Tape 87 - Forecast for 1972 / Paul A. Samuelson papers, 1933-2010 and undated / Duke Digital Repository

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This is Rose Friedman, inviting you on behalf of

0:02

Instructional Dynamics, to another of our biweekly

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interviews with Dr. Milton Friedman,

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Professor of Economics at the University of Chicago.

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We are taping this interview

0:13

on Wednesday, December 1, 1971.

0:14

It is that time of year again when we have to start

0:20

thinking of Christmas presents and economic forecasts.

0:22

What does your crystal ball show this time?

0:26

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Well as my subscribers know, I do not engage in

0:31

quantitative forecast that is estimating the number

0:35

of billions of dollars by which GNP will go up

0:38

and breaking it down into the part of it which goes

0:41

into investment, consumption, and so on.

0:43

That is not at all because such forecasts aren't useful.

0:45

They are extremely useful and desirable.

0:48

It's because I just do not happen to specialize in

0:52

that kind of an activity.

0:55

It takes a great deal of time to keep in touch with

0:57

and on top of all of these precise numerical figures,

0:59

and I do not do that, and therefore I restrict myself

1:03

to the what I regard in some ways as easier

1:07

but in other ways more difficult task

1:10

of making qualitative forecasts.

1:12

From this point of view I think the best

1:14

simple summary of the most likely outcome

1:16

is still that which President Nixon

1:20

issued in his news conference way back early in 1971

1:24

when he said 1971 would be a good year

1:29

and 1972 would be a very good year.

1:32

Judged by the economic indicators of output,

1:35

employment, and the like, 1971 is a good year

1:39

in the sense that it shows a distinct increase

1:42

in real output over 1970, that unemployment

1:45

which had been rising rapidly during 1970 peaked

1:49

and if anything has come down a little,

1:53

that there has been a considerable and substantial

1:55

tapering off in the rate of rise of prices of inflation.

1:58

In these respects, 1971 has been a good year,

2:02

though obviously it has not and could not have been

2:04

expected to be a fabulously good year.

2:07

Turning to 1972,

2:12

ordinarily this is the kind of year

2:16

for which a forecast ought to be fairly easy.

2:20

The time when it's really difficult to make a forecast

2:24

is at turning points in the economy.

2:26

That was the case, for example,

2:29

in 1969, when we were at a turning point.

2:31

It was the case a year ago when I taped a similar

2:34

report, similar forecast for 1971.

2:40

At that time I, and others of a similar persuasion,

2:43

were of the opinion that there was going to be

2:48

a turnaround in the economy, that 1971 would bring

2:49

an expansion, that the recession was over.

2:52

Others were of the opinion that the recession

2:56

was still going to be deep, it was going to deepen.

2:58

There was, therefore, a very wide variety

3:01

of forecasts, and everybody could choose

3:03

whichever one he wanted.

3:05

Now, it is clear that we have turned around,

3:08

the recession is over, that we are in an expansion.

3:11

Generally an expansion lasts well beyond the 13 months

3:15

that the current expansion will have lasted

3:20

by the end of 1971.

3:23

So that one can confidently assert the

3:27

expansion will continue, and that's the sense in which

3:29

Mr. Nixon's forecast that 1972 will be a very good year

3:32

seems the most likely.

3:36

However, I must say that this time

3:37

the situation is a little different than usual.

3:42

It is a little different because of the August 15

3:44

New Economic Policy introduced by Mr. Nixon,

3:47

which introduces an element into the business cycle picture

3:50

that has seldom been present in earlier business cycles.

3:52

In addition,

3:59

the outlook today

4:00

is a little bit more clouded

4:04

because of something which is connected with

4:06

but didn't follow directly from the August 15 actions,

4:08

and that's the sharp turnaround in monetary policy

4:11

and the extremely contractionary monetary policy

4:14

that has now been maintained for something like four months.

4:17

As a result of these two developments,

4:24

I am inclined to shade down

4:28

the kind of forecast that

4:32

Mr. Nixon made last year and that I would have

4:34

been making earlier this year.

