 4:52 | |
which we've been experiencing. | 4:55 | |
I don't mean to be so pessimistic as to say | 4:58 | |
that America, after going through a long period | 5:02 | |
of real recovery in the first part of the 1960's, | 5:06 | |
and after having overdone | 5:10 | |
the rate of spending | 5:14 | |
once full employment or over full employment | 5:18 | |
had been reached, | 5:20 | |
then inevitably was plunged into | 5:22 | |
the kind of pattern which we see in Brazil, | 5:26 | |
and which we see in Chili and other countries. | 5:29 | |
I don't think that that is in the cards, | 5:33 | |
but there is a lot of room between | 5:36 | |
the 5% inflation which we were experiencing till recently, | 5:39 | |
and the 20, 30 and 40% rates of inflation | 5:46 | |
that are typical, chronic and endemic | 5:51 | |
in Brazil and in Chili. | 5:55 | |
Why couldn't the American economy | 5:59 | |
edge upward from 5% to a | 6:01 | |
rather normal 7% or 9% rate of price inflation. | 6:05 | |
The is ample president for this. | 6:12 | |
I think that in many of the countries of western Europe, | 6:15 | |
and I'm now thinking of successful countries | 6:19 | |
of western Europe, | 6:22 | |
you have had rates of price inflation | 6:24 | |
that have gone on for a decade or more | 6:28 | |
internally that have exceeded those comfortable | 6:32 | |
2% and 3% rates of inflation which | 6:37 | |
we have learned to live with in the next economy | 6:41 | |
and about which we even tend | 6:44 | |
to become somewhat jaded and even complacent. | 6:47 | |
I'm thinking of the fact that Sweden | 6:52 | |
has had wage increases of the 10% per annum | 6:56 | |
for quite a while, | 7:00 | |
the Netherland for a long time in the middle 1960's | 7:02 | |
had wage settlements that exceeded 12%, | 7:07 | |
and hence there is no immunity | 7:11 | |
that I know of within the next economy | 7:16 | |
which assures us that we will return | 7:18 | |
to the comfortable price index behavior | 7:23 | |
of the early and middle 1960's. | 7:28 | |
Now I know it will be argued that this is impossible | 7:34 | |
if the macro economic authorities do their job properly. | 7:38 | |
If the proper fiscal policies are followed | 7:45 | |
this will be impossible, it is argued. | 7:49 | |
If the proper monetary policies are followed, | 7:51 | |
this will be impossible, it is argued. | 7:55 | |
There are some differences of opinion | 7:58 | |
among economists as to exactly | 8:00 | |
what is the appropriate mix between | 8:03 | |
fiscal policy as such and monetary policy as such. | 8:07 | |
There are some economists | 8:12 | |
who say that the important thing is monetary policy, | 8:15 | |
and more specifically, that the important thing is | 8:19 | |
the rate of growth of the money supply itself. | 8:22 | |
And so, as these economists would put it, | 8:28 | |
it is quite impossible to envisage | 8:31 | |
a 7% inflation per annum | 8:35 | |
if the Federal Reserve Authorities | 8:40 | |
do their simple business properly. | 8:44 | |
I say simple business, because according | 8:47 | |
to this monetarist view the process of what aught to be done | 8:49 | |
is quite simple. | 8:54 | |
The Federal Reserve should pick a round number, | 8:57 | |
let us say 5% per annum | 9:02 | |
or 4% per annum for the money supply growth | 9:06 | |
and should do everything | 9:12 | |
under heaven and earth | 9:16 | |
to see to that numbers achieved. | 9:18 | |
Turn it's attention away from the vicissitudes | 9:22 | |
of interest rates and whether Euro Dollar market | 9:24 | |
has gone from 12% temporarily to 14% | 9:27 | |
or down to 9%, just let the Federal Reserve | 9:30 | |
create high powered reserve money | 9:34 | |
for the banking system at the appropriate rate | 9:38 | |
and they can achieve 4%, 5%, let's call it 4,5% | 9:42 | |
rate of growth of one or another of the monetary magnitudes. | 9:48 | |
If they do this, it can be argued | 9:54 | |
it is hard to see | 9:58 | |
how the rate of price inflation | 10:00 | |
can be, let's say 7% for the next four years | 10:05 | |
in every one of those years or averaging out | 10:11 | |
to that amount in those four years. | 10:14 | |
Now, I think I largely agree with that. | 10:17 | |
There are just a few caveats that have to be made | 10:22 | |
I believe I saw in the Federal Reserve Bank of St Louis's | 10:26 | |
monthly letter the statement that | 10:31 | |
the velocity of circulation of money has gone up | 10:34 | |
in 19 out of the last 20 years, | 10:37 | |
and so it is not inconceivable | 10:41 | |
that the rate of price increase could be in excess | 10:44 | |
of the rate of money increase | 10:50 | |
