Tape 35 - Economics' credibility; forecast for 4th quarter
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| - | Hello, again, and welcome as Instructional Dynamics | 0:02 |
| brings you up to date in the latest developments | 0:05 | |
| in the economic field, with Doctor Paul Samuelson, | 0:07 | |
| professor of economics at MIT. | 0:10 | |
| This biweekly series is designed to broaden your knowledge | 0:13 | |
| in all phases of the economic world. | 0:16 | |
| Professor Samuelson, this is the week of September 15th. | 0:18 | |
| What are we gonna talk about this week? | 0:22 | |
| - | I had not realized how much economists | 0:23 |
| were believed in during the last dozen years or so. | 0:29 | |
| I say this because at the moment, | 0:35 | |
| it's quite obvious that economists are not believed in, | 0:38 | |
| and it's a refreshing difference to see in every newspaper | 0:42 | |
| and every brokerage letter, querying of some | 0:46 | |
| of the things that, in the past, the public took for granted | 0:51 | |
| that the doctors of philosophy in economics | 0:55 | |
| really knew their business, they could make forecasts | 0:57 | |
| about macroeconomics, and that they would always be right. | 1:00 | |
| But, in these new discussions, | 1:04 | |
| there is beginning to be a question | 1:08 | |
| of whether the economists really do know very much, | 1:10 | |
| and I may say for one, I think this is | 1:14 | |
| quite an interesting development. | 1:17 | |
| So, let me comment and give some examples on this. | 1:20 | |
| I'm not interested in making any converts. | 1:24 | |
| I find this aspect of the problem a little bit amusing, | 1:27 | |
| but I think it can be useful because I'm sure | 1:30 | |
| there will be some listeners to these tapes who, | 1:32 | |
| in some measure, share the doubts | 1:37 | |
| that are expressed in these brokerage letters. | 1:40 | |
| I have in front of me the September 1969 | 1:45 | |
| monthly investment letter of Hayden Stone. | 1:49 | |
| Hayden Stone is one of the large, | 1:52 | |
| well known brokerage concerns, and for quite a while, | 1:54 | |
| Louis Stone, I believe it is, has been sending me, | 2:00 | |
| I've been on a mailing list, of the monthly letter. | 2:05 | |
| It's a letter which gives comments on one or two stocks. | 2:09 | |
| For example, the Lerner stores are mentioned at the end | 2:12 | |
| of the letter, and the train company is mentioned at the end | 2:14 | |
| of the letter, but primarily, it's a discussion | 2:18 | |
| on the passing economic scene. | 2:21 | |
| I may say I don't know Mister Stone, | 2:25 | |
| but I'm very grateful to be on his mailing list. | 2:28 | |
| He starts out, actually, with a quotation, | 2:32 | |
| which I recognize to be from Shakespeare: | 2:34 | |
| "A plague on both your houses," spoken by Mercutio. | 2:37 | |
| Let me quote the first paragraph. | 2:42 | |
| "The previous administration tried | 2:46 | |
| "to cure poverty through inflation. | 2:47 | |
| "The present administration is trying | 2:50 | |
| "to cure inflation through recession. | 2:52 | |
| "In our opinion, both procedures are wrong, | 2:54 | |
| "partly because they won't work, | 2:57 | |
| "partly because in each case, | 2:59 | |
| "the cure is worse than the disease. | 3:00 | |
| "Despite the increasing monetary restraint, | 3:02 | |
| "consumers prices are still going up | 3:05 | |
| "at a six percent plus annual rate. | 3:07 | |
| "Raw material prices rose 10% in the first half, | 3:09 | |
| "and labor costs rose at a 7.9% annual rate | 3:12 | |
| "against six percent in the first half of 1968. | 3:17 | |
| "The economist will still prate about | 3:20 | |
| "the eventual effects of tight money. | 3:23 | |
| "When is eventual?" | 3:26 | |
| Well, I could go on here. | 3:28 | |