4:36

Before August 15 I saw every prospect for

4:39

a vigorous and rapid expansion in 1972.

4:42

I still believe there will be a vigorous and

4:47

substantial expansion,

4:49

but I believe it will be less vigorous,

4:51

less substantial, than I earlier thought it was going to be.

4:54

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Has there been any sign of change

4:58

in monetary policy?

5:00

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A little.

5:01

Especially in the broader total of money, M2,

5:03

currency in all commercial bank deposits,

5:06

which has been rising a little bit more rapidly

5:09

in the past two months than it had been rising

5:11

the two months before that.

5:14

But there is as yet no sign of a turnaround in the

5:15

narrowly-defined money stock, M1,

5:20

except in the sense that whereas you had an

5:24

absolute decline from just about August 15,

5:26

as the figures show, to the end of September,

5:29

you have had rough stability during October and November.

5:33

In the case of M2,

5:37

you had rough stability in the first part of this period

5:41

and then somewhat more expanse.

5:44

The slowdown has now gone on long enough,

5:49

slowdown in money that is,

5:53

so that ordinarily one would expect it to show up

5:56

in a mild slowdown in the rate of economic growth in 1972.

5:59

Even though this policy were now to be reversed.

6:05

That is, as I have emphasized often,

6:09

I do not believe one can put much credence

6:11

in month to month variations in the quantity of money.

6:14

Fortunately the economic system is tough enough

6:17

and strong enough so it smooths out those

6:20

temporary aberrations.

6:23

In order for a monetary slowdown to have any effect,

6:25

or for that matter, the other way,

6:29

a monetary acceleration, it has to be more than

6:30

a temporary blip.

6:33

It has to last for some time.

6:34

Thus, the monetary expansion from

6:36

January to June or July,

6:42

which was at an extremely rapid rate,

6:45

was long enough so that it should be showing up

6:47

and it should have been showing up now.

6:50

And indeed I believe you are seeing at the moment

6:52

some expansion in the rate of economic development,

6:54

partly as a delayed result of this.

6:57

It hasn't showed up as much as we would've expected,

6:59

because, in my opinion, of the freeze.

7:02

I'll come back to that in a moment.

7:05

Similarly, if you have a slowdown in money

7:08

of as long as four months as we have had

7:12

from something like July to now,

7:14

you would expect it to show up

7:16

early in 1972, not now,

7:19

but early in 1972

7:21

as a slowdown in the rate of economic growth,

7:24

not as a turnaround to a recession.

7:26

In order for this to produce a renewed recession,

7:28

the slowdown and the rate of monetary growth

7:32

would have to continue and perhaps

7:33

be intensified.

7:35

For the moment, assuming there's a turnaround,

7:37

the most you could expect from this blip

7:40

would be a slowdown in '72.

7:43

We've had such examples in the past.

7:46

You have, for example, the case in 1962

7:49

when you had a very distinct slowdown in the rate

7:53

of monetary growth.

7:56

I shouldn't say a slowdown, you had a reversal

7:56

from growing rapidly, the rate of growth declined

7:59

and became slightly negative.

8:02

And some six or seven or eight months later

8:04

you did also have a slowdown in the rate of economic growth

8:06

in the sense that the index of industrial production

8:10

stopped rising, declined a little,

8:12

the rate of growth of GNP and so on tapered off.

8:14

In similar fashion, if this episode were typical,

8:17

you would expect some temporary weakness in the economy

8:23

in early 1972.

8:26

However, this may not happen on this episode.

8:28

The reason is that the freeze,

8:32

as I have stressed on previous tapes,

8:35

did chill the pace of economic advance.

8:37

Did slow down the economy.

8:40

In monetary terms, it led because of the great uncertainty

8:42

and engendered to a desire on the part of people

8:45

to hold larger quantities of money,

8:47

that is to an autonomous decrease in velocity.

8:49

As the uncertainty is eliminated,

8:53

as people come to adjust to the new

8:56

Phase Two developments and operations,

8:58

it may well be that this effect will disappear,

9:00

that there will be an autonomous increase in velocity

9:03

which will offset what otherwise might have been expected

9:06

from the temporary slowdown in money.

