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- | Welcome once again as MIT professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:05 | |
This series is produced | 0:07 | |
by Intstructoral Dynamics Incorporated. | 0:08 | |
Professor Samuelson, we're now past the midpoint of the year | 0:11 | |
the time when many economists | 0:14 | |
have predicted the turnaround would come. | 0:16 | |
How is that turn around coming? | 0:18 | |
- | In the middle of 1975, | 0:22 |
the outlook certainly is less gloomy | 0:25 | |
than it was at the beginning of the year. | 0:28 | |
One of the reasons perhaps is the fact that | 0:33 | |
all over the world there's been an increase | 0:36 | |
in stock prices, common stock prices. | 0:39 | |
Which country do you suppose has been the best place | 0:45 | |
for an American to invest his money? | 0:49 | |
Taking account what the appreciation has been | 0:52 | |
in dollar terms, | 1:00 | |
In other words, if the German mark has gone up | 1:02 | |
or the Swiss frank has gone up, | 1:06 | |
then that might be an extra source of remuneration | 1:09 | |
for the investor who on New Year's Eve put in his money | 1:16 | |
into one country or another. | 1:23 | |
This is a good time to take stock because | 1:26 | |
6 months and 10 days so to speak, | 1:28 | |
have passed that you can now | 1:32 | |
cash in your long-term capital gains. | 1:34 | |
Or if the spirit moves you, you can let your profits ride. | 1:38 | |
It is a case of profits without exception. | 1:42 | |
Well I don't suppose anyone would be able to guess | 1:46 | |
but it is the Hong Kong stock market. | 1:52 | |
It's a very volatile market. | 1:56 | |
It's a good place to make a lot of money. | 1:58 | |
It's also a good place to lose a lot of money. | 2:01 | |
That's gone up 96% in the first half of 1975. | 2:04 | |
Converted into dollars. | 2:10 | |
Dollars at the beginning and dollars at the end. | 2:12 | |
Any change in the floating exchange rates being allowed for. | 2:15 | |
Not surprising you say, because Hong Kong | 2:20 | |
is a citerdo of three private enterprise. | 2:23 | |
It shows what can happen when laissez faire | 2:26 | |
is allowed to do its best or its worst. | 2:29 | |
But you may be surprised to know what the second best | 2:33 | |
stock market of the world has been. | 2:37 | |
It's been the United Kingdom. | 2:40 | |
73%. | 2:43 | |
And this despite the weakness of the pound. | 2:46 | |
A pound that has gone down. | 2:50 | |
In fact, if you had put your money in pounds | 2:54 | |
in the UK stock market, | 2:59 | |
you'd have the highest rate of profit of all. | 3:01 | |
You'd have 83%. | 3:04 | |
But looking at it selfishly from a dollar standpoint, | 3:06 | |
the depreciation of the pound that has finally come. | 3:11 | |
Most of us thought it was on its way. | 3:15 | |
Even before it was on its way. | 3:17 | |
You'd still have 73%. | 3:20 | |
Perhaps it shows that equities at some states of the game | 3:23 | |
do become something of a hedge against inflation. | 3:27 | |
Or perhaps it shows that in a directed world | 3:30 | |
or an over-directed world, | 3:33 | |
you might as well have an interest in an equity. | 3:35 | |
As in depreciating currency or fix principal investment. | 3:38 | |
Well, third you may be happy to learn is the US. | 3:47 | |
The Dow Jones average, if you use that particular average, | 3:55 | |
is 41.7% up from January 1st to June 30th. | 3:58 | |
No need to convert that into dollars. | 4:05 | |
It's already in dollars. | 4:06 | |
And that perhaps gives us slightly exaggerated notion | 4:09 | |
of what the whole market in America has been doing. | 4:14 | |
Because 38.3% and the standard import is 500, | 4:17 | |
is perhaps a more even-handed comprehensive average. | 4:23 | |
You'd have done better than that I should say though | 4:29 | |
if you'd been in risky over-the-counter stocks. | 4:32 | |
Just those in an NASDQ index, | 4:35 | |