| It's not clear exactly what | 3:32 | |
| Mister Stone's own prescription would be. | 3:35 | |
| What I discern that he would like | 3:44 | |
| to have productivity increase, | 3:46 | |
| and I would discern that he is not in agreement | 3:49 | |
| with those monetarists who think that the Federal Reserve | 3:52 | |
| has been overdoing it in the tightness. | 3:56 | |
| In fact, the view that I read | 3:59 | |
| into this particular commentary | 4:02 | |
| is that there should be even more tightening | 4:06 | |
| by the Federal Reserve, and that | 4:09 | |
| that tightening by the Federal Reserve, | 4:11 | |
| for political reasons, is very unlikely to come. | 4:13 | |
| In fact, let me read one more quotation | 4:18 | |
| from the Hayden Stone monthly letter. | 4:22 | |
| "In the face of all these dire predictions of recession, | 4:25 | |
| "et cetera, we believe that the Federal Reserve's | 4:29 | |
| "monetary policy will not prove over a period | 4:32 | |
| "to have been unduly restrictive, and that it | 4:35 | |
| "will not bring on a recession. | 4:37 | |
| "We also believe that the proposed tax surcharge | 4:39 | |
| "will not prove to have any significant effect | 4:42 | |
| "on the rising total of consumer demand, | 4:44 | |
| "and that price inflation will continue to accelerate. | 4:47 | |
| "We seriously doubt that the administration | 4:50 | |
| "could force a real recession, even if it wanted to, | 4:53 | |
| "so long as war, welfare, and labor demands | 4:56 | |
| "continue their present inflationary force in the economy." | 4:59 | |
| Well, my point in bringing this up is not to criticize it. | 5:04 | |
| I think it represents a view that quite a number | 5:09 | |
| of people in Wall Street are beginning to have. | 5:12 | |
| I think it's wrong. | 5:17 | |
| I think that if Mister Stone were living in an urban ghetto, | 5:19 | |
| he would not be so confident that a real recession | 5:24 | |
| could not be brought on by bungling Washington policy. | 5:30 | |
| It's not clear exactly how he would define | 5:36 | |
| a real recession, but if we talk about a retardation | 5:38 | |
| in the rate of growth of the GNP, | 5:45 | |
| with some increase in slackness of the labor market, | 5:48 | |
| then I don't believe that a jury of trained analysts | 5:51 | |
| is likely to come out in majority for the view | 5:59 | |
| that the American economy is recession proof. | 6:02 | |
| On the contrary, we had, in the 1950's, | 6:05 | |
| very strong labor demands, just of the sort | 6:10 | |
| that are mentioned here, and we were able to contrive | 6:12 | |
| the worst of all possible worlds. | 6:16 | |
| I'm now referring to the period 1957 and 1958. | 6:18 | |
| We had inflation along with recession, | 6:21 | |
| and I mean recession by anybody's test. | 6:25 | |
| Not a mini-recession, but an ordinary | 6:28 | |
| full-fledged National Bureau recession. | 6:31 | |
| Of course, I don't mean by that, a depression. | 6:33 | |
| To go on, though, to the particular therapy | 6:40 | |
| which I believe this commentary approves, | 6:44 | |
| and which seems to be similar to something | 6:51 | |
| that I was reading from the pen of Pierre Rinfret. | 6:54 | |
| Pierre Rinfret, you know, was an advisor | 7:00 | |
| of candidate Richard Nixon, | 7:04 | |
| and president elect Richard Nixon. | 7:08 | |
| For all I know, he's still an informal advisor | 7:11 | |
| of the president in the White House. | 7:15 | |
| A president has many advisors. | 7:17 | |
| He has criticized, though, the current Nixon crew, | 7:19 | |
| regarding them as a bunch of stable bums | 7:23 | |
| who haven't handled the economy at all properly, | 7:26 | |
| and in particular, just to give an example, | 7:30 | |
| he is very critical of the suspension | 7:33 | |
