Tape 37 - International situation
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Transcript
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- | Hello again and welcome | 0:02 |
as Instructional Dynamics Incorporated | 0:03 | |
again presents Dr. Paul Samuelson, | 0:06 | |
Professor of Economics at MIT. | 0:08 | |
This biweekly series is produced and recorded by IDI. | 0:10 | |
Professor Samuelson, this is the week of October 13th. | 0:15 | |
What's in store? | 0:18 | |
- | I think we should talk today | 0:19 |
about the international financial situation. | 0:20 | |
As a matter of fact, | 0:24 | |
this is a re-recording on that subject. | 0:26 | |
I had prepared for the present week's | 0:31 | |
distribution to subscribers, my thoughts on the matter | 0:35 | |
and there's always a inevitable lag | 0:38 | |
between the time that I record | 0:41 | |
and when these things reach the subscribers. | 0:43 | |
And so, in making that recording, | 0:46 | |
I had to make some guesses about what would happen | 0:50 | |
at the International Monetary Fund meetings | 0:52 | |
and what would happen to the German mark. | 0:54 | |
I'm very | 0:57 | |
frank to say to you | 1:00 | |
that it's just as well that I burned up | 1:03 | |
that previous recording because | 1:05 | |
having to make guesses, I was not able to anticipate | 1:07 | |
what did happen, which as you all know, | 1:12 | |
was that the German mark was permitted to float | 1:14 | |
and as of the time I'm now talking to you, | 1:18 | |
there has not been a stabilization. | 1:22 | |
This is big news, this is very exciting news. | 1:25 | |
This is good news in my judgment. | 1:29 | |
Let me | 1:33 | |
enlarge upon that, but before doing so, | 1:36 | |
let's just touch bases | 1:39 | |
on the other big happenings in the news. | 1:40 | |
The meetings of the International Monetary Fund | 1:44 | |
came and went. | 1:47 | |
People came to Washington and more or less | 1:48 | |
as everybody had been expecting, | 1:52 | |
the special drawing rights were voted in. | 1:54 | |
These are to be nine and a half billion dollars | 1:57 | |
over a three-year period. | 2:00 | |
And the United States' share of this over that period | 2:02 | |
will come to something under a billion dollars. | 2:07 | |
This is a move in the right direction, | 2:11 | |
but it is a very small move | 2:13 | |
and we, as you know about my own opinion, | 2:16 | |
are not at all out of the woods yet. | 2:21 | |
Let me turn from that expected happening | 2:25 | |
to the somewhat unexpected happening. | 2:29 | |
The German mark, in my judgment, | 2:35 | |
has been a clear case of an overvalued currency | 2:38 | |
for a long time. | 2:42 | |
This shows itself in a whopping surplus | 2:44 | |
by the German economy and a surplus of exports | 2:48 | |
over imports in the balance of payments. | 2:52 | |
If you plot the exports of Germany | 2:55 | |
for the last half dozen years | 2:57 | |
and if you plot the imports into Germany | 2:59 | |
of those same last half dozen years, you find that | 3:02 | |
after the recent recession, | 3:08 | |
couple of two, three years back, that the Germans had, | 3:10 | |
which I call recession but you can call it a pause | 3:14 | |
and which was engineered by them to control | 3:19 | |
their inflation and overexuberance. | 3:22 | |
After that incident, there's a clear drop in their imports | 3:25 | |
for, oh let's say a year. | 3:32 | |
Then, the imports come back and are back | 3:36 | |
at the same old trend rate of increase, | 3:39 | |
but they're now permanently lower | 3:41 | |
than the previous trend because of this drop. | 3:44 | |
In the meantime, what about German exports? | 3:49 | |
They show absolutely no signs | 3:51 | |
of that slowdown in Germany | 3:53 | |
This is more or less as we would expect | 3:55 | |
because the exports of Germany | 3:56 | |
are determined by how conditions are in other countries, | 3:58 | |
and those exports just continue to grow. | 4:01 | |
If we're looking to the Germans for a pattern, | 4:07 | |
then somebody who says the the United States | 4:10 | |
ought to have quote, a discipline, monetary discipline, | 4:13 | |
ought to engineer a slowdown | 4:18 | |
and that will help to bring | 4:20 | |
our balance of payments into order. | 4:22 | |
If somebody argues that way | 4:24 | |