would've shown an appreciation of 61%. | 4:39 | |
And the AMEX, American Stock Exchange Index, | 4:43 | |
has gone up 54%. | 4:49 | |
As usually happens and it's interesting to speculate | 4:52 | |
as to why this happens, | 4:55 | |
an unweighted average of stocks | 4:58 | |
like the value line index of 1,500 stocks, | 5:00 | |
which industrials, which is a very biased index | 5:05 | |
is biased downward being a geometric mean. | 5:09 | |
The fact though that it gives equal weight | 5:12 | |
to a General Motors and to American Motors, | 5:16 | |
even though there's a heck of a lot more dollars | 5:18 | |
out of value in General Motors than in American Motors. | 5:20 | |
It shows a 60% increase in this period. | 5:24 | |
You pay for this on the downside | 5:30 | |
because a, an unweighted average, | 5:31 | |
just an average of every stock by name, | 5:34 | |
not by, weighted by value, | 5:39 | |
goes down a lot more. | 5:42 | |
And went down a lot more from 19, say 68 to 1973 | 5:44 | |
than did the Dow Jones average or the S&P 500. | 5:51 | |
Well, after that comes Switzerland, helped, | 5:58 | |
you may be sure by the appreciation of the Swiss frank | 6:04 | |
in dollars terms you'da made 33% in the Swiss market. | 6:09 | |
In other words, you've benefited, well not so much. | 6:16 | |
The Swiss frank has only gone up by about 2% | 6:21 | |
in this particular period. | 6:24 | |
After Switzerland comes Australia. | 6:28 | |
Australia has its ups and downs and last year I recollect | 6:31 | |
that it had its downs. | 6:38 | |
Well it's up 23%. | 6:38 | |
Even Japan, with all of the travail | 6:42 | |
it has been going through is up by 23%. | 6:45 | |
The Netherlands to a dollar investor 21.6%. | 6:50 | |
The German market, lagged really in the sweepstakes, | 6:55 | |
up 19 and a half percent. | 6:58 | |
This despite the fact that it was helped | 7:03 | |
by a 2 and a half percent appreciation | 7:05 | |
of the mark against the dollar. | 7:09 | |
In the case of the Belgian stock exchange, it's 19%. | 7:14 | |
The Canadian stock exchange, 16.2%. | 7:23 | |
Interesting. | 7:26 | |
That lagged behind the American recovery. | 7:27 | |
Italy, which goes from distress, to distress, | 7:30 | |
to triumph, to distress, had an increase | 7:34 | |
of 12 and a half percent. | 7:38 | |
And then perhaps because | 7:39 | |
of some Emersonian law of compensation, | 7:41 | |
alas on this particular list that I have is Austria. | 7:44 | |
Which went up only by about 5%. | 7:49 | |
However, it was Austria that you may recall | 7:52 | |
which last year lead the sweepstakes. | 7:55 | |
So the story would be quite a different matter | 7:58 | |
if you'd taken a 2 year time span. | 8:00 | |
Of course, you could've invested | 8:07 | |
in other things than common stocks. | 8:09 | |
For example, you might have invested in gold. | 8:13 | |
Where would you stand at mid-year in comparison | 8:17 | |
with the beginning of the year? | 8:20 | |
Well you'd be 12% out on your, on your money. | 8:21 | |
That's in addition to having to pay storage costs | 8:27 | |
and various other fees. | 8:35 | |
And of course there are no dividends | 8:38 | |
on a simple gold holding. | 8:40 | |
Still, that's better than if you'd put your money | 8:43 | |
in the Dow Jones commodity index in a long position, | 8:47 | |
thinking of that as a hedge against inflation. | 8:50 | |
Because sensitive prices have on the hold been coming down. | 8:53 | |
You'd be out 30% in such an investment. | 8:57 | |
Silver, that's a perineal favorite with the, | 9:02 | |
not the ribbon clerks, | 9:06 | |
but with the MD's and the professional people. | 9:07 | |
5% is what you'd have made. | 9:14 | |
A Dow Jones index of 40 bonds, case you wanna take a flyer | 9:17 | |
in the bond market, would be up 5%. | 9:22 | |
And since I suppose those bonds put on the hold | 9:24 | |
give you long term bonds, about 8%. | 9:28 | |
We might increase that to a 13% rate. | 9:31 | |