9:10

I would still, if I had to bet, bet that there will be

9:13

some slowdown in early 1972,

9:16

but I would not wanna place heavy odds on that.

9:19

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What about the longer view?

9:23

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Well that depends for GNP as a whole,

9:25

that is for total spending,

9:28

that depends on my opinion on the future behavior

9:30

of the quantity of money.

9:33

And here there are two scenarios that seem to me possible,

9:35

though far from equally likely.

9:38

Scenario One, which I regard as most likely,

9:40

is that the slowdown in the rate of monetary growth

9:44

which we have been experiencing

9:46

will terminate very promptly, perhaps this month,

9:49

perhaps next month, but it will not continue

9:52

more than another month or so at the most,

9:54

that it will be succeeded by a

9:56

rapid rise in the quantity of money.

10:00

The Fed, through Mr. Burns and otherwise,

10:04

has indicated that it will try to keep

10:07

that rate of rise moderate.

10:08

I hope it will succeed, but I fear that it may not.

10:10

But in any event, that the slowdown will be

10:15

succeeded by at least a moderate and perhaps

10:17

a rapid rate of growth in the quantity of money.

10:20

If that occurs, then after perhaps the temporary pause

10:22

as stumbling in the early months of 1972,

10:27

one should see a renewed rapid and vigorous expansion.

10:32

The episode I cited earlier of 1962 and '63

10:38

could be used as an example of what might be observed.

10:45

Here in the last half of '62 you had

10:48

a distinct slowdown in industrial production

10:50

it remained roughly constant and in the first half of '63

10:53

it speeded up fairly vigorously.

10:56

That's sort of a pattern that it seems to me

10:59

you might have under my assumptions in '72 with

11:00

some hesitancy and halting in the first part of the year

11:04

and then a speedup in the later part of the year

11:06

as you overcome the consequences of the recent

11:10

monetary slowdown and start to experience

11:13

the consequences of the more rapid rate of monetary growth

11:15

that for the moment I am assuming

11:18

in discussing this scenario.

11:20

Now, scenario number two cannot be completely ruled out.

11:22

It's a very much more pessimistic scenario.

11:28

It would have The Fed continue

11:31

keeping its foot on the monetary brake,

11:34

continue to have a rapid,

11:36

well, a continued slow rate of growth

11:41

in the quantity of money, measured by M1 and M2,

11:44

say, into and through the first quarter of next year.

11:47

If that happened, it would be technically possible

11:51

that instead of a temporary pause you would get really a...

11:55

You would cut the economic expansion short,

12:00

turn it into a renewed recession.

12:04

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Why do you find Scenario One more likely?

12:09

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I think it's more likely for two quite different reasons.

12:13

First is purely political.

12:18

There is no doubt that there is great concern in Washington,

12:22

in the White House and the Council of Economic Advisers,

12:27

about the extremely slow rate of monetary growth.

12:29

You don't have to be a full-fledged

12:32

100% monetarist to be concerned about that.

12:34

Almost everybody, whatever school of thought he holds,

12:38

will agree that a long-continued slowdown

12:44

in the rate of growth of the quantity of money

12:47

can have significant adverse effects

12:50

on an economic expansion.

12:54

Washington is an extremely political environment.

12:58

The Federal Reserve Board is independent in one sense,

13:01

but it certainly is not independent

13:04

of the political atmosphere,

13:06

and there isn't the slightest doubt in my mind

13:07

that The Fed today must be greatly concerned

13:09

about this slowdown.

13:12

Indeed, Arthur Burns, in his talk before

13:13

the stock market a few weeks ago,

13:16

went out of his way to emphasize

13:18

that the current slow rate of monetary growth

13:21

was a temporary digression from a moderate

13:23

and steady monetary growth path.

13:27

So that's one reason.

13:30

I believe the political pressure is there,

13:31

there's no doubt The Fed can make it grow

13:33

more rapidly if they want to.