and points to the German experience, | 4:26 | |
he certainly has some telling debating points on his side, | 4:30 | |
because what I've described to you | 4:34 | |
is almost a classic example, | 4:36 | |
an ideal type case of a successful slowdown, | 4:39 | |
followed by an improvement in the balance of payments. | 4:43 | |
Moreover, that improvement in the balance of payments | 4:47 | |
was not temporary, but was lasting. | 4:49 | |
However, what would be good for the United States | 4:54 | |
can be very bad for the Germans and in my view, | 4:58 | |
everything that I've been describing to you | 5:02 | |
is very bad because it has frozen in | 5:04 | |
the chronic surplus in the German balance of payments. | 5:07 | |
A therapy to cure an undervalued dollar | 5:12 | |
is one thing, but that same therapy to aggravate an over, | 5:18 | |
excuse me, I have to correct myself, I misspoke. | 5:25 | |
Therapy to cure an overvalued dollar is one thing, | 5:29 | |
but that same therapy, used successfully | 5:34 | |
to aggravate an undervalued currency, | 5:37 | |
if I said earlier in my tape | 5:41 | |
that the mark is... | 5:43 | |
overvalued, then I want withdraw that. | 5:47 | |
The mark undervalued, it's a good place to buy from | 5:50 | |
and that's been part of the German problem, | 5:54 | |
that's been part of our problem. | 5:57 | |
Now, everybody has more or less known this | 5:59 | |
including the politicians on both sides in Germany. | 6:03 | |
But for a variety of reasons which make a man cynical | 6:07 | |
about the rationality of modern politics | 6:12 | |
and of human behavior in general, | 6:15 | |
it has been very unpopular in Germany | 6:18 | |
to talk about appreciating the mark. | 6:21 | |
The Christian Democratic party | 6:25 | |
under Kiesinger | 6:29 | |
and particularly with Strauss of Bavaria, | 6:31 | |
an important member, has been steadfastly | 6:34 | |
against tinkering with the currency. | 6:39 | |
They have been against appreciating the mark. | 6:41 | |
They inherited this position, you might say, | 6:45 | |
from Adenauer earlier. | 6:49 | |
Now, against this particular political view | 6:52 | |
is the view of all the experts inside of Germany | 6:56 | |
and practically all the experts outside of Germany. | 7:00 | |
Namely that Germany should appreciate its currency, | 7:03 | |
and in particular Karl Schiller, | 7:07 | |
the member of the coalition government | 7:10 | |
who is from the Social Democrats | 7:13 | |
but was a member of the previous coalition government | 7:15 | |
and who is an economist from Hamburg | 7:18 | |
and a good economist. | 7:20 | |
He would be what you might call the German equivalent | 7:22 | |
of a New Frontiersman in this country. | 7:27 | |
Schiller has been arguing for appreciation. | 7:31 | |
There exists in Germany an organization | 7:35 | |
a bit like our Council of Economic Advisers | 7:37 | |
but perhaps I should say it's more like | 7:41 | |
the Canadian council because these men | 7:43 | |
are fairly distinguished professors. | 7:47 | |
They are not civil servants, | 7:49 | |
they are not full-time government officials | 7:51 | |
as our Council of Economic Advisers are | 7:53 | |
and they meet periodically to advise the German government | 7:57 | |
on what ought to be done in terms of economics. | 8:03 | |
In a way, this removes the matter from politics | 8:07 | |
and certainly from partisan politics, | 8:10 | |
and is supposed to give the government access | 8:12 | |
to a more scientific statement. | 8:15 | |
Well, I can tell you that this scientific body | 8:19 | |
has for years now been telling the German government | 8:22 | |
what it didn't want to hear. | 8:26 | |
Namely that the mark was undervalued, | 8:28 | |
that the German export surplus was too great, | 8:32 | |
and that it should definitely be appreciated. | 8:34 | |
However, as the election approached, | 8:41 | |
this became a partisan matter. | 8:44 | |
The Kiesinger people pledged not to change the | 8:47 | |
parity of the mark and the Social Democrats | 8:53 | |
campaigning, at least in part, upon a program | 8:56 | |
of changing the parity of the mark. | 9:00 | |
Now, that being the case, how did I go wrong | 9:03 | |
in my prediction before the fact? | 9:08 | |
Well, it's very easy for me to make mistakes in prediction. | 9:10 | |
