Tape 123 - More on the Dollar Crisis; the domestic outlook
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| Announcer | Welcome once again as MIT professor | 0:02 |
| Paul Samuelson discusses the current economic scene. | 0:04 | |
| This biweekly series is produced | 0:07 | |
| by Instructional Dynamics Incorporated. | 0:08 | |
| This program was recorded March 8th. | 0:11 | |
| - | [Professor Samuelson] I've had to say | 0:14 |
| a great deal about the currency crisis, | 0:15 | |
| and one would have thought that, perhaps, | 0:18 | |
| by this time it would be over | 0:20 | |
| and one can move on to other matters. | 0:21 | |
| Well, as you know, the 10% devaluation | 0:25 | |
| of President Nixon didn't clear the air. | 0:28 | |
| The floating upward of the Japanese yen | 0:33 | |
| by another 15% plus didn't satisfy the speculators. | 0:35 | |
| The speculators turned, among other things, | 0:41 | |
| away from all currencies and toward | 0:44 | |
| the free gold and bid the price of it way, way up | 0:47 | |
| with the result that there still is a great deal of doubt. | 0:53 | |
| Now I don't think since at the moment that I'm speaking, | 0:56 | |
| we have to be in a position of waiting. | 1:00 | |
| I don't think that I should spend very much time | 1:03 | |
| in speculating on what we'll all know next week. | 1:07 | |
| My guess, just for what it's worth, | 1:11 | |
| is that, as I speak on March 8th, | 1:17 | |
| I can't expect that next week we'll | 1:22 | |
| go back to business as usual at | 1:24 | |
| parities all around those | 1:27 | |
| close to what President Nixon | 1:32 | |
| left us with some twenty-odd days ago. | 1:35 | |
| In other words I don't believe that | 1:39 | |
| the lack of confidence has been now taken care of. | 1:41 | |
| What are the most likely patterns? | 1:46 | |
| Well there are two quite possible patterns. | 1:49 | |
| Most likely, it seems to me, is | 1:52 | |
| that the Germans will finally | 1:54 | |
| convince the French that the common market countries, | 1:55 | |
| at least in the short run, have to have | 1:59 | |
| a united front and float against the dollar. | 2:03 | |
| Now, to be sure, the British pound | 2:06 | |
| is not all that strong, and one would not | 2:10 | |
| be surprised if they didn't join | 2:12 | |
| enthusiastically in the common float | 2:14 | |
| at least at present parities. | 2:16 | |
| And the Italian lira is not out of the woods either. | 2:18 | |
| But I dare say those problems can be solved, | 2:20 | |
| and I guess if I had to bet my money, | 2:24 | |
| the most likely thing in a week or two | 2:27 | |
| would be that, at least for a short period of time, | 2:30 | |
| the continental countries of the common market will stop | 2:32 | |
| supporting the dollar, and the dollar | 2:37 | |
| will have to find it's own level. | 2:39 | |
| That's the meaning of the dollar's floating. | 2:40 | |
| Now I think that's a very good outcome. | 2:43 | |
| I don't know whether, if that should eventuate, | 2:45 | |
| that in the months ahead the dollar | 2:50 | |
| would float downward or would float upward. | 2:53 | |
| A lot of people, a lot of speculators, | 2:56 | |
| must think that the dollar is pretty sure to float downward, | 2:58 | |
| but there are a lot of reasons against that | 3:02 | |
| and one of the advantages of having the dollar float is | 3:05 | |
| that the price will move right now | 3:10 | |
| to separate the bulls and the bears | 3:12 | |
| and to make them about equal in number, | 3:14 | |
| and we can let the free market take care of that. | 3:16 | |
| Now there's another possibility. | 3:22 | |
| Namely, the solution along the lines | 3:25 | |
| that the French undoubtedly have been wanting | 3:27 | |
| and which the Germans have been resisting. | 3:30 | |
| Because they couldn't agree with each other, | 3:32 | |
| it's cost the German treasury billions and billions | 3:35 | |
| of paper marks in order to take over paper dollars. | 3:38 | |