13:35

The second reason is quite different.

13:37

It has to do with the mechanics of the money growth,

13:40

and it has to do with the explanation

13:43

of why you've had the monetary slowdown.

13:44

In my opinion, this has reflected the tendency

13:47

for The Federal Reserve to try to ride two horses at once.

13:50

To continue to try to ride two horses at once.

13:55

Namely, the interest rate horse

13:57

and the monetary growth horse.

13:59

They have been much more explicit about this

14:01

recently than they ever were before.

14:03

I've been interested in reading the policy directives

14:05

as they appear 90 days later in the Federal Reserve Bulletin

14:08

to see how much the talk is precisely in these terms,

14:12

how much they are trying to give the impression

14:17

that they are really watching for monetary growth,

14:20

and yet it is clear as you read the directives

14:24

that they finally come out with that they are, in fact,

14:26

giving major emphasis to interest rate movement.

14:29

That's what's dominating their policy.

14:32

So in my opinion, what happened was that

14:34

the vigorous expansion that got started

14:36

in the first half of this year,

14:37

particularly the rebound from the GM episode,

14:39

the GM strike, tended to raise short-term interest rates

14:43

and raise them vigorously.

14:47

The Fed, concerned, as they say in their directives,

14:48

that rising interest rates would cut short the expansion,

14:52

leaned against that and produced

14:55

the rapid monetary explosion.

14:57

Then, sometime in July and August,

14:59

this upward pressure ceased, and The Fed,

15:04

for a little while, was able to do what it really wanted to,

15:07

which was to maintain a moderate rate of growth.

15:11

But then, with the August 15 announcement

15:13

and the international development,

15:16

short-term interest rates came down

15:19

and started to come down very rapidly.

15:21

The Fed, with its usual posture

15:23

of operating on interest rates,

15:27

leaned against this interest rate decline.

15:28

It could do so only by holding down

15:31

the rate of monetary growth,

15:34

and consequently you had a decline in the rate of...

15:35

You had an absolute decline

15:37

in the quantity of money narrowly defined,

15:39

and a zero rate of growth, roughly,

15:41

for a while in the quantity of money

15:43

defined more broadly after August 15.

15:46

Now, along these lines,

15:49

the question of what's going to happen

15:50

to the quantity of money depends on interest rate changes.

15:51

If, as I have been inclined to believe,

15:55

the slowdown of the demand for loanable funds

15:59

arising out of the uncertainty created by the freeze,

16:02

and the rising or the inflow of foreign funds

16:06

from abroad which made it unnecessary

16:09

for The Treasury to borrow at home,

16:10

if that ends, as you have a greater degree

16:13

of Treasury borrowing on the domestic market,

16:16

as you have

16:19

continued expansion in business,

16:23

which leads to an increase in the demand

16:24

for loans from business,

16:26

then you will see short-term interest rates

16:28

turn around and start to go up again.

16:30

And as this happens, The Fed,

16:32

with its automatic method of operation,

16:34

will lean against it,

16:36

especially under present circumstances,

16:38

when there is so much talk about

16:40

not letting interest rates go up,

16:42

when the administration is committed to a policy

16:44

of direct controls over prices and wages,

16:46

why not interest rates, under those circumstances,

16:48

I would be surprised if any autonomous tendency

16:51

for interest rates to rise did not produce

16:54

a reaction on the part of The Fed

16:57

in the form of a more rapid expansion

16:59

in the quantity of money.

17:01

To begin with this may be moderate,

17:03

but the real danger of an excessive expansion

17:05

will occur later on as these pressures develop and emerge.

17:08

These are the two reasons why I think

17:14

that the first scenario is much the more likely,

17:17

and indeed I am almost inclined to attribute

17:20

a very, very small probability to the second.

17:24

Yet I have been so often wrong in the past

17:27

on Federal Reserve actions,

17:31

on the assumption that they would

17:34

follow a reasonable and sensible course,

17:36

I have been much more wrong on that in the past

17:40

than I have been about what

17:42

the consequences of their actions would be,

17:43

that I am hesitant to rule out that scenario completely.