Not, not very bad. | 9:36 | |
Well, you can believe that sentiment | 9:38 | |
among the establishment classes is better | 9:45 | |
with this kind of a stock market rise just behind us. | 9:50 | |
It's amazing how much of the animal spirits | 9:56 | |
and the degree of optimism and pessimism | 9:59 | |
of the middle classes and the upper-middle classes, | 10:02 | |
I suppose there are no upper classes anymore, | 10:07 | |
is a just reflection of what's been happening | 10:09 | |
in the last 18 months to their stock market holding. | 10:13 | |
THere's many a happy home, balance-sheet wise, | 10:20 | |
at the mid year in comparison with the beginning of the year | 10:23 | |
in terms of stock market. | 10:30 | |
And this means, of course, billions of dollars | 10:31 | |
of net worth in the aggregate. | 10:35 | |
Most sophisticated analysts of consumer spending | 10:40 | |
take as the first approximation of consumer spending. | 10:44 | |
The flow of income available to spend. | 10:49 | |
But to a second approximation, they do take into account | 10:54 | |
the stock of wealth or net worth of individuals. | 10:58 | |
And that net worth number had been decimated. | 11:03 | |
It had lost at least 1 in 10 in the recession, | 11:08 | |
but by the same token, it's what has been coming back. | 11:13 | |
Although trips to Europe I understand | 11:19 | |
are languishing this year | 11:22 | |
except for cheap group charter flights. | 11:23 | |
It's this sort of appreciation which gives rise | 11:28 | |
to purchase of big-ticket items. | 11:33 | |
To Mercedes, and small Cadillacs. | 11:35 | |
And trips around the world. | 11:37 | |
This could all be made quantitative | 11:42 | |
by that kind of metric investigation. | 11:46 | |
But let me pass on to another aspect of the problem. | 11:49 | |
A high price for stocks relative | 11:53 | |
to the dividends that have to be paid, | 11:57 | |
and a rising price of stocks, | 12:00 | |
means that the availability of equity capital | 12:02 | |
to corporations desirous of increasing their liquidity | 12:06 | |
by floating new stock issues | 12:12 | |
becomes more favorable. | 12:16 | |
And that indeed has been the case. | 12:18 | |
We've seen a whole rash of new issues brought to the market | 12:20 | |
in the first half of the year. | 12:26 | |
It of course has long been awaited | 12:28 | |
by the investment bankers, by First Boston Corporation, | 12:33 | |
by Morgan Stanley, | 12:36 | |
because there were some pretty lean days | 12:38 | |
for such investment bankers | 12:42 | |
during the worst of the recession last year. | 12:46 | |
Fortunately, they would say, there was a need | 12:49 | |
and a desire of firms to issue debt securities | 12:53 | |
that kept them paying their overhead. | 12:58 | |
And so two, another part of the moral of the story, | 13:02 | |
the analysts who do the best job, I won't say | 13:06 | |
at predicting the future of GNP, | 13:11 | |
but the best job at describing and understanding | 13:14 | |
what's happening in the GNP models like that | 13:17 | |
of Professor Modeliani and his colleagues at MIT pan, | 13:21 | |
former federal reserve board model. | 13:30 | |
They also build into their investment equation | 13:35 | |
a favorable availability | 13:39 | |
and favorable cost of capital component | 13:42 | |
when the stock market goes up. | 13:47 | |
It's curious that we economist fight the conclusion | 13:51 | |
that an increase in the stock market | 13:56 | |
has a causal association with the buoyancy of business. | 14:00 | |
It's what every vulgar non-economist, and for that matter, | 14:08 | |
every refined non-economist, | 14:13 | |
believes he absorbs that with his mother's milk | 14:17 | |
so to speak, | 14:20 | |
but the economist tend to resist that conclusion | 14:21 | |
and yet as Professor James Tobin of Yale | 14:24 | |
pointed out at a conference of economist | 14:26 | |
a couple of years ago, | 14:30 | |