| of the Investment Tax Credit. | 7:35 | |
| According to Mister Rinfret, | 7:37 | |
| the way to cure inflation is by increasing production. | 7:38 | |
| The way to get extra production is by having | 7:41 | |
| new and clever machinery and plants, equipment, | 7:43 | |
| and the Investment Tax Credit was a way of getting you | 7:50 | |
| nearer to the day when you had that better equipment, | 7:54 | |
| which would pour goods out on the market. | 7:57 | |
| Well, it's in the same vein that the quotation is made | 7:59 | |
| in the Hayden Stone letter from Mister Robert C. Tyson, | 8:03 | |
| chairman of the finance committee of US Steel. | 8:07 | |
| And, I quote Mister Tyson: | 8:11 | |
| "Our advantage in productive efficiency | 8:15 | |
| "would be further jeopardized by the threatened repeal | 8:17 | |
| "of the Investment Tax Credit, | 8:20 | |
| "and by other features in the Tax Reform Bill of 1969, | 8:22 | |
| "just passed by the House. | 8:26 | |
| "This bill involves direct tax relief | 8:27 | |
| "for individual consumers, but also involves | 8:29 | |
| "many so-called tax reform provisions, which in effect, | 8:32 | |
| "partially pay for this tax relief. | 8:34 | |
| "Many of these reforms, principally against corporations, | 8:37 | |
| "would be detrimental to productive saving and investment, | 8:40 | |
| "detrimental to capital formation and economic development." | 8:43 | |
| He goes on: "Wage or cost-push inflation | 8:47 | |
| "is adding to America's international disadvantages, | 8:50 | |
| "simultaneously putting upward pressure on prices | 8:53 | |
| "and downward pressure on profit margins. | 8:56 | |
| "I submit that there can be no significant slow down | 8:58 | |
| "in inflation until these twin pressures | 9:01 | |
| "of cost-push are alleviated. | 9:03 | |
| "I doubt whether cost-push inflation can be slowed down | 9:05 | |
| "by temporary tight money and tax surcharges alone. | 9:08 | |
| "Indeed, wage-push inflation seems to have speeded up | 9:11 | |
| "in the face of monetary and fiscal restraints, | 9:15 | |
| "and all these pressures can only lead to a profit squeeze, | 9:17 | |
| "which, if prolonged, breeds recession and unemployment. | 9:21 | |
| "Let us never lose sight of the fact that if we are | 9:26 | |
| "to have continuing development, this nation must stop | 9:29 | |
| "discouraging the expansion of capital formation. | 9:32 | |
| "Rising private investment is the key | 9:35 | |
| "to economic development. | 9:37 | |
| "More money at work means more people at work. | 9:38 | |
| Now, if this view is correct, we should feel unhappy | 9:42 | |
| that the latest survey of businessmen's plant | 9:46 | |
| and equipment investment intentions | 9:50 | |
| showed a decline in its rate of increase. | 9:53 | |
| We should have felt happy when, earlier in the year, | 9:57 | |
| it turned out that we were in the middle of a vast | 10:03 | |
| investment equipment boom. | 10:06 | |
| You remember the figures first were 13% higher | 10:08 | |
| than the previous year. | 10:12 | |
| The system really wasn't even capable | 10:13 | |
| of filling that demand, and in the event, | 10:14 | |
| it now appears that we're going to have | 10:17 | |
| something like 10 or 11%. | 10:20 | |
| Here, we have something that the analyst | 10:23 | |
| has to be very careful about. | 10:26 | |
| It's a matter of timing. | 10:28 | |
| Of course, new plant and equipment, when it is finished, | 10:29 | |
| when it is onstream, will help to curb | 10:35 | |
| some future inflation, but if you add to the bottlenecks, | 10:40 | |
| if you add to the back logs, | 10:44 | |
| if you add to the queues, | 10:46 | |
| if you add to the pressure against capacity | 10:47 | |
| in the machinery industries, | 10:50 | |
| now, in the attempt at some future date | 10:53 | |