| And I don't think there's any doubt that the German | 3:44 | |
| government is gonna take a loss on | 3:46 | |
| a lot of those paper dollars, | 3:48 | |
| so it' been an expensive decision. | 3:50 | |
| But of course if you're in a common market | 3:52 | |
| you have to get along with your | 3:54 | |
| partner in that market who's just | 3:57 | |
| about as big and just about as politically | 3:58 | |
| powerful as you are and certainly is as stubborn as you are. | 4:00 | |
| I'm referring to the way the French | 4:05 | |
| must look to the Germans. | 4:06 | |
| Now the French undoubtedly would have said, | 4:09 | |
| Why don't you, in Germany, split the mark? | 4:11 | |
| Have a two-tier mark system? | 4:15 | |
| I'm not talking now of the two-tier gold system, | 4:17 | |
| but I am talking of the system which the French have | 4:20 | |
| and which the Belgians have and which | 4:22 | |
| quite a number of other countries in Europe have, | 4:24 | |
| whereby for ordinary commercial transactions, | 4:27 | |
| the parity of the dollar, | 4:31 | |
| as agreed upon after President Nixon's February 1973 | 4:34 | |
| 10% devaluation, is maintained and is supported | 4:39 | |
| within the widened bands of the IMF, | 4:44 | |
| 2 and 1/4% on each side of that parity. | 4:48 | |
| But as far as capital flight is concerned, | 4:51 | |
| know you wanna get your dollars out of the United States | 4:54 | |
| and into Germany, into marks, that's your business. | 4:59 | |
| You gotta find somebody who will | 5:03 | |
| make a deal with you because we in Germany, | 5:05 | |
| we the central bank, will not support that. | 5:07 | |
| The result undoubtedly then I think would be, | 5:10 | |
| where you have two kinds of currencies, | 5:13 | |
| almost by Gresham's Law, | 5:14 | |
| that the capital account German | 5:16 | |
| mark parity would slip downward. | 5:21 | |
| Now whether it would stay downward or not I can't say. | 5:24 | |
| You'll have to ask a successful speculator | 5:28 | |
| who's gonna turn out to be successful | 5:30 | |
| to give you the answer to what | 5:32 | |
| has not yet been determined in the present | 5:34 | |
| and must wait upon the future. | 5:36 | |
| Well I think that either of those solutions | 5:39 | |
| would not mean the end of the world, | 5:45 | |
| and I suspect that the first of those | 5:49 | |
| would make quite a lot of people happy, | 5:51 | |
| and I don't think that official | 5:53 | |
| Washington would be unhappy about it. | 5:55 | |
| Well let's turn from the international | 5:58 | |
| situation to the domestic situation. | 6:00 | |
| I'd like to comment on the strangeness of the present times. | 6:03 | |
| If you will talk to a bank economist | 6:10 | |
| or a corporation economist or | 6:12 | |
| an economist in one of our university research centers | 6:15 | |
| who has a computer model of the GNP, | 6:20 | |
| and if you ask him, "How's business, how are things?" | 6:24 | |
| He'll say, very likely, "Pretty well. | 6:27 | |
| "1972 was a great year of real growth, | 6:31 | |
| "and on the inflation front it was | 6:34 | |
| "rather surprisingly favorable. | 6:37 | |
| "1973 looks to be another great year on the | 6:42 | |
| "physical output growth side, | 6:46 | |
| "and, although we won't do as well | 6:50 | |
| "in terms of inflation as we did last year, | 6:52 | |
| "we're still not going to do very, very badly." | 6:55 | |
| Well those fellas have generally tended to be right. | 7:01 | |
| In fact they're more right than | 7:05 | |
| any other group that you can name. | 7:06 | |
| When you get somebody who espouses | 7:08 | |
| minority opinion and who tells you | 7:11 | |
| he's been right all the time, | 7:13 | |
| believe you me that if you had | 7:15 | |
| kept a little black book on him, | 7:18 | |
| on just what he said over the years, | 7:20 | |
| and I don't care who the well-known | 7:23 | |
| publicists in these matters are that you consider, | 7:27 | |
| I've kept book on most of them, | 7:31 | |