it's one of the simplest positive correlations | 14:32 | |
that stands out in the economic time series | 14:37 | |
of this country and of many other countries | 14:41 | |
and cross-sectional analysis. | 14:43 | |
Somewhat substantiates what the Times | 14:45 | |
or Series story seems to be telling us. | 14:48 | |
Well consumer sentiment as measured by the various polls, | 14:54 | |
and here we're now sampling by telephone | 15:01 | |
or by scientific sample interrogation and interview, | 15:05 | |
a much wider class of people | 15:11 | |
than those who own any appreciable amount of common stocks. | 15:15 | |
Consumer sentiment is way up from the trough of despair | 15:19 | |
of last Christmas to Valentine's Day. | 15:26 | |
The index of consumer sentiment | 15:32 | |
that anabor group survey records, | 15:35 | |
or that the conference board records, | 15:42 | |
or various private organizations | 15:46 | |
are still by no means telling a rosy story. | 15:49 | |
They're no where near their previous optimistic peaks | 15:55 | |
but they're a good deal up from the trough of despair | 15:59 | |
which characterized the American economy | 16:07 | |
and I dare say an economist from Western Europe | 16:10 | |
or from Japan could have told | 16:14 | |
pretty much the same story last Winter | 16:17 | |
about consumer sentiment in those countries. | 16:20 | |
I've read somewhere that the Japanese recovery | 16:25 | |
which has been slow in coming and getting underway, | 16:29 | |
has in part been the slow down | 16:35 | |
by a wave of extra thrift, or thriftiness, | 16:38 | |
that has swept over the Japanese consumer. | 16:45 | |
For the first time in a long time, | 16:48 | |
he's not spending as if money were going out of use. | 16:51 | |
It's because I suppose, for the first time in a long time, | 16:56 | |
the money income of the Japanese family cannot be expected | 17:00 | |
to rise by 15 or 20% and prices are still rising | 17:06 | |
I think in Japan on double-digit bases. | 17:12 | |
For the first time in a long time, | 17:17 | |
a Japanese family cannot look ahead to the next ten years | 17:18 | |
and expect to have an improvement factor in real terms | 17:22 | |
of perhaps something like 7 to 10 to 12 percent. | 17:25 | |
The Japanese government doesn't know | 17:33 | |
how fast it can grow prudently | 17:35 | |
or even how fast it's likely, actually, to grow. | 17:38 | |
And the same uncertainty | 17:44 | |
that besets the government forecasters | 17:46 | |
must be shared by the ordinary person | 17:49 | |
in the Japanese street. | 17:54 | |
Well, where do we stand, | 17:59 | |
not with respect to the stock market, | 18:02 | |
but with respect to the American economy? | 18:05 | |
If we have already gone through a V-recovery, | 18:13 | |
it must be one of the best-kept secrets | 18:21 | |
in the annals of economic history. | 18:24 | |
It's possible that the GNP, | 18:28 | |
if we're calculated on a real monthly basis, | 18:36 | |
that it reached its trough in March or in April. | 18:41 | |
The towns and greens and Greenspan Organization | 18:47 | |
makes a rough calculation currently of monthly GNP. | 18:51 | |
And I recollect that their estimate showed | 18:56 | |
that the turn as measured by that indicator | 19:02 | |
came before May of 1975. | 19:06 | |
Yet, analysts are still in doubt | 19:12 | |
as to whether the turn has taken place. | 19:16 | |
I conclude from this that in all likelihood, | 19:20 | |
the turn is a fairly gentle one, | 19:24 | |
describable in its local features, | 19:31 | |
that is it's March to let's say August time span | 19:34 | |
as a much more of a U than of a V. | 19:41 | |
The history books will still be able to resurrect | 19:49 | |
the notion, fiction if you like, of a V-turn | 19:51 | |
if what happens between mid-1975, just a little while ago, | 19:56 | |
and one year from now, mid-1976, | 20:03 | |
records an average rate of real GNP growth | 20:07 | |