for a considerable period of time. | 10:53 | |
The difference being due to the systematic shift | 10:55 | |
in the velocity of circulation. | 10:59 | |
And as a matter of fact we have some experience | 11:02 | |
over a considerable number of recent years | 11:07 | |
that suggest that this may even be the common pattern. | 11:11 | |
I knew some monetarists who just a couple of years ago | 11:16 | |
were beginning to predict that the rise | 11:19 | |
in the velocity of the circulation of money | 11:23 | |
was about to be a thing of the past | 11:25 | |
and they would have not been surprised with | 11:28 | |
seeing the velocity of circulation of money start to descend | 11:31 | |
from the peaks of a few years ago. | 11:35 | |
Well that did not happen. | 11:40 | |
I think that it's not surprising that it did not happen | 11:42 | |
since I believe that the velocity of the circulation | 11:48 | |
of money is, | 11:50 | |
presumed to be systematically related | 11:53 | |
to the rate of interest, | 11:55 | |
I'm not surprised that in this regime | 11:58 | |
of very high interest rates, | 12:00 | |
that there should be economy in the holding of cash balances | 12:02 | |
so that a smaller rate of growth of the money supply, | 12:08 | |
however defined, can support a larger | 12:11 | |
rate of growth of the money GNP. | 12:15 | |
There is quite a tad of precedence for this. | 12:21 | |
If I recall the multiple correlation | 12:25 | |
of the Federal Reserve bank of St Louis, | 12:29 | |
in which a monetarist approach is taken | 12:33 | |
and which the rate of change of the GNP | 12:36 | |
is related primarily | 12:41 | |
to the contemporary rate of change in the money supply | 12:43 | |
and the rate of change in the money supply | 12:48 | |
in the preceding three quarters. | 12:50 | |
In that analysis I will remind you | 12:54 | |
of the importance of fiscal variables | 12:56 | |
turned out to be negligible. | 13:02 | |
The tax rate changes is written down in that analysis | 13:05 | |
as result of least square estimation to essentially zero | 13:10 | |
and the effects of Federal expenditure | 13:15 | |
are shown to be positive only in the first two quarters | 13:20 | |
and negative in the next two quarters, | 13:24 | |
so that I think for the purpose of our discussion | 13:26 | |
we can more or less eliminate the fiscal variables | 13:28 | |
in appraising this monetarist model. | 13:32 | |
Now in that model, the change in GNP | 13:37 | |
is positive even if there is no change in the money supply | 13:43 | |
because there is a positive intercept coefficient | 13:49 | |
in the regression estimating equation | 13:53 | |
and we have therefore build into that model | 13:58 | |
a systematic increase over time | 14:02 | |
in the velocity of circulation of money. | 14:05 | |
Now I don't suppose that any of the framers of that | 14:11 | |
equation are prepared to use it without modification | 14:15 | |
to discuss average inflation over a decade period | 14:20 | |
or a half decade period such as I'm now venturing | 14:25 | |
to apply it to. | 14:28 | |
Never the less, let's see what it's implications are. | 14:30 | |
So, if the rate of money supply is kept at 4,5% | 14:36 | |
and if the prices | 14:42 | |
for some reason are postulated | 14:46 | |
to grow at 7%, let's say 7,5%, | 14:50 | |
part of the 3% discrepancy per annum | 14:55 | |
can be made up by a positive speeding up | 15:00 | |
of the velocity of circulation of money. | 15:05 | |
This is reinforced, | 15:10 | |
or at least we end up with | 15:13 | |
a consistent position in this direction | 15:15 | |
if we realize the 7,5% price increase | 15:18 | |
will generate a quite substantial | 15:23 | |
increase in interest rates. | 15:26 | |
If our present 8%, 9% and 10% interest rates | 15:29 | |
are compatible with a price increase | 15:35 | |
of 5% or 6% per annum, | 15:40 | |
then a 7,5% rate of price increase | 15:44 | |
fairly long maintained by our hypothesis | 15:49 | |
so that every fool can see what's going on | 15:53 | |
and so can every wise man | 15:56 | |
and every lender and every borrower, | 15:57 | |
in that case Mr Wright Patman | 16:00 | |
of the Congressional Banking Committee | 16:03 | |
has some more unpleasant news awaiting him | 16:07 | |
because the 8%, 9% and 10% interest rates | 16:11 | |
might under those circumstances be | 16:14 | |
9%, 10% and 11%, 12% interest rates. | 16:16 | |
Now with those interest rates, | 16:21 | |
and particularly as long as the interest rate structure | 16:23 | |
is still rising, it seems to me | 16:26 | |
that some more can be squeezed out | 16:29 | |
of the velocity of circulation of money, | 16:32 | |