| and I can assure you that your mean squared error | 7:33 | |
| from those fellas would be colossal. | 7:35 | |
| Well if everything's so rosy, | 7:40 | |
| as the consensus forecast seems to indicate, | 7:42 | |
| why is it that we're all so unhappy? | 7:45 | |
| Why is it that the stock market | 7:48 | |
| has been making such heavy weather? | 7:50 | |
| Why is it that if you go to a | 7:52 | |
| good New York luncheon club, and I don't care | 7:55 | |
| whether this is downtown or uptown, | 7:58 | |
| you will find a great amount of trepidation. | 8:00 | |
| This is so marked that I've just recently | 8:05 | |
| been writing a Newsweek column on the phenomenon. | 8:09 | |
| I entitled it What's Wrong? | 8:14 | |
| And I constructed a hypothetical, | 8:17 | |
| but I can assure you he's a very real fellow, | 8:20 | |
| but a hypothetical composite | 8:22 | |
| of the fears and preoccupations | 8:24 | |
| which a typical man in the financial | 8:27 | |
| community is feeling these days. | 8:31 | |
| And I put it in the form of a | 8:33 | |
| question and answer dialogue just like | 8:34 | |
| some of the question and answer dialogues | 8:37 | |
| that I've actually had to participate in. | 8:39 | |
| Now in 750 words of a Newsweek column | 8:46 | |
| I can barely scratch the surface. | 8:48 | |
| Let me try to dig deeper and | 8:49 | |
| to explain the points that are involved. | 8:52 | |
| In the first place a chap like this will say, | 8:56 | |
| "I just have an eerie feeling. | 9:00 | |
| "like that of the smarter people in 1928 or '29. | 9:04 | |
| "that maybe there's something very fishy. | 9:07 | |
| "Maybe there's something very wrong. | 9:10 | |
| "In fact, I'm filled with nameless dreads. | 9:12 | |
| "I get the impression when a stock in | 9:14 | |
| "a company that I see is doing great, | 9:17 | |
| "as a company is doing great, the earnings are doing great, | 9:19 | |
| "they live up to my forecast, and yet | 9:22 | |
| "I find I have a 50% loss in that stock, | 9:25 | |
| "I get kind of a feeling that somebody | 9:29 | |
| "knows something that I don't know, | 9:31 | |
| "and I'm just wondering what that could be." | 9:33 | |
| Well now my answer on such occasions is, | 9:37 | |
| I suppose a psychoanalyst might say the same, | 9:40 | |
| "Let's get it out on the table. | 9:44 | |
| "Let's give names to these nameless dreads of yours, | 9:46 | |
| "and let's just see whether they'll | 9:49 | |
| "stand up under the cold light of day." | 9:52 | |
| Well the first kind of argument | 10:02 | |
| that I'll hear is the following: | 10:03 | |
| Is the inflation a great deal worse really, | 10:09 | |
| looking ahead, than we've been led to believe? | 10:10 | |
| For example one man said to me that | 10:16 | |
| he keeps a little sample index number of futures prices: | 10:19 | |
| soybeans on the Chicago board | 10:24 | |
| of trade, copper, cotton, wool, silver. | 10:26 | |
| And he reported to me that his index number | 10:33 | |
| of those prices, staple prices, those are | 10:36 | |
| volatile, sensitive prices, is up 50% over a year ago. | 10:37 | |
| Just this morning as I came into my office | 10:42 | |
| I listened on the car radio to the | 10:46 | |
| official release of the new wholesale prices | 10:47 | |
| for February, and the Bureau of Labor Statistics | 10:51 | |
| had to point out that there was more bad news, | 10:55 | |
| I think it was 1.6% for the month, and | 10:58 | |
| that an index number of such prices | 11:02 | |
| over a six month period had | 11:07 | |
| something like a 50% annual rate. | 11:09 | |
| I must be exaggerating those number | 11:13 | |
| a little because that hardly seems credible. | 11:14 | |
| And so what this man said to me is | 11:20 | |
| maybe there's a worldwide inflation. | 11:23 | |
| Maybe we're in a period like 1919, 1920. | 11:25 | |
| Now few people can't themselves remember that period, | 11:30 | |
| but I'll remind you in the backwash of World War One, | 11:34 | |