| to have more equipment, you are paying in present inflation | 10:56 | |
| for the release, which may come later. | 11:00 | |
| And, the question that the administration has asked, | 11:03 | |
| and I think it's very good one. | 11:06 | |
| You know I'm not a spokesman for administration economics, | 11:07 | |
| but I call the shots as I see them. | 11:11 | |
| I think that the quickening of the prices, | 11:14 | |
| which all of these gentlemen comment is such | 11:18 | |
| that it is just not proven policy to add more demand | 11:21 | |
| in the investment sector just because at some later date, | 11:26 | |
| we will get some relief for the handling | 11:30 | |
| of future inflation. | 11:34 | |
| At the moment, the most serious problem of inflation | 11:35 | |
| is the current inflation, and the inflation in prospect. | 11:39 | |
| Let me go on to say that there's a great deal of evidence, | 11:44 | |
| it goes under the heading of arguments | 11:46 | |
| about the Phillips curve, that wage-cost push | 11:49 | |
| is not something that is unilateral, and is unexplainable, | 11:52 | |
| and is just due to the labor sector. | 11:58 | |
| Mister Tyson's industry did not face as much wage-cost push | 12:01 | |
| in the early 1960's as it will face next year, | 12:06 | |
| I can assure you, and the reason for that is | 12:09 | |
| that by not limiting the aggregate of spending, | 12:12 | |
| by not holding back on the investment boom, | 12:18 | |
| which has caused prices to rise in those sectors, | 12:22 | |
| we have had in being, for two, three, four years now, | 12:25 | |
| an increase in inflation, | 12:30 | |
| an increase in inflation expectations, | 12:32 | |
| and this has seeped down to the union leaders | 12:34 | |
| at the United Steel Workers. | 12:37 | |
| It has seeped down to the rank and file. | 12:40 | |
| It will affect the men whom another vice president | 12:42 | |
| at US Steel, is going to have to sit across | 12:48 | |
| the bargaining tables from in the next year. | 12:51 | |
| So, in my own writings, I've been warning now | 12:55 | |
| for a couple of years, if the proper macro fiscal | 12:58 | |
| and monetary policies are not put in with the proper dosage, | 13:04 | |
| the demand pull inflation of one period | 13:07 | |
| will be followed by the wage-cost push inflation | 13:10 | |
| of the later period, and we can very well find ourselves | 13:14 | |
| in the worst of two possible worlds: | 13:17 | |
| inflation, along with a slow down | 13:20 | |
| and retardation of real growth. | 13:24 | |
| Well, how is the actual economy behaving | 13:27 | |
| as we turn from ideology to actual fact? | 13:30 | |
| As far as I can see, the economy is developing, | 13:36 | |
| according to the same, slow motion scenario | 13:41 | |
| that we've been talking about now | 13:45 | |
| for three, four, and actually, for more than six months. | 13:47 | |
| The rate of real growth that is taking place | 13:51 | |
| in the GNP is definitely slowing down. | 13:55 | |
| It was slower in the first two quarters of the year | 14:00 | |
| than a year earlier. | 14:04 | |
| It was slower in the second quarter | 14:05 | |
| than in the first quarter. | 14:06 | |
| It looks to be a bit slower in the third quarter, | 14:07 | |
| and almost all of the serious estimates | 14:11 | |
| that are in numerical terms, whether by monitorists, | 14:14 | |
| or whether by GNP model builders, | 14:18 | |
| show as we move into the end of the year, | 14:22 | |
| a further slowing down in real growth. | 14:25 | |
| Most of them, optimistically, show belatedly, | 14:28 | |
| a beginning to get some relief in the price index numbers. | 14:34 | |
| Here, I'm not so sure. | 14:40 | |
| I think that the only plausible expectation, | 14:42 | |
