Tape 30 - America's balance of payments; stock market

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-	Hello again and welcome,	0:02
	as Professor Paul Samuelson looks at economics.	0:03
	This bi-weekly services produced and recorded	0:06
	by Instructional Dynamics Incorporated	0:09
	and is designed to give our listeners	0:11
	an inside look at the changing developments and trends	0:13
	in the economic picture.	0:15
	This is the week of June 23rd.	0:17
	Professor Samuelson, we have a question here	0:19
	from a subscriber, it reads as follows.	0:21
	One of the most valuable things one can get from an expert	0:24
	is his opinion on the views of other experts.	0:27
	If the experts agree, that is one thing if they disagree,	0:29
	that is quite something else and something valuable to know.	0:32
	All this is a prelude to the following question.	0:36
	Do you agree with the view that America	0:40
	has no balance of payments problem?	0:42
	That we do not have to worry about gold in the free market,	0:44
	and that we don't have to worry about gold or deficits	0:47
	and the official club of 10 ie and the official tier	0:50
	of the two tier gold system?	0:53
-	I don't think I do fully agree.	0:55
	First we have had since a year ago, March	0:59
	a two tier gold system.	1:02
	I don't think we have to worry much	1:06
	about what happens to the price of gold	1:09
	in the unofficial tier.	1:12
	If I were a South African central banker	1:14
	or government official, I'd spend too much of my time	1:17
	worrying about that market.	1:20
	But we're not South Africa and are only concerned	1:23
	with what happens to the price of gold in Zurich,	1:27
	or in London in the free market.	1:31
	Whether it is $41, whether it runs up to $45,	1:33
	whether it dips below $39,	1:37
	is as a symptom of international uneasiness	1:43
	and perhaps as an omen of crisis in exchange rates,	1:49
	and in foreign exchange markets to come.	1:56
	It used to be thought when the two tier	2:00
	gold system was first set up,	2:02
	that we should be very much concerned	2:04
	as to whether the price of gold in the free markets	2:07
	gets too high above $35 an ounce.	2:12
	The thought here was that if it was $40 an ounce,	2:16
	and only 35 in the official market,	2:21
	then some obscure little central bank,	2:26
	the blondes, the official market would not be much tempted	2:30
	to try to cheat to try to get some gold	2:33
	at the low official price and feed it openly	2:36
	or surreptitiously into the free market	2:39
	for a little arbitrage profit.	2:43
	But if gold it was said rose to $55 an ounce	2:46
	or some outlandish figure like that in the free market,	2:50
	then that $20 discrepancy would be too great.	2:53
	And the temptation would be so strong that the system	2:58
	would develop leaks and would finally break down.	3:02
	That was a legitimate fear when we had no experience	3:06
	with the new system.	3:08
	But as far as I can make out the people who know	3:09
	a lot about these things and worry about them a lot	3:13
	do not have as our number one worry	3:16
	the fact or the possibility that some central bank	3:19
	may get out of line and try to arbitrage	3:24
	between the two systems.	3:26
	I think the greater concern is how our balances	3:29
	in international trade to be settled	3:34
	within the official system.	3:37
	Now there is a view which my colleague at MIT	3:39
	Professor Charles Kindleberger represents,	3:44
	which says that the dollar is a key currency.	3:47
	It's about the only key currency.	3:50
	New York is the only big capital market in the world today,	3:53
	and the dollar is better than gold,	3:57
	and that America in a fact is a banker for the whole world.	4:00
	Now we all know that domestically a bank can create money.	4:05
	People like convenience of bank accounts,	4:08
	and they leave their money at no interest rates	4:11
	or low interest rates with the bank	4:13
	because of the convenience of holding reserves in that form.	4:15
	And this is like a license on the part of the banker	4:19
	to steal, or rather a license to counterfeit.	4:23
	And so according to the Duprey Kindleberger slant argument	4:27
	to name the principal exponents of this view,	4:32
	America has a license to counterfeit,	4:36