17:47

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What do you expect the course of inflation to be

17:50

in the next year?

17:52

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In answering that question under present circumstances

17:55

one has to distinguish sharply between

17:57

what will happen to prices and what will happen

18:00

to the price index numbers.

18:03

Suppose, for a moment, that there had been no freeze,

18:06

no Phase Two, no Pay Board, no Price Board.

18:09

Under those circumstances,

18:14

what in my opinion was built into the machinery,

18:15

and built in for a longer period here than for output,

18:19

because, as I've emphasized in earlier tapes,

18:22

typically the effects on prices

18:26

come very much later than the effects on output,

18:28

and therefore past monetary experience enables us

18:31

to try to look farther into the future

18:36

about prices than we can about output.

18:38

To go back, let's assume for the moment

18:42

that there's no Pay Board, no Price Board,

18:44

no Phase Two, then what was in the cards?

18:47

What was in the cards was a tapering off

18:50

of the rate of inflation

18:52

and the rate of price rise through 1971

18:53

until the early months of 1972.

18:58

Then, the turnabout in monetary policy

19:02

that began in February 1970 would be

19:07

starting to manifest itself on prices.

19:11

And one might have expected that the rate of price rise

19:14

would then turn around and start to accelerate.

19:17

That the acceleration in prices would

19:20

pick up steam by the end of 1972

19:22

as you started to feel the effects

19:26

of the monetary explosion of the early months of 1971.

19:29

On that scenario, therefore, on that case therefore,

19:35

you would've been, by the end of 1972,

19:40

back to a rate of price inflation perhaps equal to that

19:45

which we were experiencing at the beginning of 1971,

19:48

maybe somewhere in the rate of 5% per year.

19:51

However, we now have to introduce the Price Board,

19:55

the Pay Board, and the like.

19:59

They have had two effects.

20:01

First, the effect in chilling the economy,

20:03

in postponing the expansion, in reducing velocity,

20:06

means that you might on that ground

20:11

expect the pattern I have described to have been pushed

20:13

perhaps four or five or six months later.

20:15

Therefore, factoring that in,

20:18

you might well expect that the rate of price increase,

20:22

the rate of price rise, properly measured,

20:26

without distortion, by the end of 1972,

20:30

would be back in a range of maybe about 4, 4.5%,

20:34

after having come below that,

20:37

after having fallen perhaps to something like 2.5 to 3%.

20:41

Now we have to factor in the other aspect

20:46

of the Price and Pay Board,

20:49

their effect on distorting the index numbers.

20:51

Because it is clear, as I have emphasized before,

20:55

that whatever happens to actual prices,

20:58

price index numbers are going to be prevented

21:00

from rising as rapidly as otherwise

21:03

by the mere existence of the Board

21:05

regardless of what they approve or disapprove.

21:07

Even if they approve every request that is made to them,

21:10

and they will not quite do that,

21:13

the index numbers would show less rise

21:14

because it will be in the interest of enterprises

21:16

to use indirect methods of raising prices.

21:19

And therefore I expect that so far as

21:23

price index numbers are concerned,

21:26

it will be very surprising indeed

21:29

if by the end of 1972 or late 1972

21:31

you don't have things like the cost of living index number

21:35

as calculated rising at a rate somewhere

21:37

perhaps not more than 2 to 3%, and maybe even less.

21:40

Beyond that, you have to start worrying about

21:47

how long the present slowdown in money will last,

21:51

about the problems raised earlier

21:55

about Scenarios One and Two.

21:57

My best guess would be that under these circumstances

21:59

you would start to have pressure

22:04

even on the price index number

22:05

sometime in 1973, maybe early, maybe late 1973.

22:07

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What about unemployment?

22:13

-

Unemployment has tapered off a little bit.

22:15

It's down slightly lower than it was at its peak,

22:19

but as always in the early stages of an expansion

22:21

there has not been much effect on unemployment.

22:24

Typically you would expect the effect on unemployment

22:27

to pick up and to show more significantly

22:30

as the expansion gets into full steam.