| if money GNP, having grown 16 billion in the second quarter, | 14:46 | |
| and growing again by something like 15 billion | 14:53 | |
| in the third quarter, a lot of that being due | 14:56 | |
| to the huge governmental pay increase, | 14:58 | |
| it's not that this was such a huge thing, | 15:02 | |
| but given that it's all put in one month, | 15:05 | |
| the way we handle our GNP deflator, | 15:07 | |
| it will bulk very large in the third quarter figures. | 15:10 | |
| Given that 15 billion, I would suppose | 15:16 | |
| that the conventional wisdom is forecasting | 15:19 | |
| for the fourth quarter money GNP increases | 15:25 | |
| of anywhere from 11 billion dollars | 15:29 | |
| to 16 or 17 billion dollars. | 15:33 | |
| If we are around 12 billion, | 15:41 | |
| which is sort of a fashionable figure. | 15:44 | |
| I've actually widened that because it seems to me | 15:46 | |
| that you should, in your forecasting, | 15:48 | |
| this is a bit of wisdom, assume continuity. | 15:51 | |
| Always assume that things will change, | 15:55 | |
| but they won't change fast, | 15:58 | |
| and if somebody tells you they're going to change very fast, | 16:00 | |
| then say you're probably right, | 16:02 | |
| but then shade his estimates. | 16:04 | |
| I say this, not if you wanna make a reputation | 16:07 | |
| for yourself as a flashy journalist, | 16:09 | |
| or for the economist who is right when everybody else | 16:12 | |
| was wrong, but if you're a serious journeyman, | 16:15 | |
| and you're gonna penalize yourself | 16:18 | |
| for every billion dollar error you make, and perhaps, | 16:19 | |
| you're gonna penalize yourself a lot more | 16:22 | |
| for big errors than for small errors, | 16:25 | |
| say using these squares as your criteria, | 16:27 | |
| then the smoothing that I'm advising, | 16:29 | |
| I've found from bitter experience, is very valuable. | 16:31 | |
| So, I've widened the limit from 11 to 17 billion, | 16:35 | |
| but I'm gonna talk about what most people are talking about, | 16:41 | |
| that the money GNP will only grow in the fourth quarter | 16:44 | |
| about 12 billion and then, the first quarter of next year, | 16:49 | |
| perhaps not grow not quite as much as that. | 16:52 | |
| Well, now most of the analysts who say this | 16:56 | |
| also make a forecast of what's going to happen | 17:00 | |
| to the rate of increase in prices, and I will now confine | 17:04 | |
| my remarks, not to wholesale prices, not to food prices, | 17:08 | |
| which, of course, are volatile, | 17:11 | |
| nor to the consumer price index, | 17:13 | |
| but to the price index which is used | 17:15 | |
| for all GNP calculation, | 17:17 | |
| the so-called implicit price deflator. | 17:19 | |
| That deflator, in the current quarter, | 17:23 | |
| must certainly have been sent up significantly | 17:26 | |
| above five percent by the government increase. | 17:30 | |
| Let's say, without the government increase, | 17:33 | |
| there would've been five percent, | 17:34 | |
| I'm speaking in very round terms, | 17:37 | |
| with the government increase, it's perhaps 5.3 or 5.4%. | 17:39 | |
| It would be natural enough, then, in the fourth quarter, | 17:44 | |
| to get rid of that government increase | 17:47 | |
| that is the extraordinary part of it, | 17:50 | |
| go back to five percent, and since the economy is weakening | 17:51 | |
| a bit, to take a little something away from it again, | 17:54 | |
| and almost everybody does. | 17:58 | |
| I say almost everybody, but in Washington, | 18:00 | |
| you can usually find one chap who disagrees with the other, | 18:02 | |
| and many of you will have seen in the newspapers | 18:06 | |
| just a couple weeks ago, I guess it was, | 18:10 | |
| that assistant secretary Chartner, in his swan song | 18:13 | |