	it's very wrong to look for a zero balance in our payments,	4:38
	as power equilibrium.	4:43
	The proper balance is for us to run a considerable deficit.	4:45
	This is because of the counterfeit money	4:51
	which we're putting abroad.	4:53
	Now, I agree by and large that there is an element	4:55
	of truth in that.	4:58
	I think there's a great deal of exaggeration	4:59
	when the doctrine sometimes takes the form	5:02
	that we can issue any amount of this that we like.	5:04
	Because I don't believe that sound economics	5:07
	within a country as far as a single	5:09
	domestic bank is concerned, or as far as the domestic	5:11
	banking system even is concerned,	5:15
	that any amount of IOUs can be issued	5:18
	by the banking system and the public	5:23
	will have to absorb them.	5:27
	That would take me into the mechanics of central banking	5:29
	within a country I don't want to go into that.	5:31
	The truth is, that if the dollar were as good as gold	5:37
	if the $35 an ounce within the official family	5:41
	was a an equilibrium rate,	5:46
	and if the cross rates between the dollar and the Franc,	5:48
	the French Franc and the Belgian Franc,	5:53
	and the Mark and the Pound if these were all	5:55
	in approximate equilibrium, then the United States	5:59
	could count upon financing part of her equilibrium deficit,	6:03
	through the issuing of money.	6:09
	That means the foreigners would like to hold dollars	6:12
	for part of their reserves.	6:15
	I should like however, to give a warning about the this.	6:17
	It used to be thought that when the counterfeit	6:21
	or the bank issued money,	6:23
	he issued money that carried no interest rates.	6:25
	I think that when interest rates are as high	6:29
	as they are in the world today, that you will get	6:31
	not very far in trying to issue	6:34
	money that bears no interest at all.	6:37
	And if we did not have Regulation Q and other regulations	6:40
	preventing demand deposits from carrying interest,	6:44
	I'm sure that the banks within the United States	6:46
	would find that they would have to pay interest	6:49
	on their demand deposits.	6:52
	Now, the important is this for international economics	6:54
	is this, that people if they thought the dollar	6:57
	was as good as gold abroad, and I now included as people,	7:00
	the official central banks and the official	7:05
	finance ministries abroad,	7:09
	they would surely like to hold dollars,	7:11
	but that mustn't give you the vision	7:13
	of them holding greenbacks.	7:16
	And it mustn't give you the vision of them holding	7:17
	demand deposits that pay no interest.	7:19
	That Southern America gets a complete gift	7:22
	by this License to counterfeit.	7:24
	On the contrary, what they would like to hold	7:28
	are dollar securities,	7:31
	which these days would pay quite a high interest.	7:33
	I don't say that they would necessarily have the 10%, 11%	7:36
	and 12% rates, which prevail in this time of stringency,	7:39
	in the euro dollar markets.	7:44
	But they would certainly be as high as the treasury	7:46
	bill rate them as the commercial paper rate	7:49
	because central bank can hold these securities	7:52
	and know that it could catch them in very quickly.	7:56
	So this is not quite the gift that	8:00
	the older view of the right to counterfeit might be.	8:03
	Let me hasten on, 'cause I want to get	8:08
	on to some other questions.	8:12
	And let me turn to a still a different view,	8:13
	which is that the America is in the saddle	8:15
	within the official family, if anybody wants the gold	8:19
	he knows he can't have it, and therefore	8:21
	he will not ask for it and therefore we have no concern.	8:24
	I think it is correct that a big single central bank	8:28
	to whom we owe a $3 billion	8:33
	could not on any Monday morning present	8:37
	a bill and say we'd like the $3 billion that you owe us,	8:41
	and we would like it all in gold.	8:45
	I think that would break up the present system.	8:46
	But I don't think that, that's something,	8:50
	that event when it happened is something harmless	8:52
	no worse than a bad cold and which we could shrug off	8:55
	and and laugh at and say there is no balance	8:59
	of payments problem.	9:01
	On the contrary, I think that if that the unhappy	9:02
	day should arrive, it would be a prelude	9:06