however, well I shouldn't say however defined, | 16:36 | |
but at least as narrowly defined. | 16:39 | |
That's point number one, point number two, | 16:44 | |
there's no guarantee in this pessimistic model | 16:48 | |
that I am broaching with you | 16:53 | |
that the rate of real growth in the economy | 16:56 | |
is anything like that of our potential | 17:02 | |
and so the 7,5% increase in prices | 17:08 | |
might in a boogeyman pessimist model | 17:14 | |
be associated with | 17:19 | |
a negligible growth in real income. | 17:22 | |
Indeed as long we're being pessimistic | 17:27 | |
and scaring ourselves, why can't we have | 17:29 | |
as a number of clever Latin American countries | 17:32 | |
have managed to contrive for themselves | 17:35 | |
secular recurring creeping price inflation, | 17:38 | |
along with actually stagnating and regressing real income. | 17:43 | |
I don't mean this for any extended period of time | 17:50 | |
and now I want to shorten my view of the future | 17:52 | |
that I'm talking about, but let's talk about | 17:57 | |
just the next couple of years. | 18:00 | |
In the attempt to hold down this | 18:03 | |
runaway creeping price inflation of 7,5%, | 18:08 | |
we'll assume that the Federal Reserve authorities | 18:12 | |
stay very strong and do hold the money supply down | 18:16 | |
to the hypothetical monetarist number of say 4,5%. | 18:21 | |
They might in so doing | 18:27 | |
generate a reduction of real output | 18:31 | |
at an annual rate of 1% of 2%. | 18:37 | |
Now, I can assure you that's a very uncomfortable prospect | 18:40 | |
maintained for any duration | 18:44 | |
that's measured in years | 18:48 | |
because it means eroding profits, | 18:50 | |
it means increasing unemployment, | 18:53 | |
it means trouble in the cities, | 18:55 | |
it means soaring unemployment among | 18:58 | |
the unskilled and the handicapped and the black, | 19:02 | |
but never the less, | 19:05 | |
let's assume that we're facing a quayside Brazilian, | 19:08 | |
quayside Chilian situation, | 19:12 | |
and that the Fed stays stern under those circumstances. | 19:15 | |
We'll the arithmetic more or less does add up | 19:21 | |
4,5% in terms of money and growth | 19:26 | |
and let's say 1,5% per annum for a couple of years | 19:31 | |
in the form of velocity of circulation growth. | 19:35 | |
That leaves us with | 19:41 | |
room am I right for a -1% growth in real output | 19:44 | |
and all of that is compatible with 7,5% increases in prices. | 19:51 | |
Now, there is an inconsistency, | 19:56 | |
it's rather unlikely according to most models | 20:01 | |
and according to most patterns of experience | 20:06 | |
that you should have for any sustained period of time | 20:09 | |
a -1% increase in growth of real output, | 20:15 | |
and an expansion in the | 20:19 | |
amount of unemployment | 20:23 | |
and still have the 7,5% increase in prices | 20:25 | |
that I've been speaking about. | 20:29 | |
But I don't think that's impossible | 20:31 | |
particularly when you take into account | 20:33 | |
the leads and lags which our present | 20:36 | |
in any behavioral equation relationship between | 20:41 | |
wage cost pressures and price pressures | 20:46 | |
and the state of slack in the economy. | 20:50 | |
It's become fashionable these days, an I think properly so, | 20:54 | |
to emphasize the lags between causes and effects. | 20:57 | |
The money supply changes today and that has an effect | 21:02 | |
six months from now, that has an effect according | 21:06 | |
to some models 12 months from now, | 21:09 | |
15 months from now and even longer. | 21:11 | |
When there are tax changes today, that has a delayed effect | 21:15 | |
according some models three months, six months and so forth. | 21:22 | |
The saying mush surely be true | 21:27 | |
about the forces which make for | 21:30 | |
an increase in administered prices, changes in wage costs, | 21:33 | |
and I venture to think | 21:39 | |
when we deal with commodity so imperfectly | 21:42 | |
defined and so imperfectly competitive as labor generally | 21:47 | |
in the Phillip's Curve phenomena of the labor market. | 21:54 | |
And so, although I don't think this model | 21:57 | |
that I'm speaking about is likely, | 22:00 | |
I would like to cover myself, | 22:02 | |
so that if two years from now | 22:05 | |
something like this has happened | 22:06 | |
I'd like to be able to look back and say, | 22:08 | |
that in a brain storming session, | 22:11 | |
when I was trying to consider | 22:14 | |
all of the little unpleasant surprises | 22:17 | |
that might be possible | 22:19 | |
and when I say possible, I mean possible with some | 22:22 | |