I do it all the time. | 9:15 | |
I try to control it but it's not possible. | 9:15 | |
I talked to people who are well informed on the German scene | 9:19 | |
and they told me that the Gallup poll | 9:24 | |
showed that the Social Democrats | 9:26 | |
would not win a majority. | 9:28 | |
They told me that with the man in the street, | 9:31 | |
there's no understanding of these matters in Germany | 9:34 | |
and that he is very much against currency tinkering. | 9:37 | |
I can testify that that lack of understanding | 9:41 | |
on the part of the public is fairly widespread | 9:44 | |
because in one of my Newsweek columns some time ago, | 9:46 | |
I just threw off the sentence that of course | 9:49 | |
the German mark should be appreciated after the election, | 9:53 | |
and I received an irate letter | 9:56 | |
from a member of our own diplomatic corps | 10:00 | |
who spent many years abroad and he berated me | 10:05 | |
for this recommendation. | 10:09 | |
He said, don't you know that France has gone through | 10:12 | |
many and many a depreciation | 10:15 | |
and tinkering of the currency | 10:17 | |
has had this damage and that. | 10:18 | |
Well, I had to write back to him, of course, | 10:20 | |
that he had everything exactly 180 degrees wrong. | 10:22 | |
I was talking about appreciation | 10:27 | |
and he is berating me with examples | 10:29 | |
of the evils of lack of discipline in depreciation. | 10:32 | |
Well, the man in the street in Germany, | 10:36 | |
like this esteemed gentleman, makes the same mistake. | 10:38 | |
He can't tell the difference | 10:42 | |
and he remembers something about his grandfather's stories | 10:44 | |
of the wild hyper-inflation in Germany in 1920 to 1923, | 10:47 | |
and he thinks that this man Schiller | 10:52 | |
may be perpetrating the same thing once again. | 10:54 | |
Armed with this information about the Gallup poll, | 10:59 | |
armed with the | 11:02 | |
statement about what was politically popular | 11:05 | |
inside of Germany, told that Schiller | 11:08 | |
was soft pedaling his electoral speeches | 11:11 | |
and playing down his recommendation | 11:15 | |
with respect to appreciation | 11:18 | |
and also being told that the Germans | 11:21 | |
were beginning to be apprehensive | 11:23 | |
about the competition from Japan. | 11:25 | |
You know, whenever you get a currency that's too strong | 11:28 | |
and you criticize and berate them for being too strong, | 11:31 | |
that can always dredge up some other currency | 11:35 | |
which they think is even stronger still | 11:38 | |
and in comparison with it, | 11:41 | |
they feel very weak and therefore they tell you | 11:44 | |
that they are a weak currency | 11:46 | |
who cannot stand appreciation. | 11:47 | |
In any case, what happened was the Gallup poll was right. | 11:50 | |
The Social Democrats | 11:55 | |
did not get a | 11:58 | |
majority. | 12:00 | |
They did not even get a plurality. | 12:01 | |
But the third party, | 12:05 | |
I can't call it the Wallace Party, | 12:08 | |
but the third party with the swing vote | 12:12 | |
which had itself | 12:15 | |
gone down from 10% to | 12:18 | |
only a little bit over 5% | 12:21 | |
of the total vote and whose seats had dropped | 12:22 | |
from something in the thirties | 12:25 | |
to something in the low twenties. | 12:27 | |
It, for reasons that | 12:29 | |
an expert in German political life | 12:32 | |
might well understand | 12:35 | |
but which is not important for us to even think about, | 12:36 | |
it has decided to throw in its hand | 12:41 | |
with the Social Democrats. | 12:44 | |
And it's therefore a new ballgame. | 12:47 | |
We do have the Social Democrats coalition | 12:49 | |
prospectively with Karl Brandt at the top | 12:53 | |
and with Schiller as certainly one of the most | 12:56 | |
dynamic and effective persons in the coalition. | 13:00 | |
Now, it's interesting that the free speculative market | 13:05 | |
jumped the gun on all of this. | 13:11 | |
It anticipates, as free markets try to do, | 13:12 | |
what might happen | 13:17 | |
and there was a massive flow of funds | 13:19 | |
into Germany in the days before the meetings | 13:23 | |
of the International Monetary Fund | 13:25 | |
and even in the days before the election. | 13:26 | |
So much was this, that the Central Bank | 13:30 | |