	to a certain amount of anarchy and chaos	9:08
	in the international finance markets.	9:11
	Now, let me try to describe what I mean by that.	9:14
	We have had a tremendous increase in the volume	9:17
	of real international trade in the post war period.	9:20
	No profits that I know had forecast 20 years ago,	9:24
	quite how the volume of real international trade would grow.	9:28
	We do not have a free trade world, we have moved more	9:33
	towards a free or trade.	9:36
	This has been an international division of labor.	9:37
	It has been extremely valuable to the importers,	9:39
	to the exporters' to the capital importer,	9:42
	to the capital exporters.	9:46
	It is a very important and very wonderful thing,	9:47
	but it is not something which was given to us by God	9:50
	and which will stay with us forever.	9:53
	If the official tier system breaks down,	9:57
	I do not think that we will go painlessly	10:02
	to a new set of floating exchange rates,	10:05
	with new equilibrium being attained very rapidly.	10:08
	And therefore, all of our crying about balance of payments	10:13
	was for not and was quite unnecessary.	10:16
	What I think is more likely to happen,	10:20
	what I fear will happen, and what I know no expert	10:23
	can assure us will not happen,	10:27
	would be the following:	10:29
	That the common market countries of Europe	10:30
	would become very panicky if the dollar started	10:34
	to float downward and what they consider	10:38
	undue manner and they could rationally	10:41
	do certain things to protect themselves against that	10:45
	or they could countenance that.	10:48
	But what I fear is that finance minister Strauss in Germany	10:49
	would not do the rational thing.	10:54
	I don't think that the post AGOA government of Papa Do	10:56
	would necessarily do the rational thing.	11:00
	And you might have one clear, rational voice	11:02
	of Carly in Italy at the Central Bank	11:06
	stating what might be the rational thing,	11:09
	but I think it is very likely, I don't say	11:12
	that the probability is 90% and it doesn't matter	11:14
	from my argument if the probability is only 35%,	11:18
	but I think it's very likely that you would get some	11:21
	comprehensive exchange controls	11:24
	on the part of the common market.	11:27
	There would be retaliation against the American flooding	11:29
	of goods or really the threat of the flooding of goods.	11:34
	The threats are often really empty threats.	11:37
	But I think in international trade there is a xenophobia,	11:42
	and a paranoia that is even greater	11:45
	than in domestic affairs.	11:47
	And I think that that unhappy cataclysm	11:49
	that I'm talking about would not be something unimportant.	11:52
	I think it's something that would set us back	11:55
	three or four or five years we look very painfully,	11:58
	and very slowly climb back to an international	12:00
	division of labor.	12:04
	So what we have is something in the international finance,	12:05
	like the stalemate on the Roman front.	12:09
	We have a balance of terror.	12:14
	The Americans can say to the common market countries,	12:16
	"You upset the apple cart and you will bring down	12:20
	the avalanche of chaos in exchange controls."	12:23
	I think that we have that the blackmail power	12:31
	but I think that that is not something	12:34
	which will necessarily hold and I think	12:36
	that there is a great deal to worry about	12:39
	in connection with the balance of payments.	12:42
	So, to our questioner I would say write this down	12:45
	in your little black book,	12:48
	as not one of those areas in which the experts	12:49
	are all in agreement and this particular semi expert warns	12:52
	you that the balance of payments situation of United States	12:56
	still is a very serious one.	13:00
	The trade fingers are very bad.	13:03
	I am anticipating that sometime if it hasn't already	13:06
	happened a lot of the hot and cool money	13:10
	which has come so eagerly into Wall Street	13:13
	will cease to come into Wall Street	13:16
	as our Dow Jones averages languish and you might	13:19
	even get an exodus outward.	13:22
	And so we will not have cosmetically on capital account	13:25
	disguise of what's been happening in uncurrent account	13:30
	in the wave of deterioration.	13:35