| from the government, he was a holdover | 18:17 | |
| from the Democratic Johnson administration | 18:19 | |
| and has gone back to Goldman Sachs. | 18:23 | |
| I believe I'm right in that. | 18:26 | |
| In his final speech, his epilogue, | 18:27 | |
| he said that he did not buy the notion | 18:33 | |
| that inflation was over and was slowing down. | 18:36 | |
| He expected the economy to be strong | 18:39 | |
| all the rest of 1969, at least. | 18:42 | |
| I believe that Mister Chartner had a certain success | 18:46 | |
| in departing from the conventional wisdom | 18:50 | |
| in the middle of 1968, he's now going for double or nothing, | 18:52 | |
| and is trying his luck again by standing out | 18:56 | |
| from the conventional standard forecast. | 19:02 | |
| Well, how is Mister Chartner likely to end up? | 19:06 | |
| We won't know until the year's end, and if he's wrong, | 19:10 | |
| everybody will have forgotten that he's wrong. | 19:15 | |
| At least, most people not in the business | 19:18 | |
| will have done so. | 19:20 | |
| Let me address myself to that question. | 19:22 | |
| If he is saying that the rate of price increase | 19:28 | |
| will stubbornly stay high, then I don't think | 19:33 | |
| there can be much argument. | 19:38 | |
| I think that he's going to be right, and I think, actually, | 19:39 | |
| if put in exactly those terms, most people whom you ask | 19:44 | |
| who have studied the matter will agree. | 19:48 | |
| If he says that not only will the rate of price increase | 19:52 | |
| stay high, but as the Hayden Stone letter | 19:56 | |
| that I quoted from you suggested, | 19:59 | |
| that the real economy will also be ragingly strong, | 20:02 | |
| then I think that in this departure | 20:08 | |
| from the conventional wisdom, | 20:12 | |
| Mister Chartner is likely be wrong. | 20:14 | |
| I don't say he's certain to be wrong | 20:17 | |
| 'cause nothing is certain in this matter, and I, myself, | 20:18 | |
| as I've just said a moment ago, | 20:21 | |
| put a little bit greater probability that will exceed | 20:23 | |
| the fashionable wisdom, then we will fall short of it, | 20:28 | |
| and so, he has a good sporting chance | 20:31 | |
| that he might inadvertently, so to speak, be almost right. | 20:34 | |
| But, now, let's get down to not fun and games, | 20:42 | |
| but actual detailed estimating of how much | 20:45 | |
| the rate of inflation will attenuate. | 20:50 | |
| Now, I have seen arguments showing that by the end | 20:54 | |
| of the year, the GNP deflator, which as I've said, | 20:58 | |
| we now have to think of as about five and a third percent | 21:01 | |
| per year, will be down to levels like four percent. | 21:03 | |
| I don't think anybody, anymore, uses the figure that you | 21:09 | |
| remember Arthur Burns used on Meet the Press | 21:13 | |
| or some such TV program, in which he said | 21:17 | |
| by the end of the year, with a little luck, | 21:20 | |
| the rate of price inflation will be down | 21:22 | |
| below three percent, but we didn't have | 21:25 | |
| that kind of luck and nobody is saying things | 21:27 | |
| like that out of Washington. | 21:31 | |
| But, can we get down from five and a third percent | 21:34 | |
| to four percent, to below four percent, | 21:40 | |
| as some of the estimates are showing, | 21:48 | |
| as we hear New Year's Eve bells next December 31st? | 21:48 | |
| It's possible. | 21:56 | |
| There are two particular places where you might get relief. | 21:58 | |
| Food prices have been very high and have been rising. | 22:03 | |
| Now, we've been assured by experts, | 22:06 | |
| we've heard this story so many times, | 22:09 | |
| but they're gonna be right sometime, | 22:11 | |
| that some relief in food prices is appearing just ahead. | 22:13 | |