| there were shortages of goods and prices went up. | 11:38 | |
| There was a tremendous boom in the silk market | 11:41 | |
| in Tokyo and in the United States, | 11:44 | |
| and prices were really soaring. | 11:48 | |
| But just about May the bubble burst, | 11:51 | |
| and we moved into the rather serious | 11:54 | |
| post-World War One recession of 1920-21. | 11:56 | |
| Well this man asked me, "Are we in such a period?" | 12:02 | |
| He said, "My uncle can remember that Sears Roebuck | 12:06 | |
| "was almost technically bankrupt in that period. | 12:09 | |
| "There were caught with lots of inventory, | 12:11 | |
| "and Julius Rosenwald had to pledge his own personal | 12:13 | |
| "fortune collateral for a loan to | 12:18 | |
| "keep them out of the bankruptcy court." | 12:20 | |
| He even said to me, "Are we, perhaps, | 12:25 | |
| "like the Germans in 1920 not realizing that | 12:29 | |
| "we were already in the maelstrom of a galloping inflation?" | 12:32 | |
| Now none of us needs to be reminded what | 12:38 | |
| the German 1921-1923 hyperinflation | 12:40 | |
| was like because you literally | 12:42 | |
| could light your pipe with money. | 12:44 | |
| You could plaster your walls to | 12:49 | |
| keep out the cold wind because | 12:51 | |
| it took baskets and baskets of the old money | 12:53 | |
| in order to buy one glass of beer. | 12:56 | |
| And he said, "I remember reading | 13:04 | |
| "about the reassuring statements that came | 13:06 | |
| "out of Berlin at that time, and I must say | 13:08 | |
| "when I hear the reassuring statements coming | 13:10 | |
| "out of Washington, instead of | 13:12 | |
| "comforting me it makes me scared." | 13:14 | |
| Well my answer to him has to be | 13:18 | |
| Let's look at the quantitative figures. | 13:23 | |
| First I don't think that we could be | 13:25 | |
| said to be on the verge of a runaway, galloping inflation. | 13:28 | |
| We have to remind ourselves what was | 13:32 | |
| necessary for that runaway, galloping inflation. | 13:34 | |
| The head of the German central bank, | 13:36 | |
| the Deutche Bundesbank, that corresponds | 13:39 | |
| to our Federal Reserve system, | 13:42 | |
| I think it was Helferich at the time, | 13:44 | |
| he was printing off billions and trillions | 13:49 | |
| and trillions of trillions of German marks. | 13:52 | |
| He said it had nothing to do with inflation. | 13:55 | |
| He was just trying to catch up | 13:58 | |
| with the increase in prices. | 13:59 | |
| That's the amount of money which | 14:00 | |
| the system needed at that time. | 14:01 | |
| And of course that was a stupidity | 14:06 | |
| that has to be read in order to be believed | 14:09 | |
| that a man would be capable of it | 14:12 | |
| or official, but that's true. | 14:14 | |
| I also wanna remind ourselves that | 14:16 | |
| in all this period the German mark was floating, | 14:21 | |
| the floating of a currency is | 14:24 | |
| no protection against domestic | 14:25 | |
| indiscipline which leads to uncontrolled, | 14:28 | |
| circularly self-aggravating, | 14:34 | |
| runaway money supply and runaway inflation. | 14:42 | |
| But we haven't come to that point, | 14:48 | |
| or, it seems to me, remotely near that point. | 14:50 | |
| Now you may have your little gripes | 14:54 | |
| with whether Doctor Arthur Burns is, | 14:58 | |
| as Chairman of the Federal Reserve Board, | 15:01 | |
| shirking his duty in favor of | 15:06 | |
| Arthur Burns as the Chairman of the | 15:10 | |
| Interest Rate Control Board or | 15:13 | |
| Doctor Arthur Burns in 1972, | 15:15 | |
| the longtime friend of President Nixon, | 15:17 | |
| who wanted to keep the economy | 15:19 | |
| prosperous prior to the election. | 15:20 | |
| But, however cynical or hostile | 15:24 | |
| you may be towards the Federal Reserve, | 15:28 | |
| if you actually look at the statistics | 15:31 | |
| of where the money supply was a year ago | 15:33 | |
| and where it is now, all seasonal | 15:34 | |