-	Professor Samuelson, several of our listeners have written	13:36
	in asking that you comment on the present	13:39
	stock market outlook.	13:41
-	I'm always reluctant to speak in my capacity	13:43
	as a PhD in economics on the subject as to what's going	13:46
	to happen to the stock market.	13:51
	I refuse to make any prophecies in this particular area,	13:54
	if I had the confidence in my opinions,	13:58
	I might stick my neck out	14:01
	but I have no particular confidence.	14:03
	Let me however comment on what seemed to me	14:06
	to be four conflicting factors that are bearing	14:10
	upon the present stock market in Wall Street.	14:15
	There are as to my mind a couple of bearish factors.	14:21
	And to my mind there are a couple of bullish factors.	14:25
	I don't mean that you can just count factors up	14:29
	and factors down and then take the net difference	14:34
	between those integers.	14:38
	You have to have to wait them and I'm not going to pretend	14:40
	to give you a definitive way of waiting them.	14:43
	What are the bearish factors?	14:47
	The first bearish factor seems to me	14:49
	is the hardness of money.	14:51
	With interest rates at the eight and a half percent	14:54
	on the prime rate, perhaps is going go up again,	14:58
	with margin accounts having to pay well over 9%,	15:01
	the in many cases over 10% with euro dollar rates,	15:07
	having gone to 10, 11 and 12% and make no mistake about it,	15:11
	people are paying these rates, you've got to be awfully good	15:15
	in investing in equities.	15:19
	To beat that kind of handicap.	15:21
	There must be a lot of people in Wall Street	15:24
	who haven't made any money on equities	15:27
	in the last three or four years.	15:31
	If you look at the principal indexes which are about	15:32
	where they were two or three, four years ago.	15:35
	And in the meantime, they have been paying out	15:38
	a very high interest rates to carry their accounts.	15:41
	In addition, there's a even larger group who don't borrow	15:44
	in order to buy stocks, but who have the opportunity cost	15:48
	or alternative of investing in short term	15:52
	fixed interest securities.	15:56
	I say short term because we've had a bear market	15:59
	in long term bonds, because interest rates have been	16:02
	rising and have not stabilized.	16:04
	So that's the first factor.	16:07
	The second factor is that they real economy is beginning	16:09
	to slow down, I've commented enough on that.	16:12
	Let me simply say that it means that profits	16:14
	are in considerable danger of eroding away for some time,	16:17
	and the market tries to look ahead	16:22
	and the market has taken note of this.	16:24
	Well, that explains it very well why the market	16:26
	should wander downward.	16:30
	Why shouldn't have done it faster and even more?	16:32
	Well, a couple of bullish factors.	16:36
	One, there is the problem of peace.	16:38
	The market seems to be a dove.	16:42
	A Time magazine picked up an image that I mentioned	16:45
	to one of the interviewers of the bullish dove,	16:50
	or devilish bull and showed a picture in a recent issue	16:53
	of a bull with wings.	16:57
	The prospect of peace has been a factor which has kept	17:03
	the market up.	17:06
	But of course you can form your own judgment	17:07
	as to how much near we are two piece.	17:10
	I think myself that president Nixon is smart enough	17:12
	to realize that this is a losing war	17:16
	and that he's going to cut his losses one way or the other	17:18
	and that the market probably will keep	17:21
	this in the back of its mind.	17:25
	The second bullish factor is inflation itself.	17:27
	If the country is going to the dogs	17:34
	because inflation is snowballing,	17:35
	that doesn't make cash very attractive.	17:38
	And although equities are not all that lovely	17:40
	under the circumstances that were describing,	17:46
	they're better than cash.	17:47
	Equities, of course, are great as an inflation hedge	17:50
	if it's the old fashioned kind of demand pull inflation	17:53
	but if you are getting cost push,	17:56
	and I think that this year we're getting a good deal	17:59
	of wage cost push,	18:01
	We're getting way to settlements	18:03
	of nine and 10% in some cases.	18:05
	This is the inheritance of past demand pull inflation.	18:06