22:35

But the factors I mentioned earlier

22:38

which have caused a hesitation in the expansion,

22:40

the August 15 plus the monetary slowdown,

22:42

are also likely to mean that you will not

22:46

see very rapid progress in

22:47

the reduction of unemployment for some time.

22:49

I wanna qualify that.

22:54

You may see fairly rapid progress in the next few months,

22:56

but then you will see a slowdown

22:59

as the effects of the monetary slowdown hit.

23:01

However, when expansion renews vigorously

23:04

in the last half of 1972,

23:07

I expect unemployment to decline

23:09

fairly sharply and significantly.

23:12

This means that if one were to talk

23:15

only about what unemployment rate

23:19

would be at the end of 1972,

23:20

my guess is that it is not likely to be as high as 5%.

23:24

I am more optimistic in this respect

23:27

than I think most commentators are.

23:29

On the other hand, I believe there is very great

23:32

uncertainty between now and then

23:35

about what the pattern of changes in unemployment will be.

23:37

When you will get the substantial decreases

23:40

and when you will not.

23:42

-

Let's return to interest rates for a moment.

23:44

How do you expect them to perform?

23:47

-

I've already suggested part of my expectation,

23:49

and here I think it is essential

23:53

to distinguish between long-term

23:55

interest rates and short-term interest rates.

23:56

As you all know, both long- and short-term

24:02

interest rates rose in the earlier part of 1971.

24:05

But short-term interest rates rose

24:10

much more rapidly than long-term rates.

24:12

This is the typical pattern during the course

24:14

of a cyclical expansion.

24:16

Short-term rates fluctuate more widely than long-term rate,

24:18

therefore the spread between short- and long-term rates

24:22

tends to increase when you're going down

24:24

through a recession.

24:27

It tends to contract when you're coming up in an expansion.

24:28

But then, beginning really in mid-July,

24:31

in July or August,

24:36

but most dramatically after August 15,

24:38

you had both long- and short-term rates come down.

24:41

But again, short-term rates came down

24:44

much more rapidly than long-term rates.

24:47

The difference between the two

24:50

widened rather significantly.

24:52

This is against the usual trend during an expansion,

24:56

but is a usual behavior when rates are falling.

25:00

Moreover, the widening of this gap is important

25:04

in understanding the reasons behind the changes.

25:08

One argument that many people made after August 15

25:13

was that the President's announcement

25:16

led to a reduction in expectations about inflation.

25:17

That the reduction in expectations about inflation

25:21

did produce and would produce a decline in interest rates.

25:23

Now, such expectations are most important

25:28

for the long-term interest rate,

25:30

not for the short-term rate.

25:32

If those inflationary expectations

25:33

had been the main factor at work,

25:35

you would have had a larger fall

25:37

in long-term rates than in short-term rates.

25:39

You did not, and that shows that it was not at work.

25:41

Another factor at work was

25:44

the enormous inflow of funds from abroad.

25:47

The fact that central banks all over the world

25:50

were buying Treasury Bills to an extremely high rate

25:52

and indeed enabled the Treasury

25:56

to finance its deficit completely

25:57

without floating anything on the domestic market.

25:59

But most discussions of that have been erroneous

26:02

because they have looked at only one side of the picture.

26:05

They have seen the central banks buying the Treasury Bills

26:08

but they have not asked the question,

26:11

"Where did the dollars that the cental banks used

26:12

to buy the bills come from?"

26:16

They weren't manufactured out of thin air.

26:18

They came from somewhere.

26:23

In certain cases we can trace it down very clearly.

26:26

For example, in the case of the four

26:28

or five billion dollars that came out of Japan,

26:30

it seems clear that what happened is

26:33

the Japanese banks borrowed dollars in the United States,

26:35

handed those dollars over to the

26:40

Japanese central bank,

26:45

the Japanese central bank in turn

26:46

bought Treasury Bills or their equivalent,

26:48

Treasury securities, specially set up

26:50

for foreign central bank.