of the, let's say, 8%. | 20:14 | |
Something over 7%. | 20:17 | |
That would fit in with the notion of a longer-term V. | 20:20 | |
But that kind of a V is still consistent | 20:28 | |
with a local bottom that looks like a U. | 20:32 | |
Those who follow inventories most carefully | 20:38 | |
are not convinced that the inventory decummulation | 20:42 | |
is already at an end. | 20:46 | |
Particularly in the durable goods fields. | 20:48 | |
Now the hero in this scenario has been consumption. | 20:53 | |
Chain stores sales as measured, let's say by Crezgy's, | 20:59 | |
as measured by Woolworth's, as measured by JC Penny's | 21:04 | |
and a bit more disappointingly is measured by Sears Robuck, | 21:08 | |
behaved well in June. | 21:14 | |
The spending occasion by the tax rebates | 21:18 | |
is presumably now beginning to take place | 21:26 | |
and on its way. | 21:30 | |
I've had occasion to comment more than once | 21:33 | |
on the view that you hear so often | 21:36 | |
that this term came without the help | 21:39 | |
of the tax rebate and the fiscal stimulants. | 21:43 | |
In the first place we don't really know for sure | 21:47 | |
that the turn has come. | 21:49 | |
But in the second place, what's been happening | 21:51 | |
is very close to what the consensus forecasters | 21:55 | |
were saying would be happening for the months | 22:00 | |
that we're going through. | 22:03 | |
And, I must remind all of us | 22:05 | |
that those census, consensus forecasters, | 22:09 | |
built into their consensus forecast | 22:13 | |
the fiscal stimulants voted by Congress | 22:17 | |
and not vetoed by the President. | 22:21 | |
So where we are, apparently, | 22:24 | |
as far as the prudent judge can tell, | 22:29 | |
because of the fiscal stimulants. | 22:33 | |
The fiscal stimulus actual | 22:37 | |
and the fiscal stimulus anticipatable. | 22:39 | |
So there's no reason to say | 22:43 | |
that it's been independently of the fiscal stimulus | 22:46 | |
that the Great Depression has been avoided. | 22:54 | |
We shall never know what would've happened | 22:58 | |
if we hadn't had the fiscal stimulus. | 23:02 | |
THat's the limitation under which | 23:04 | |
every economic historian must labor. | 23:08 | |
You can never know what would've happened | 23:12 | |
if history had not been what history turns out to be. | 23:14 | |
But it's one thing to agree with what is almost a banality. | 23:21 | |
Namely that in the absence of fiscal stimulus. | 23:30 | |
At some point, whether it be | 23:34 | |
in mid-1975, or late-1975, or mid-1976, | 23:37 | |
the recession would have come to an end. | 23:45 | |
But would it have come to an end | 23:49 | |
with the same peak amount of unemployment | 23:54 | |
that we are expecting with the fiscal stimulus. | 23:57 | |
And it seems to me that the bulk of experience | 24:03 | |
and plausible ways of analyzing that experience | 24:09 | |
would argue against such a particular view. | 24:12 | |
Since I've spoken about employment, let me say more. | 24:19 | |
The numbers came in for June of only 8.6%. | 24:23 | |
That looks as if we really could celebrate | 24:32 | |
because it was 9.2% in May fishell number. | 24:34 | |
And the fishell number is 8.6% in June. | 24:39 | |
But I must congratulate the commissioner | 24:43 | |
of the Bureau of Labor Statistics, Shush Shishcanow, | 24:49 | |
he's been handling this particular bit of news. | 24:52 | |
He pointed out in May in announcing the figures, | 24:56 | |
I mean in June announcing the figures for May, | 25:02 | |
that the 9.2% was spuriously high | 25:04 | |
because of a faulty seasonal correction method. | 25:08 | |
And that inconsequence of Mays' being so high, | 25:17 | |
we would find in June, | 25:23 | |
that the June number | 25:25 | |
would be lower as it has turned out to be. | 25:26 | |
But that would be true even if | 25:28 | |
there'd been no basic improvement | 25:31 | |