	Such an inflation is not all that good for profits.	18:10
	But what can you do	18:14
	if you've got to put your money somewhere?	18:15
-	Professor Samuelson, another subscriber writes and asks,	18:17
	we enjoyed your first tape commenting	18:20
	on what is scientifically known about the stock market	18:22
	and look forward to its continuation.	18:25
	Is there any chance that you would comment on the scientific	18:27
	knowledge known about commodity markets	18:30
	and commodity trading?	18:32
-	I haven't too much time left today.	18:33
	but let me begin on this matter.	18:36
	Most of the large brokerage concerns belong	18:40
	to the Board of Trade into various markets	18:44
	and to exchanges and so your friendly customers man	18:46
	will not only take an order from you to buy a stock	18:50
	or to buy a bond, or to sell a stock short	18:54
	but he will also take an order from you,	18:57
	to buy a contract in pot bellies, or in the Platinum,	19:01
	or in silver, or with equal equanimity,	19:05
	he will take a contract from you to sell silver,	19:09
	to sell soybean meal and so forth.	19:13
	Now, obviously, most of the customers of these	19:16
	brokerage houses have nothing to do with the milling	19:20
	industry or the farming industry or the potato industry.	19:25
	They are not grinders of wheat into flour,	19:29
	rather, they are people with sporting blood,	19:34
	who see that there's a lot of action up and down	19:38
	in the commodities and for them, for many of them,	19:41
	I think it can be said that it is a casino.	19:43
	It's the a licensed way to gamble.	19:48
	Now, I can't say this with complete certainty,	19:53
	because we don't have a great deal of information	19:57
	about these matters,	20:00
	we don't have something like the SCC,	20:01
	which gathers so much in the way of statistics	20:04
	and requires so much in the way of reports	20:07
	from the securities industry.	20:09
	We do have regulation by various commodity agencies,	20:11
	they will, for example, require you if you are a hedger	20:16
	to make that clear.	20:21
	If you take position of beyond a certain amount	20:23
	that has to be reported, this is protection against coners.	20:27
	Those of you who read Frank Norris's great novel,	20:31
	The Pit, the story of a coner,	20:37
	early in the century of the Chicago Board of Trade	20:40
	that week market will know what the old fashioned	20:43
	manipulation of commodity markets was like.	20:46
	Well, there isn't too much of that today I think.	20:50
	Well, as I say the little we know about this	20:53
	scientifically is amazing.	20:57
	I've seen a number of studies and where	21:00
	do they get their raw material?	21:04
	For example, is it true that little people losing	21:05
	in the commodity market?	21:08
	I think that the evidence points in that direction.	21:09
	But we do not have comprehensive evidence,	21:14
	we get evidence from samples of the following sort.	21:17
	A particular large brokerage house failed	21:21
	before World War II.	21:25
	And so it's records became available to researchers.	21:27
	I have seen and learned journals a number of articles	21:31
	doing a post mortem on how the customers of that house did.	21:34
	Now the economist who wrote these articles say in footnotes,	21:38
	we are assuming that this sample from this brokerage house	21:43
	is typical of the universe of all speculators.	21:48
	And if that assumption is wrong,	21:52
	you the reader must take into account	21:54
	the bias that's been imparted by our selection.	21:56
	Well, what are we to think?	22:00
	I think it is a bias, because it is the experience	22:02
	of anyone who has observed the brokerage business	22:06
	that the customers man is more than a conduit.	22:10
	He is more than an order boy who was conveying	22:14
	the buy and sell orders of the customer	22:17
	who is a sovereign customer.	22:20
	Quite the contrary, most small people in the stock market	22:23
	and most small people certainly in the commodity market,	22:29
	are in fact taking their cue on whether to buy soybeans	22:31
	or whether to sell soybeans from the customers man himself.	22:35
	And so if this brokerage has failed,	22:39
	I think it is a fair thing to assume	22:42
	that its customers did not do as well as the customers	22:45