which can see that in one afternoon | 13:33 | |
it may be getting hundreds of millions of dollars worth | 13:35 | |
of currencies coming in to bet upon an appreciation, | 13:39 | |
apparently there was some kind of an ultimatum | 13:43 | |
given to the old government | 13:47 | |
by Blessing, by the central bankers. | 13:51 | |
Now, you may wonder that things can be run this way. | 13:55 | |
Could Mr. Martin in our own country | 14:00 | |
give an ultimatum to President Nixon | 14:02 | |
and to Congress and make them do something? | 14:05 | |
And the answer is no. | 14:08 | |
And I don't suppose that Blessing, | 14:09 | |
in his ultimatum, really made anybody do something. | 14:12 | |
But what he must have said was the following. | 14:15 | |
Look here, I can't be responsible for the consequences. | 14:18 | |
The money is coming in in tens and tens | 14:21 | |
and hundreds of millions of dollars | 14:23 | |
and in other day or two, | 14:26 | |
that's gonna be in the billions. | 14:28 | |
If you do later find that you decide to appreciate, | 14:31 | |
now, it can't cogently be argued | 14:37 | |
that they're absolutely forced | 14:39 | |
to appreciate by the speculators, | 14:40 | |
it can be shown from the arithmetic of the problem | 14:43 | |
that speculators can take their money | 14:46 | |
out of a country and in the end, | 14:49 | |
can force you to depreciate. | 14:50 | |
They cannot in the same way | 14:53 | |
symmetrically force you to appreciate, | 14:55 | |
but they can make it very uncomfortable | 14:58 | |
if you don't do so. | 15:00 | |
And so, Blessing must have said | 15:02 | |
if you let this money come in and if you require me, | 15:04 | |
as the central banker, to sell marks at par, | 15:09 | |
and if you should ever change your mind afterwards, | 15:14 | |
either because you're more or less almost forced to | 15:17 | |
or because you choose to, | 15:20 | |
then you are making a free gift | 15:22 | |
to foreign speculators of billions and billions | 15:24 | |
of dollars worth of marks. | 15:27 | |
They will reap the profits from the appreciation | 15:30 | |
and you will lose those profits. | 15:35 | |
And so I say to you, not one more penny. | 15:36 | |
I cannot answer for the consequences another hour | 15:39 | |
and Mr. Kiesinger apparently | 15:42 | |
had to give in. | 15:46 | |
The form in which he gave in | 15:47 | |
was to suspend all markets. | 15:51 | |
That can buy you a little time, | 15:55 | |
it can buy you time until the weekend comes, | 15:56 | |
it can give you a few days' breathing spell, | 15:59 | |
but that is not a tenable situation | 16:03 | |
because pretty soon, | 16:05 | |
a black market or a gray market or a white market | 16:07 | |
outside the country will develop | 16:10 | |
and something more significant than that | 16:12 | |
has to follow such action. | 16:15 | |
Well, what did follow the action? | 16:18 | |
Since the German government wasn't in a position to, | 16:20 | |
the new government, | 16:24 | |
it still wasn't known which it would be. | 16:26 | |
It was thought the Free Democrats would go in | 16:30 | |
with the Social Democrats, but nobody could be sure. | 16:31 | |
A very wise decision was made | 16:35 | |
and as an economist I welcome that decision. | 16:38 | |
Namely, just to let the pound float. | 16:43 | |
This was done, now, letting the pound float | 16:46 | |
is considered to be a heterodox thing, | 16:50 | |
very radical sort of thing. | 16:51 | |
We've been warned by the Gnomes of Zurich | 16:53 | |
how awful the world will be that day | 16:56 | |
when we wake up and find that currencies float | 16:59 | |
and here we had something of an experiment. | 17:02 | |
And what happened? | 17:05 | |
Well, we know exactly what happened | 17:06 | |
because everybody was assembled in Washington. | 17:08 | |
Everybody was delighted. | 17:12 | |
You never was such glee in the corridors | 17:13 | |
of the Shoreham Hotel and the Sheraton Park | 17:16 | |
as when the word came that the German mark was floating. | 17:20 | |
This is not because the financiers there | 17:25 | |
are reckless people who love to play with fire | 17:29 | |
and just like to have exciting things happen | 17:32 | |
but it was because it was the most practical thing | 17:35 | |
that they could think of | 17:39 | |