| corrections in a sense wash out. | 15:37 | |
| Then I think you'll find it's of the order | 15:39 | |
| of magnitude of about 7 and 1/2%. | 15:42 | |
| I'm talking about now M1 the money supply | 15:46 | |
| not inclusive of time deposits. | 15:49 | |
| There story would be a little bit different | 15:51 | |
| if you were to take M2 inclusive of time deposits. | 15:54 | |
| Well that's higher than, say, the 5% | 16:01 | |
| which people who believe in absolute stability | 16:04 | |
| of the rate of growth of the money supply | 16:06 | |
| year in and year out would recommend. | 16:08 | |
| But when you look at the magnitude | 16:12 | |
| of all the numbers it's not very much higher. | 16:14 | |
| Moreover, if you take the position | 16:17 | |
| that moving into the beginning of 1972 | 16:21 | |
| we had behind us a couple of years | 16:23 | |
| of disappointing strength in the economy, | 16:27 | |
| so that there was a risk of a third | 16:30 | |
| year of disappointing strength. | 16:32 | |
| Then if the Federal Reserve was going | 16:33 | |
| to make an error of judgment, it was | 16:36 | |
| important that it make the error | 16:38 | |
| of judgment on the expansionary side. | 16:39 | |
| And in the event 1972 was a great year, | 16:43 | |
| so this 7 and 1/2% increase in | 16:47 | |
| the money supply over the year | 16:51 | |
| has to be pitted against the real rate | 16:54 | |
| of increase of the GNP which is overdue and which | 16:56 | |
| was of the order of magnitude of just about 6 and 1/2%. | 17:01 | |
| Now you can say that it was 1% too much, | 17:06 | |
| and that that contributed towards price inflation | 17:10 | |
| or will contribute towards price inflation | 17:13 | |
| in the longer run, and you can make | 17:15 | |
| more refined estimates of what the | 17:16 | |
| velocity of circulation of money would show, | 17:19 | |
| but I will remind you that, if you | 17:24 | |
| look at the equations of the Federal Reserve Bank | 17:27 | |
| of St. Louis, again remember we're | 17:30 | |
| looking at policy in the early 1972 period, | 17:34 | |
| then the way things have worked out | 17:40 | |
| has not been worse than would have | 17:42 | |
| been expected by those equations. | 17:47 | |
| Now what's past is past. | 17:51 | |
| It could still be the case that everybody | 17:53 | |
| in the American system would lose his marbles | 17:56 | |
| and that things would become so chaotic | 17:58 | |
| and disorganized that the vicious circle | 18:00 | |
| of galloping hyperflation would | 18:02 | |
| be joined and rejoined and that | 18:05 | |
| as prices rise, then the money supply responds | 18:10 | |
| and kicks prices up still further. | 18:15 | |
| So it's like the comical case of a man | 18:19 | |
| who loses his bowler hat in the wind | 18:21 | |
| and bends down to pick it up, | 18:24 | |
| but very time he bends down he | 18:27 | |
| gives the hat a kick forward, | 18:28 | |
| and you're in a vicious cycle syndrome. | 18:31 | |
| Well if those are your nameless dreads, | 18:36 | |
| you're really working very hard to scare yourself | 18:38 | |
| because we are not in the backwash | 18:41 | |
| of a defeated war, we are not paying | 18:44 | |
| reparations to an enemy, we are not | 18:48 | |
| in the Weimar Republic with its deep cleavages | 18:50 | |
| between those who are not reconciled | 18:53 | |
| to the ending of the German empire, | 18:56 | |
| the Kaiser's empire, and the Weimar | 19:00 | |
| Republic with its heterogeneous | 19:04 | |
| group of supporters comprising | 19:07 | |
| everything from the extreme left | 19:10 | |
| who were really were not for Weimar in that form, | 19:14 | |
| to the Social Democrats and the middle parties. | 19:17 | |
| There is no such stalemate in American politics | 19:27 | |
| of that nature at all, so as far as | 19:32 | |
| runaway inflation is concerned | 19:33 | |
| of the German pattern, I would not counsel | 19:35 | |
| anyone to pay very much to Lloyd's of London | 19:39 | |