	of houses that did not fail.	22:50
	There was a so to speak a correlation between the fate	22:52
	of the brokerage house and the fate of the customers	22:56
	and you must take that into account.	22:59
	Well, to go on to what is known scientifically,	23:02
	there are lots of informed people as well	23:06
	as uninformed people who are scrutinizing the weather	23:09
	in Kansas when the wheat crop is being planted,	23:12
	when the wheat crop is being harvested.	23:15
	Every day, there is a change in the quotation	23:18
	of Kansas City wheat.	23:22
	There is a change every minute and the marketplace	23:24
	brings together all these little bits of information.	23:28
	Now, I think it's fair to say that there is a Darwinian	23:31
	process of selection going on.	23:35
	If you find a man who has been in the commodity market	23:38
	speculating business steadily for 15 years,	23:41
	you are looking at a very sturdy Tiger	23:44
	who has survived in that jungle.	23:48
	Where a brokers customers are concerned in connection	23:52
	with stocks, if you take us an audit today,	23:55
	and 10 years from now, go back to that same broker,	24:01
	you will find a vast number of the same customers	24:03
	at a 10 year interval.	24:07
	Of course, some people change to other brokers,	24:10
	some people move, some people die.	24:12
	But there's a great continuity.	24:13
	I am convinced if the same thing could be done,	24:15
	although I can approve this, you will find that among	24:18
	those brokers who specialize in commodities,	24:21
	that it is a very changing group of customers	24:24
	who form the clientele.	24:28
	And that is because most of the people	24:29
	come into the into the commodity speculating activity,	24:33
	stay in for a little while, lose their $3,000 or 5000,	24:36
	$7,000 have learned a lesson at least for the moment	24:41
	and go out never to return.	24:44
	So the first thing that we know scientifically	24:47
	I believe about the commodities is,	24:49
	stay away from it unless you have some special knowledge.	24:51
	It is what economists call a zero sum game.	24:55
	When Peter plays with Paul,	25:01
	what Peter wins Paul loses.	25:03
	The stock market is not a zero sum game.	25:07
	Stupid suburban ladies who consult their horoscopes	25:11
	before their investment club makes their decisions	25:16
	can make money in the stock market.	25:19
	Every fool can make money in the stock market,	25:21
	if the country grows if the inflation takes place,	25:24
	because the total value of stocks rise.	25:27
	In fact, the proper way to appraise a person's performance	25:30
	is not where they lost money or not,	25:33
	but whether you made as much money as he should have made	25:35
	on the average.	25:38
	The stock market is not a zero sum game.	25:39
	Commodity markets by and large are the smart takeaway	25:42
	from the stupid and unless you are especially well informed,	25:46
	it's something to stay away from.	25:53
	Now in some future tape if I have a little more time	25:55
	I'd like to go into what we know about the random mark	25:58
	character of commodity prices.	26:02
	I'd like to say a few things about technical methods	26:04
	as against fundamental methods.	26:07
	And who knows, I might even say what in my judgment	26:10
	are the few ways that informed people	26:15
	can make money on the average in the commodity market,	26:18
	but certainly that's too tall in order for today.	26:22
-	Thank you Professor Samuelson.	26:25
	If you have comments, questions or suggestions	26:28
	write Instructional Dynamics Incorporated	26:30
	166 East superior Street, Chicago	26:33
	six, O, six, one, one.	26:36

Item Info

Title:

Tape 30 - America's balance of payments; stock market

Date:

1969

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

CC BY-NC 4.0

Rights Note:

This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0030
ref2199_xkd
samuelsonpaul
duke:325053
pstau001030
ark:/87924/r49883383
98ebacab-082d-4c3b-88cb-eae8403542ac

Permalink:

https://idn.duke.edu/ark:/87924/r49883383

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Tape 30 - America's balance of payments; stock market

Transcript

Item Info

Economists' Papers Archive

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