in the unemployment situation. | 25:33 | |
The reason is not hard to describe in gross detail. | 25:37 | |
About the same number of college students | 25:46 | |
and high schools students | 25:49 | |
pour into the labor market this year, a deep recession, | 25:51 | |
as last year before we were in the deep recession. | 25:57 | |
Or the year previous to that | 26:02 | |
when we still were riding pretty high. | 26:04 | |
If you use as your seasonal correction and assumption | 26:07 | |
that there's always the same percentage increase | 26:12 | |
in unemployment due to this factor, | 26:16 | |
then in a year of deep depression, | 26:23 | |
it turns out that there's only | 26:29 | |
of the same number of people going onto the labor market. | 26:30 | |
That's a smaller fraction of the higher unemployment. | 26:33 | |
And so it's a poor method of seasonal correction. | 26:37 | |
If you could recognize it while it's happening, | 26:42 | |
the question one must ask | 26:46 | |
is why couldn't you recognize in advance | 26:47 | |
and have a better method of seasonal correction | 26:51 | |
to allow for what is predictable, | 26:54 | |
what is a predictable aberration. | 26:56 | |
Now I think Dr. Shishkin was right, Mr. Shishkin was right | 26:59 | |
not to change in mid-screen in May | 27:03 | |
because it would look as if | 27:06 | |
he was trying to cook the figures. | 27:07 | |
But I think that last year | 27:10 | |
there should've been thought about this, or better still, | 27:14 | |
when the programs on the computer | 27:19 | |
were being devised several years ago. | 27:20 | |
There should be a better method of seasonal correction | 27:25 | |
and let's hope that this won't happen again. | 27:28 | |
We still are looking at the housing industry | 27:35 | |
and there has been some improvement there. | 27:39 | |
And perhaps the pessimists are being confounded | 27:44 | |
just as the optimists earlier were being confounded. | 27:48 | |
But it still is a picture | 27:52 | |
of rather modest rate of housing rebound. | 27:55 | |
In the case of automobiles, | 28:00 | |
the American cars seem to be gaining a little bit | 28:02 | |
at long last on the imports. | 28:09 | |
For one thing, there are a lot of, | 28:12 | |
there aren't so many 1974 imports anymore | 28:14 | |
which were selling at competitive prices. | 28:17 | |
The new imports are not all that competitive in prices | 28:20 | |
in part because the dollar, until recently, | 28:23 | |
had floated downward. | 28:27 | |
There's also a fact that there's | 28:30 | |
the biggest liar contest going on now | 28:32 | |
in what our rather inflated mileage claims. | 28:36 | |
The best performance that any one of your cars | 28:42 | |
ever runs in an official test is used in your advertising. | 28:45 | |
And so as I've been reading the newspapers | 28:50 | |
and listening on the TV screens, | 28:54 | |
it now appears that those same American cars, | 28:56 | |
which were doing so badly in mileage | 28:59 | |
compared to the foreign cars, just some months ago, | 29:01 | |
are now doing almost as well. | 29:04 | |
Nothing's been changed in their engines, | 29:08 | |
but something has been changed in the public image. | 29:11 | |
I conclude by giving my opinion | 29:17 | |
that the turn is behind us, | 29:22 | |
that the year ahead is not likely to show that V, | 29:27 | |
right hand of the V bottom, 8% rate of growth. | 29:37 | |
But something measurably less than that. | 29:41 | |
And so 4 to 8% I still think | 29:45 | |
is about the only sensible range | 29:49 | |
that one can give for what the real growth | 29:53 | |
the American economy will be in the next 12 months. | 29:56 | |
- | If you have any comments or questions | 30:03 |
for Professor Samuelson, | 30:05 | |
address them to Instructural Dynamics Incorporated | 30:07 | |
for 50 East Ohio Street, Chicago Illinois, | 30:10 | |
60611. | 30:13 |
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