| to take out insurance against that. | 19:41 | |
| But you can't get insurance at | 19:45 | |
| Lloyd's of London, I guess what you'd | 19:46 | |
| have to do is to buy things, and there are | 19:48 | |
| elderly gentlemen and some young ones | 19:50 | |
| with the wind up who have been getting into things. | 19:53 | |
| Certainly you can't understand the | 20:00 | |
| silver and gold market except in terms | 20:01 | |
| of the speculative movements in those markets | 20:04 | |
| which have nothing to do with the rate of consumption | 20:06 | |
| of the metals in the industrial uses | 20:10 | |
| or the rate of supply by the mines of those metals. | 20:12 | |
| The next question one is asked is | 20:19 | |
| well, are we in a Chilean, Argentinian, Brazilian, | 20:21 | |
| Latin American pattern which is not | 20:27 | |
| runaway hyperinflation that can't go on | 20:30 | |
| and finally has to be brought to some kind | 20:33 | |
| of an end in the way that Schacht did in 1923 in Germany. | 20:36 | |
| We know that a Chile, and Argentina | 20:43 | |
| and a Brazil can go along not for a year, | 20:45 | |
| not for a decade, not for just one generation, | 20:47 | |
| but really for a century with prices rising | 20:51 | |
| at an annual rate of 20-30%. | 20:55 | |
| It's not comfortable to live through, | 20:58 | |
| but people who've lived through | 21:00 | |
| nothing else learn to live through it. | 21:01 | |
| Of course they don't save and hoard soft paper currency. | 21:03 | |
| They don't make long term loans at | 21:11 | |
| any kinds of rates of interest that you would recognize. | 21:15 | |
| In fact they don't make them at any rates of interest. | 21:18 | |
| There are all kinds of sliding scale agreements, | 21:20 | |
| all kind of equity ownerships, | 21:23 | |
| all sorts of rushing into resort property | 21:25 | |
| and residential property, a movement to | 21:28 | |
| hold one's net worth in the form of real things | 21:32 | |
| which, presumably, will be marked up in balance | 21:35 | |
| during these chronic inflations. | 21:39 | |
| Well now I don't think that we are | 21:42 | |
| near to such a situation appreciably | 21:45 | |
| than we were five years ago | 21:49 | |
| or seven years ago or three years ago. | 21:52 | |
| Of course we're nearer to it than we were | 21:54 | |
| one or two years ago because we're | 21:57 | |
| in the second or third year of a fairly | 21:59 | |
| vigorous expansion, and if this dread fate | 22:02 | |
| is going to await us, it's going to await us | 22:04 | |
| after the system moves more towards its capacity. | 22:08 | |
| And of course any of you who've been listening | 22:15 | |
| over the years to these tapes | 22:17 | |
| knows that I take very seriously | 22:19 | |
| the problem of cost push inflation. | 22:21 | |
| If that's what you mean by structural inflation. | 22:26 | |
| Namely that the reasons that the price level | 22:28 | |
| creeps upward and never creeps downward, | 22:33 | |
| and the reasons that fiscal policy | 22:37 | |
| and monetary policy tend to, what shall I say? | 22:39 | |
| Condone? Permit? Support these increases, | 22:46 | |
| is not because of lack of knowledge | 22:50 | |
| about the simple MV equal PQ | 22:54 | |
| of the quantity theory of money. | 22:55 | |
| It's because when you are faced | 22:59 | |
| with cost push structural inflation of that kind, | 23:01 | |
| if you fight it by cutting down on the money supply, | 23:05 | |
| you don't just cut down on | 23:10 | |
| the unhealthy rate of price inflation. | 23:12 | |
| You may cut a little into that fat, | 23:16 | |
| but you cut also into the good, important flesh | 23:19 | |
| of real growth, and you contrive to produce | 23:24 | |
| by this method, unemployment in the here and now. | 23:29 | |
| Well I don't think that the appropriate | 23:39 | |
| pattern for us at this point in the game, | 23:43 | |
| this is my opinion, is that of Argentina, Brazil and Chile. | 23:45 | |
| I think it's more that of western Europe. | 23:49 | |