| Even if food prices don't go down much, | 22:21 | |
| if they just stop growing as fast, | 22:25 | |
| that will cut down on the rate of increase, | 22:27 | |
| which is what I'm talking about, | 22:29 | |
| so I put down on my scorecard, | 22:30 | |
| that food prices are probably a favorable factor | 22:33 | |
| for bringing down somewhat the rate of increase | 22:37 | |
| in prices in the GNP deflator. | 22:41 | |
| Then, there's the problem of mortgages. | 22:44 | |
| The interest you pay on your mortgage is a considerable item | 22:48 | |
| in your annual cost of living, | 22:51 | |
| and that item has been going up | 22:53 | |
| because the mortgage rates have been going up. | 22:56 | |
| It doesn't really matter whether money eases off a bit. | 23:00 | |
| There's gonna be a period of time in which | 23:05 | |
| longterm mortgage rates, newly issued, | 23:07 | |
| are gonna be catching up with the previous increase | 23:10 | |
| in money rates, and so, we can't really expect much | 23:14 | |
| of a reduction in longterm mortgage rates. | 23:19 | |
| However, remember, we're talking about the rate of increase | 23:22 | |
| in prices, and we can hope that longterm mortgage rates | 23:24 | |
| will stop rising at the previous rates, and this, too, | 23:30 | |
| along with food, will give us some relief. | 23:32 | |
| Industrial prices have been behaving pretty well. | 23:38 | |
| That'll be part of the profit squeeze that I think is about | 23:41 | |
| to develop and is already developing, | 23:44 | |
| so you'll get a little improvement there, | 23:47 | |
| but having said that, it seems to me | 23:50 | |
| almost all the other components will be very sluggish, | 23:52 | |
| even to decelerate very much, and so, I'm taking | 23:57 | |
| all these fashionable estimates that come over my desk | 24:01 | |
| and where the price deflator column is concerned, | 24:04 | |
| I'm writing up most of those figures. | 24:10 | |
| Now, the big question is, when I've done that, | 24:12 | |
| should I then write down the rate of real increase | 24:15 | |
| that these same forecasts envisage, or should I write up | 24:20 | |
| the rate of money increase that these forecasts envisage? | 24:24 | |
| I suppose something of both, but I suspect that a good deal | 24:27 | |
| of it has to go into the money increase | 24:31 | |
| that these forecasts are envisaging, and so, | 24:35 | |
| when I get the Wharton School Model, | 24:38 | |
| when I get other machine models, which show a decline in ... | 24:41 | |
| A definite, strong slow down in money GNP in the middle | 24:50 | |
| of the year, I must say that I shade these figures upward. | 24:55 | |
| I not only make the average figure in my own mind higher, | 24:59 | |
| but I think I could be wrong two ways, | 25:02 | |
| which way am I likely to be wrong? | 25:05 | |
| And, I think I'm more likely to be wrong as everybody | 25:07 | |
| has tended to be wrong, almost everybody, | 25:11 | |
| for many quarters now, by underestimating | 25:14 | |
| the money strength of the economy. | 25:18 | |
| This takes me to two big questions. | 25:23 | |
| I'd like to discuss in these tapes, | 25:26 | |
| the questions that are thrown at me most often | 25:29 | |
| as I meet analysts, as I meet the business groups, | 25:31 | |
| business people, and the people | 25:37 | |
| whom I talk to on the telephone. | 25:38 | |
| There's the perennial question, which we've been batting | 25:41 | |
| around all the time: has the turn come | 25:44 | |
| in the longterm bond market? | 25:46 | |
| I know a Texas speculator who's very active | 25:48 | |
| in speculation of all sort, and he told me | 25:53 | |
| that on the basis on all that he's heard, | 25:57 | |
| he is now as a trader, in the longterm bond market. | 26:01 | |