to handle this transition of government problem in Germany. | 17:40 | |
Immediately, the whole situation changed | 17:46 | |
because now a speculator was put on his mettle. | 17:49 | |
Before, he had no risk. | 17:56 | |
It was a heads, I may win, | 17:58 | |
tails, I certainly won't lose situation. | 18:00 | |
He would buy the mark on the bet | 18:03 | |
that it's going to be appreciated. | 18:05 | |
If he's wrong, he just gets his money back. | 18:07 | |
If he's right, he makes a killing. | 18:10 | |
A 5% killing or whatever he was expecting, | 18:13 | |
but this is a 5% killing in just a few hours | 18:16 | |
or a few days and it is a killing | 18:20 | |
which can be leveraged and pyramided | 18:24 | |
and made very large by borrowed money. | 18:26 | |
So if you're in the business of speculating, | 18:28 | |
this is the kind of dream situation | 18:31 | |
that you've been hoping for. | 18:34 | |
Of course, they had hoped for this long before | 18:36 | |
and we had periodic | 18:38 | |
movements into the mark | 18:41 | |
exactly like this by the same speculators, | 18:44 | |
many of whom of course were disappointed. | 18:46 | |
I refer to last | 18:51 | |
November, last August when the franc devalued. | 18:53 | |
And why not? | 18:57 | |
Because there's no risk in it. | 18:58 | |
The minute the mark was permitted to float, | 19:00 | |
that changed the ballgame. | 19:03 | |
You now had to buy those marks at a free price | 19:07 | |
and that free price at which you buy it | 19:12 | |
could go up or could go down. | 19:15 | |
The secret of speculation is to buy cheap and sell dear. | 19:18 | |
Well, the secret of making losses, and it's no secret, | 19:21 | |
is to buy dear and sell cheap. | 19:25 | |
And no speculator could know the moment | 19:28 | |
after they announced that the mark would float | 19:31 | |
which he was going to be, a successful speculator | 19:35 | |
or somebody who was going to lose his shirt. | 19:37 | |
Now everything goes in reverse in a few hours, | 19:40 | |
in a few days, and on heavily borrowed leveraged money. | 19:42 | |
Instead of making a great return, | 19:46 | |
you can make a very substantial loss for yourself. | 19:49 | |
And so, the mark simply wobbled | 19:52 | |
up and down | 19:56 | |
depending upon which speculators | 19:58 | |
thought that it would appreciate more than 5%. | 20:01 | |
I think most people were surprised | 20:05 | |
at the moderation of the level | 20:08 | |
to which it did float once it was made | 20:13 | |
to be floating. | 20:17 | |
That was generally more around 5%. | 20:20 | |
I don't suppose anybody knows for sure, | 20:25 | |
certainly not as I am recording this, | 20:27 | |
perhaps when you hear this | 20:31 | |
there will be more information, | 20:33 | |
what the exact intentions of the new government are. | 20:35 | |
The presumption is, | 20:38 | |
and again, I'm making a prediction which could be wrong, | 20:41 | |
and this time I won't be able to call back the tape and | 20:44 | |
preserve my reputation from the rashness of my tongue. | 20:50 | |
The presumption I would think is that the | 20:57 | |
new government won't have the guts | 21:01 | |
and the determination to live with a floating mark, | 21:04 | |
that this is a halfway house, | 21:08 | |
and that they will decide | 21:11 | |
in a week | 21:15 | |
or a month or in a couple of months | 21:17 | |
what should be the new pegged rate. | 21:21 | |
The head of the | 21:25 | |
International Monetary Fund, | 21:29 | |
when he announced with | 21:30 | |
some approval obvious in his face and voice | 21:34 | |
that the mark was floating, | 21:38 | |
he had to admit lamely that this was technically a violation | 21:39 | |
of the IMF rules but it was not a violation | 21:45 | |
that he was likely to want to send the bailiff | 21:48 | |
over to do something about. | 21:52 | |
This violation could go on indefinitely | 21:57 | |
and I think that there are many academic economists | 21:59 | |
who would advocate that. | 22:02 | |
I may say, just speaking for myself, | 22:04 | |
that I wouldn't be at all adverse to this. | 22:06 | |
I think that it would be dandy | 22:09 | |
for us to accumulate some experience | 22:12 | |
with a floating mark. | 22:15 | |
I think it would be dandy for the economics profession. | 22:17 | |