| They have been living with cost push inflation | 23:53 | |
| as we have but at a higher rate for 15 years. | 23:55 | |
| The world did not come to an end for western Europe. | 24:02 | |
| Indeed these are the 15 years of | 24:05 | |
| the greatest economic triumphs of western Europe. | 24:06 | |
| So don't sell the mixed economy short | 24:10 | |
| with all its imperfections with respect | 24:11 | |
| to economists' knowledge of how | 24:14 | |
| to control creeping inflation. | 24:15 | |
| That's the pattern, which it seems to me, | 24:19 | |
| not only lies ahead waiting for us, | 24:21 | |
| but I think we are in that pattern, | 24:25 | |
| we've been in that pattern for | 24:27 | |
| a considerable period of time, and so | 24:28 | |
| the question that every sensible person | 24:32 | |
| has to ask themselves is how do we | 24:34 | |
| improve on that pattern and how do we, | 24:37 | |
| as individuals, as private investors, | 24:39 | |
| best live within that pattern and accomplish | 24:46 | |
| what we want to accomplish which typically | 24:50 | |
| is to save the value of our assets | 24:53 | |
| and amplify them if possible, provide for our old age | 24:57 | |
| if we're lucky enough to be in a position | 25:00 | |
| to be able to think about providing | 25:04 | |
| something for a good head start with one's children, | 25:07 | |
| then we're in the definite, definite minority, | 25:11 | |
| but we wanna pass on a bit of a nest egg to them | 25:14 | |
| in real terms that can be preserved as best as is possible. | 25:17 | |
| Well this raises the question that | 25:23 | |
| I've touched on a lot on the past. | 25:24 | |
| Why is it that the stock market this last decade | 25:29 | |
| hasn't seemed to be the one way, easy street | 25:33 | |
| toward preserving or amplifying one's capital | 25:36 | |
| that it seemed to be back in the 1940s and in the 1950s? | 25:40 | |
| Well first I think we have to recalibrate ourselves. | 25:47 | |
| It's a very common notion, at least until recently, | 25:52 | |
| that if you're a bit clever, you can get 15% per year | 25:55 | |
| in the stock market and get it with reasonable safety. | 25:58 | |
| I refer you to an article within the last year | 26:03 | |
| in Baron's magazine on the set up of pension funds, | 26:07 | |
| pension plans set up by some of the biggest | 26:11 | |
| corporations in the world, and they | 26:12 | |
| honestly will say to themselves, | 26:15 | |
| you wouldn't believe it possible again | 26:17 | |
| unless you had read it, that | 26:19 | |
| well, we aim to get 12%, we figure anybody | 26:22 | |
| can make 9% a year and with | 26:25 | |
| cleverness we can make an extra 3%. | 26:29 | |
| Well that just isn't true. | 26:31 | |
| The best money managers in New York, | 26:34 | |
| and it's very hard to define who are the best ones. | 26:37 | |
| What is easy is who did the best | 26:41 | |
| in the last six months or the last year? | 26:43 | |
| But that's a very changeable... | 26:47 | |
| It's as changeable as the numbers | 26:50 | |
| that come up in Las Vegas on the dice table. | 26:53 | |
| But I think there are some who | 26:56 | |
| do better over the longer run, | 26:58 | |
| and they don't do very many, in my opinion, | 26:59 | |
| percentage points better than the crowd | 27:01 | |
| and better than the averages themselves. | 27:05 | |
| Obviously everybody can't beat the averages. | 27:08 | |
| And the story which the averages themselves tell | 27:10 | |
| is not the simple story that you learned | 27:14 | |
| a few years ago when the Merrill Foundation | 27:18 | |
| financed the graduate school of business | 27:21 | |
| at the University of Chicago | 27:23 | |
| to make a study of how you'd have done | 27:25 | |
| if you threw a dart at the financial pages | 27:26 | |
| or bought all the stocks on the New York | 27:29 | |
| Stock Exchange from 1925 to 1962 or 1964. | 27:32 | |
| Well, those numbers are solid numbers of history, | 27:39 | |