| He's buying bonds for a six month and a day play, | 26:05 | |
| and if the tax laws change to 12 month and a day play, | 26:10 | |
| then he thinks that he'll make money on a one year basis. | 26:15 | |
| I think with some confidence that one year from today, | 26:23 | |
| bond yields will be lower than they are today. | 26:28 | |
| So, anyone who at this moment, goes in to | 26:31 | |
| the longterm government bond market, | 26:34 | |
| and buys bonds judiciously will find that he has | 26:36 | |
| a capital game a year from now. | 26:43 | |
| I can't be sure of that because a year from now | 26:45 | |
| is a long time away, and there's a lot of noise | 26:46 | |
| in the system, but the reasons for it, you've all heard, | 26:49 | |
| and you've all read in the newspapers, | 26:54 | |
| that by a year from now, there should have been intervened | 26:56 | |
| a period of slow down and less inflation, | 27:02 | |
| and with less inflation, there needs to be built | 27:04 | |
| into the interest rate structure | 27:07 | |
| a little bit less premium for the price change. | 27:09 | |
| But, it's quite another thing to say that I could encourage | 27:14 | |
| at this point a trader to go in | 27:17 | |
| because the trader has to ask himself this question. | 27:20 | |
| He's got a lot of uses for his money. | 27:23 | |
| He goes in on borrowed money, typically, | 27:25 | |
| with very great leverage. | 27:27 | |
| It isn't enough always, for him | 27:29 | |
| to be right on a year's basis. | 27:31 | |
| What he has to be right on, is on a two month basis. | 27:33 | |
| And, I must say, that my vacillation | 27:37 | |
| before becoming enthusiastic, as so many people | 27:40 | |
| in Wall Street, Henry Kaufman, of Salomon Brothers, | 27:45 | |
| for example, whom I've quoted before, who have said, | 27:49 | |
| now for many months that the turn was here, | 27:52 | |
| I think that anyone who dragged his heels and vacillated, | 27:56 | |
| still will not hate himself when he looks in the mirror | 28:00 | |
| because, I'll give an example, | 28:04 | |
| and I'll have to close because I haven't much time. | 28:06 | |
| I spoke to somebody in the money lending business | 28:09 | |
| one of the big commercial financial houses, | 28:12 | |
| lends to consumers, it lends on durables, | 28:17 | |
| it lends to business, it factors. | 28:19 | |
| And, the chap I spoke to said, | 28:21 | |
| when I went out to my anteroom in June, | 28:24 | |
| there was a long line of people waiting for money. | 28:27 | |
| I examined him very carefully and they tended to be | 28:30 | |
| takeover people and so forth. | 28:32 | |
| He said, I went out the other day. | 28:35 | |
| The line is even longer, and this time, | 28:37 | |
| there are the most respectable corporate executives | 28:40 | |
| I've ever seen. | 28:42 | |
| They're trying to get money from me above the prime rate. | 28:44 | |
| They're begging me for it. | 28:47 | |
| I don't see any abatement yet. | 28:50 | |
| I think the Federal Reserve policy of the past | 28:51 | |
| is tightening, and that the moment there's any easing | 28:54 | |
| at all, the calendar of bonds is going to increase | 29:01 | |
| very rapidly, and so, I'm now quoting this vice president. | 29:05 | |
| If I had to talk to a traitor, I would say he's | 29:10 | |
| taking quite a chance to jump the gun | 29:12 | |
| and think that in the next two months, | 29:15 | |
| things won't get worse as far as bond prices are concerned | 29:17 | |
| before they get better. | 29:21 | |
| - | Thank you, Professor Paul Samuelson. | 29:23 |
| Instructional Dynamics welcomes your questions, | 29:25 | |
| comments, or suggestions. | 29:28 | |
| Write IDI, 166 East Superior Street, Chicago, 60611. | 29:29 |
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