I think it would be good, in all probability, | 22:20 | |
for the common market countries. | 22:22 | |
I think it would be good for the United States, | 22:25 | |
and I think it probably would be good for Germany. | 22:29 | |
So, I would welcome their not deciding | 22:34 | |
or trying to decide in the near future | 22:38 | |
what should be the new parity of the mark. | 22:42 | |
Nevertheless, I could well understand | 22:46 | |
their unwillingness to live | 22:49 | |
in that unfamiliar situation. | 22:51 | |
You have a party with a razor-thin majority, | 22:54 | |
very undependable coalition, I would guess, | 22:58 | |
and that's not exactly the kind of situation | 23:03 | |
in which you want to take chances, | 23:06 | |
and a floating exchange rate, | 23:09 | |
precisely because it is an innovation, | 23:12 | |
precisely because the Gnomes of Zurich | 23:14 | |
and then men of affairs are not too familiar with it, | 23:17 | |
does involve some risk and I could hear, | 23:22 | |
I could imagine in my mind's ear, | 23:26 | |
hearing the men in the street in Germany | 23:28 | |
beginning to say that this is Schiller's folly | 23:32 | |
and that all along, the wiser | 23:36 | |
Christian Democrats, | 23:41 | |
Christian Democrats | 23:44 | |
Kiesinger group was right. | 23:46 | |
Certainly you're going to have Strauss | 23:49 | |
who was a very strong man in opposition | 23:51 | |
who was going to make a lot of any mistake | 23:53 | |
in the economic sphere that might result | 23:56 | |
from any of these decisions. | 23:59 | |
And so I say, not as an unhedged prediction, | 24:02 | |
but as a 60-40 bet that I would kind of expect | 24:06 | |
Schiller and the boys to arrive at a new figure | 24:12 | |
for the mark | 24:17 | |
after they have got some experience from the free market. | 24:18 | |
I may say that it's very hard to get experience | 24:23 | |
from the free market because it's a case | 24:26 | |
of circular interdependence. | 24:30 | |
The free market is going to have the mark | 24:33 | |
wobble up and down depending upon supply and demand | 24:36 | |
from day to day. | 24:39 | |
But in the first couple of months, the dominant | 24:41 | |
force of supply and demand | 24:47 | |
will be what speculators think will be the ultimate decision | 24:49 | |
by the Social Democratic party. | 24:55 | |
If they think that ultimately 7% | 24:57 | |
will be the appreciation, | 24:59 | |
then, | 25:02 | |
and it's quoted at five, you'll get a lot of money | 25:05 | |
coming in to push it up towards seven. | 25:07 | |
So, Schiller will be watching the free market | 25:12 | |
for a clue as to what it's telling him | 25:14 | |
is the right rate, but at the same time | 25:17 | |
the free market will be watching Schiller | 25:20 | |
to see what they think he's going to do. | 25:22 | |
I emphasize this because we had experience | 25:25 | |
with exactly this in 1925 | 25:28 | |
when Britain made what we now know | 25:31 | |
to have been a terrible mistake | 25:33 | |
in restoring the pre-1914 gold standard | 25:35 | |
with the pound sterling back | 25:41 | |
at the pre-1914 parity. | 25:44 | |
Now, this was done in 1925. | 25:47 | |
It was done by Winston Churchill | 25:49 | |
as Chancellor of the Exchequer | 25:51 | |
and he had lots of advisers who | 25:53 | |
aided him in his folly. | 25:56 | |
It looks stupid now but it wasn't so stupid then | 25:59 | |
because what happened was that speculators | 26:02 | |
were betting that he would do exactly that. | 26:05 | |
And so, long before he made up his mind, | 26:07 | |
speculation pushed the value of the pound | 26:11 | |
nearer toward the parity | 26:15 | |
which they expected him to put it at. | 26:17 | |
He looked at that situation, | 26:20 | |
said look, it's already very nearly there, | 26:22 | |
therefore the equilibrium can't be very far off from that | 26:25 | |
and so it'll be a safe thing and it'll be a good, | 26:28 | |
an honest thing and all the rest | 26:30 | |
of the arguments which I won't go into, | 26:32 | |
to go back to that | 26:35 | |
level. | 26:38 | |
Then, let me | 26:42 | |
try to | 26:44 | |
think aloud what I would do in Schiller's position | 26:45 | |
if I had to set that rate. | 26:48 | |
From the standpoint of the world, in my judgment, | 26:53 | |
5% is the least that the pound should appreciate. | 26:58 | |