| but they are not solid supports for extrapolation. | 27:43 | |
| And people since then have not been | 27:47 | |
| achieving those particular numbers. | 27:49 | |
| The question everybody on Wall Street | 27:54 | |
| is asking himself is, Who's making the money? | 27:57 | |
| I'm not, my friends aren't, this man | 28:00 | |
| with this style of investment doesn't seem to be. | 28:04 | |
| Well when the market is up, somebody | 28:07 | |
| has to be making the money, but when | 28:11 | |
| the market is down of course it isn't necessarily | 28:13 | |
| the case that anybody has to be making the money, | 28:15 | |
| and certainly there isn't a balance on the short side | 28:18 | |
| which would permit the gains of those | 28:21 | |
| who are selling short to equal the gains | 28:24 | |
| of those who are holding the stocks | 28:30 | |
| long in a declining market. | 28:33 | |
| I think it would be found, if a careful study were made, | 28:37 | |
| that the trust departments of the banks, | 28:40 | |
| particularly the big banks, have been | 28:42 | |
| doing better than the crowd. | 28:44 | |
| I know I met an old graduate school classmate of mine. | 28:45 | |
| He isn't old but he goes back to my time, | 28:49 | |
| this is William Greno of CREF, | 28:53 | |
| that's the Teachers' Insurance Annuity Corporation, | 28:56 | |
| and I asked him how their interest had been done, | 29:01 | |
| and this is something that can be very objectively tested, | 29:05 | |
| and he was able to point out to me | 29:07 | |
| that they'd been doing very well indeed. | 29:08 | |
| Now you wouldn't expect the philosophy | 29:11 | |
| behind CREF which is a philosophy | 29:13 | |
| that puts a great deal of premium, | 29:16 | |
| even in the investment of equities, on safety, | 29:19 | |
| to outperform all the time those people | 29:22 | |
| who are willing to bear lots of risk | 29:26 | |
| in the interests of high return, | 29:30 | |
| but in recent months and really years, | 29:32 | |
| CREF has had the better return and the better safety. | 29:39 | |
| Well I suppose I haven't done a detailed | 29:45 | |
| autopsy on this, it's because they're | 29:48 | |
| in those blue chip growth stocks | 29:49 | |
| which, alone, seem to be doing so well. | 29:52 | |
| I have mined the IBMs, the Xeroxes of this world, | 29:56 | |
| perhaps the Polaroids, I'm a little hesitant | 30:01 | |
| to name names because it's wonderful | 30:04 | |
| when you're in the glamour group | 30:06 | |
| but when all the institutional investors | 30:09 | |
| at once decide to put you in the dog house | 30:11 | |
| and get you out of that group, | 30:13 | |
| it can really be a brutal, deglamorizing experience. | 30:16 | |
| This market then is very different | 30:21 | |
| from the 1961-62 market when the performance-minded | 30:23 | |
| gunslingers began to get into operation. | 30:30 | |
| You can see that by taking an index number | 30:34 | |
| of how the American stock exchange stocks | 30:36 | |
| are doing compared to those on the big board. | 30:38 | |
| Or better still, every week in the Wall Street Journal, | 30:40 | |
| in the New York Times, in Baron's and other publications, | 30:43 | |
| the Arthur Lipper organization shows | 30:47 | |
| how the mutual funds are doing, the income funds, | 30:49 | |
| the balance funds, the growth funds, | 30:51 | |
| in comparison with how the Dow Jones average is doing | 30:54 | |
| in comparison with how the Standard and Poor's | 30:56 | |
| and other index numbers are doing. | 30:59 | |
| And of course it's no news to any | 31:01 | |
| of those people that they have been | 31:04 | |
| doing very badly compared to the bluer chip averages. | 31:05 | |
| Announcer | If you have any comments | 31:10 |
| or questions for Professor Samuelson, address them to | 31:11 | |
| Instructional Dynamics Incorporated, | 31:14 | |
| 166 East Superior Street, Chicago, Illinois 60611. | 31:16 |
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