modicum of probability. | 22:27 | |
After all everything is possible anytime | 22:30 | |
and it'll be the death of all science | 22:34 | |
to admit anything that's possible | 22:36 | |
has been interesting to talk about. | 22:39 | |
But this particular pattern | 22:41 | |
I think in some other countries, | 22:43 | |
has occurred and there is no benevolent providence | 22:45 | |
which ensures that the Unites States | 22:53 | |
could not also experience this behavior. | 22:55 | |
I'm going to conclude this pessimistic | 22:59 | |
brain storming session by asking | 23:01 | |
that you not concentrate upon the 7,5% figure | 23:05 | |
and the 4,5% money supply figure | 23:08 | |
but to consider it as a parable well told | 23:12 | |
if anything like these magnitudes | 23:15 | |
should actually develop in the future. | 23:19 | |
Now I'd like to turn to the current situation early in July. | 23:22 | |
I suppose the question that I am asked | 23:30 | |
more than any other question | 23:32 | |
in these last couple of months is this: | 23:34 | |
has the Bond market had it? | 23:37 | |
Is there, in the period ahead, | 23:42 | |
some chance that interest rates will soften? | 23:46 | |
Is this perhaps the bargain opportunity | 23:52 | |
of the decade, | 23:56 | |
of I will say, our lifetime | 23:58 | |
to go in and buy long term Government Bonds? | 24:01 | |
In the rather confident hope | 24:06 | |
that there will be a sizeable capital gain situation. | 24:08 | |
That's the way the problem looks | 24:13 | |
to the nimble trader and speculator. | 24:15 | |
But the same problem off course | 24:17 | |
is in the mind of every prudent man | 24:19 | |
who is a trustee for pension funds | 24:22 | |
and for investments generally. | 24:24 | |
Should he at long last | 24:27 | |
begin to be in more interested in the Bond market. | 24:30 | |
The Bond market has been in a very long term bear movement. | 24:35 | |
Are we yet at the end of this movement? | 24:42 | |
A month or two ago, there was a substantial | 24:49 | |
group of informed opinion which thought we were | 24:54 | |
at that time at that situation. | 24:57 | |
At the present time I think you will find | 25:01 | |
that there is a fairly substantial body of opinion | 25:04 | |
which says: | 25:09 | |
only hogs and fools think they can catch | 25:12 | |
the very bottom of the Bond market. | 25:16 | |
We are near enough to the bottom | 25:20 | |
so that a program of aggressive | 25:21 | |
buying of long term bonds is now indicated. | 25:25 | |
And then, I am asked; | 25:32 | |
Professor Sameulson, what do you think of this reasoning? | 25:34 | |
We are interested in your opinion on this | 25:40 | |
because of our investments problems | 25:42 | |
but we're also interested in it | 25:45 | |
because we think it has a lot to do | 25:46 | |
with the forces that the stock market is gonna have to fight | 25:49 | |
in trying to have a summer recovery. | 25:52 | |
If the interest rates will indeed soften a bit | 25:56 | |
then the stock market will have removed from it | 25:59 | |
one of the obstacles and hurdles | 26:03 | |
toward that usual summertime recovery. | 26:06 | |
Well, it's a hard question for me to answer | 26:11 | |
and I think that's the most important part of my answer | 26:14 | |
that should be stressed, namely, | 26:16 | |
that I do not consider it to be | 26:19 | |
and open and shut case in either direction. | 26:20 | |
But if forced at the point of a gun | 26:25 | |
to give an answer, my hunch is, that we aren't yet there. | 26:28 | |
I think that the minute interest rates ease off a little bit | 26:33 | |
the calender will grow. | 26:37 | |
There are lots of financial needs which are in the process | 26:38 | |
of being starved by the Federal Reserve | 26:42 | |
tightness to the money supply | 26:44 | |
which is down to about a 2,5% rate of growth | 26:46 | |
of the money supply in the first half of the year. | 26:50 | |
And I think that this need of corporations | 26:54 | |
to continue to finance their funds | 26:58 | |
plus the possibility that I mentioned at the very beginning, | 27:00 | |
that the second quarter may be | 27:03 | |
a bit stronger than we thought | 27:05 | |
al of these may mean that the bulls on bonds | 27:07 | |
are a little bit early and so I'm still gonna stick | 27:10 | |
to my night before Labor Day guess on this matter. | 27:14 | |
- | Thank you Professor Sameulson. | 27:19 |
We welcome your question and comments | 27:21 | |
and hope that this service is of value to you. | 27:23 | |
Our address is: | 27:26 | |
166 East Superior Street, Chicago, 60611. | 27:27 |
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