I can't conscientiously say that the pound | 27:04 | |
ought to appreciate if it's to be stuck | 27:07 | |
at a new level by as much as | 27:10 | |
10%, | 27:14 | |
but I would say somewhere between five and 10% | 27:15 | |
is the indicated | 27:20 | |
equilibrium rate. | 27:22 | |
Nevertheless, unless Schiller is a much braver man | 27:26 | |
than I think he ought to be probably, | 27:30 | |
if he has to stop | 27:35 | |
letting the mark float, | 27:38 | |
if I misspoke, by the way, and said pound | 27:41 | |
instead of mark, I meant mark, and everything | 27:44 | |
that I'm talking about now is to be the mark. | 27:48 | |
If he has to set a rate, | 27:51 | |
there are greater political risks for him if he | 27:53 | |
sets that rate | 27:58 | |
too high rather than too low | 28:00 | |
because the whole purpose of a high rate | 28:03 | |
is to get rid of the German export surplus. | 28:07 | |
And although the Germans | 28:12 | |
in the abstract will admit | 28:16 | |
that their surplus is too large | 28:17 | |
and although the rest of us | 28:19 | |
keep insisting that it's too large, | 28:20 | |
nevertheless there are lots of vested interests | 28:23 | |
in the export industries in Germany | 28:25 | |
who like that export surplus | 28:28 | |
and who are gonna be crybabies anyway | 28:31 | |
and there's gonna be a lot of recrimination | 28:33 | |
on their side, and they will get more and more | 28:35 | |
of the public with them if Schiller overdoes it. | 28:37 | |
And so, figuring that everybody in this world | 28:41 | |
is a little bit on the chicken side, | 28:44 | |
I'm gonna be a little chicken myself, | 28:47 | |
and my own forecast would be that | 28:49 | |
you'll get something like 5% to 7%, | 28:53 | |
5% or 6% or 7%, | 28:56 | |
if the mark is to be stabilized | 28:58 | |
by a forthright announcement with a new parity | 29:03 | |
which will then be recognized by the IMF. | 29:07 | |
Well, we'll learn more about that | 29:11 | |
with the passing weeks. | 29:14 | |
Let's just note | 29:17 | |
as my final swan song today | 29:20 | |
that the international balance of payments situation | 29:24 | |
looks a bit peaceful. | 29:28 | |
The mark's been a little bit better. | 29:29 | |
Even our export surplus is a teeny weeny bit better. | 29:31 | |
You still have the problem of the franc, | 29:36 | |
but nevertheless, in my judgment, | 29:39 | |
this is all still very deceptive. | 29:41 | |
The money that came in to the stock market | 29:45 | |
is beginning to leave | 29:47 | |
and will not continue in any case to come in, | 29:49 | |
so you can't | 29:52 | |
count on that fact. | 29:55 | |
The only thing that we've been counting on | 29:56 | |
in the face of a very important deterioration | 29:59 | |
in our export surplus, in our competitiveness, | 30:04 | |
has been the fact that we are paying 9%, | 30:08 | |
10%, 11%, and 12% interest rates | 30:12 | |
in the euro-dollar market, | 30:16 | |
and it's very easy for a country | 30:18 | |
which is a key currency to plaster over | 30:20 | |
any difficulties in its balance of payments | 30:25 | |
if it's willing to pay the pawn brokers that much money. | 30:26 | |
However, there will come a time | 30:32 | |
when domestic conditions in the United States | 30:34 | |
will call for lower interest rates | 30:36 | |
and even lower interest rates perhaps relative | 30:38 | |
to the interest rates which | 30:42 | |
are equilibrium rates abroad. | 30:44 | |
And when that time would come, | 30:47 | |
we will find that the overvaluation of the dollar | 30:49 | |
which has not in the least been mitigated, | 30:53 | |
probably has been aggravated in recent years, | 30:56 | |
will show itself much stronger. | 31:00 | |
And so, now that we're congratulating everybody | 31:03 | |
on flexibility in the mark, | 31:06 | |
let's do a little soul searching about how to get | 31:09 | |
some extra flexibility in the dollar itself. | 31:11 | |
- | You've been listening to Professor Paul Samuelson. | 31:15 |
He will be back with more comments | 31:18 | |
on the week of October 27th. | 31:20 | |
If you have question or suggestions, | 31:22 | |
write Instructional Dynamics Incorporated, | 31:25 | |
166 East Superior Street, Chicago, | 31:28 | |
Illinois. | 31:33 |
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