26:53

If we look at the American banks,

26:55

then, they simply substituted loans

26:56

to Japanese banks for some other asset,

26:58

and if we suppose that what they did

27:01

was to sell off Treasury Bills, let's say,

27:03

in order to be able to provide the loans to the Japanese,

27:05

why then, all that happened in this home market

27:10

was that the Japanese central bank bought the Bills

27:12

rather than the US commercial bank.

27:15

This example is not intended to be precise

27:19

and accurate but only to suggest

27:21

why it is necessary to look at both sides of the account.

27:23

Now, as I've studied that more and more

27:27

it has seemed to me that a very large part

27:28

of the funds that came from abroad

27:31

came out of the short end of the market.

27:33

That is, came out of Treasury Bills.

27:35

Not all of them would have done so.

27:37

And insofar as any of it came out

27:39

of what would otherwise have gone into

27:41

the long end of the market,

27:42

since all of it came back into the short end,

27:45

this is the reason why you might have had,

27:48

this would have tended to widen,

27:52

to raise the margin between short and long rates.

27:54

Now another factor which I think

28:00

worked in the same direction,

28:01

and in my opinion was probably much more influential,

28:02

because I do believe that most of this

28:05

other business was a washout,

28:07

was the decline in business confidence

28:08

and increase in uncertainty which produced

28:12

a substantial decline in business demand for funds.

28:15

And I think this would be reflected primarily

28:19

in the short end, and that's why I believe

28:21

you had most of the reduction in the short end.

28:23

Well, why is this important for the future?

28:26

Because it means...

28:28

It means that if you

28:30

do have a resumption of expansion,

28:33

even with some slowdown in early 1972,

28:34

short-term interest rates are almost sure to go up.

28:37

So far as the foreign security thing is concerned,

28:41

that's likely to be reversed and turned around,

28:44

but if it was mostly a washout one way

28:46

it'll be mostly a washout the other.

28:48

So far as expectations of inflation are concerned,

28:51

there it's very hard to know whether people form them

28:54

on the basis of index numbers or on the basis of reality.

28:57

If they form them on the basis of index numbers,

29:00

you would expect long-term rates to continue down a little.

29:03

However, there is a very strong force

29:08

in the other direction.

29:11

That is, first, the very, very large government deficit

29:12

that is coming, which will add to the demand

29:16

on the credit market, and second,

29:18

the fact that the government is engaged in

29:21

widespread guarantees and subsidizations

29:23

of private borrowing, particularly on the housing market.

29:26

And much of this will be in long-term form.

29:29

Thus my conclusion.

29:32

From these very diverse tendencies,

29:35

and I believe it's extremely difficult

29:37

to make accurate predictions right now for 1972,

29:39

but my conclusion is that short-term rates

29:43

will rise during 1972 almost certainly,

29:46

that long-term rates, if I have to guess,

29:50

I guess they will rise, also,

29:54

but I am very much less confident about that statement.

29:56

It does seem to me possible that long-term rates

30:00

may either go horizontal or even decline a little.

30:03

The one thing that seems to me pretty clear

30:07

is that the spread between short- and long-term

30:09

rates will decline and will be lower

30:12

at the end of 1972 than it is now.

30:14

-

We have only a moment left.

30:18

What about international developments?

30:20

-

Well I believe that the international situation

30:22

will not develop into an enormous crisis,

30:25

there'll be a lot of talk and a lot of back and forth,

30:28

but that you will continue pretty much

30:30

along your present line without any kind of

30:32

a new agreement about currencies,

30:36

with separate central banks pegging exchange rates,

30:39

but doing so less firmly, within wider bands,

30:43

and subject to change more frequently.

30:46

-

Remember, subscribers, if you have any questions

30:49

or comments for topics you would like to hear

30:52

discussed in this series, please send them

30:54

to Instructional Dynamics, Incorporated,

30:56

166 East Superior Street,

30:59

Chicago, Illinois, 60611.

31:01

We will be visiting with you again in two weeks.

31:05

Tape 87 - Forecast for 1972

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