Tape 36 - Business outlook
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- | Hello again and welcome as Dr. Paul Samuelson of MIT | 0:02 |
shares with you his thoughts on the current economic scene. | 0:05 | |
This weekly series is produced and recorded | 0:08 | |
by Instructional Dynamics Incorporated. | 0:11 | |
This tape is for the week of September 22nd. | 0:13 | |
Professor Samuelson, what are we gonna talk about today? | 0:16 | |
- | We're gonna talk today about topic number one, | 0:19 |
what everybody is interested in, | 0:23 | |
namely what's the outlook for business | 0:25 | |
for the rest of this year and into the coming year. | 0:28 | |
The situation in my eyes | 0:32 | |
is clarifying itself a little bit | 0:36 | |
but there are still contradictory elements in the picture. | 0:38 | |
Let me first emphasize | 0:42 | |
the less puzzling aspects of the problem. | 0:47 | |
Real growth has been declining for more than a year. | 0:54 | |
The expectation is that in the current quarter | 0:57 | |
real growth will continue to decline, | 0:59 | |
and by the end of the year | 1:03 | |
1% per annum rate of real growth | 1:08 | |
is typical of the forecasts that are being made. | 1:12 | |
At the same time the rate of price inflation | 1:16 | |
is still not clearly past any any peak. | 1:20 | |
So we're in a scissors motion. | 1:23 | |
Money magnitude is still going up fairly strongly | 1:25 | |
because of price tag changes. | 1:29 | |
But real growth decelerating not to zero | 1:33 | |
but less than before, | 1:39 | |
with the result that money magnitudes | 1:41 | |
are still growing fairly rapidly | 1:44 | |
but not quite so rapidly as before. | 1:46 | |
There was a puzzle, however. | 1:50 | |
The growth stash of product figures | 1:52 | |
bear out what I've been saying. | 1:56 | |
However for the first half of 1969, | 1:58 | |
the Federal Reserve Board Index of Production, | 2:02 | |
physical production did not seem to agree with this | 2:04 | |
and it showed a 5% or thereabouts | 2:08 | |
rate of real growth, so there was a discrepancy | 2:13 | |
which figures were one to believe. | 2:15 | |
With the August decline, slight decline as it is | 2:21 | |
in the Federal Reserve Board Index of Production | 2:25 | |
and some revisions of the July figures, | 2:27 | |
the discrepancy and the discordance | 2:29 | |
of these two bits of evidence has become less. | 2:32 | |
So I would say that some of the most | 2:36 | |
important statistics that have been | 2:38 | |
coming in lately have been reducing | 2:39 | |
the inconsistencies that one finds in the data. | 2:44 | |
Let me mention another area. | 2:50 | |
I referred to the growth of employment. | 2:52 | |
Now employment has stopped growing | 2:58 | |
at the rate that it was previously growing, | 3:01 | |
and it too is pointing in the same direction | 3:03 | |
of real retardation that the real GNP figures are. | 3:07 | |
And this long last because one will expect | 3:12 | |
it to show up in employment. | 3:16 | |
I'm told by experts in the labor market field | 3:17 | |
that perhaps the employment series | 3:21 | |
is a more interesting and important one to watch | 3:23 | |
than the unemployment series | 3:26 | |
because as you know the unemployment series has been | 3:28 | |
very slow to increase. | 3:32 | |
At the last that I heard it still was 3.5% above, | 3:35 | |
it is true, it's 3.3% earlier in the year, | 3:40 | |
but down even a bit from a 3.6% limit reached earlier. | 3:44 | |
So taking employment and the Federal Reserve | 3:51 | |
Board Index of Production into consideration, | 3:54 | |
it does look as if we're getting a coherent picture. | 3:56 | |
If I turn to retail sales, | 3:59 | |
that same coherent picture is reconfirmed. | 4:01 | |
It's misleading, I think in a time like this | 4:05 | |
to look at retail sales compared to a whole year ago. | 4:08 | |
It's much more valuable to look at | 4:11 | |
recent month's retail sales | 4:14 | |
with the best seasonal correction that we can manage | 4:16 | |
and just to see whether that's going up or down. | 4:19 | |
I believe it has been not going up, | 4:21 | |
it's been barely holding level. | 4:25 | |
Now automobiles have a considerable weight in this. | 4:28 | |
One has to be careful not to give | 4:32 | |
too much importance to automobile statistics | 4:35 | |
because they already get a great deal of importance | 4:37 | |
in the way we collect our data. | 4:40 | |
Auto sales for example are in new orders. | 4:41 | |
And as they are weak, that shows a weakness in new orders. | 4:47 | |
They are in retail sales, | 4:50 | |
and if they are weak they're an important | 4:53 | |
component of retail sales. | 4:54 | |
So part of this leveling off of retail sales | 4:56 | |
that I've been speaking of is automobiles. | 5:00 | |
As far as one can make out, | 5:03 | |
Detroit has had a definite slow down | 5:06 | |
in consumer taking of domestic automobiles. | 5:09 | |
Earlier in the model year they were selling | 5:12 | |
at almost $9 million domestic car rate. | 5:16 | |
It's doubtful if they're selling at more | 5:19 | |
than an $8 million domestic car rate. | 5:21 | |
Now, I don't think this will show up in production | 5:23 | |
for quite a while. | 5:27 | |
The production schedule now in the new models | 5:28 | |
is at about a $9 million car rate. | 5:32 | |
But the consumer taking seems to be at an $8 million rate. | 5:34 | |
You may ask you how long can this go on, | 5:39 | |
well it can go on for quite a while | 5:41 | |
because with the new model year | 5:42 | |
they have to fill all the pipelines. | 5:44 | |
And so production for many months | 5:46 | |
after the middle of the year after late summer | 5:49 | |
is quite independent of demand. | 5:54 | |
The pipelines are harder to fill these days | 5:57 | |
because there's so many different models, | 5:59 | |
such a great variety in order that the dealers | 6:01 | |
could have a complete list to show and to fill orders. | 6:03 | |
And so if we continue to sell cars | 6:08 | |
at an $8 million rate and we produce them | 6:13 | |
at a $9 million rate, something will have | 6:15 | |
to give eventually. | 6:18 | |
And what will happen, of course, | 6:19 | |
is that we are, in effect, borrowing against production | 6:20 | |
early next year after the turn of the year. | 6:26 | |
And so we all, as business analysts, | 6:29 | |
should watch what's exactly happening to | 6:33 | |
consumer taking of domestic automobiles. | 6:36 | |
I say they'd been running at eight million rate | 6:41 | |
as against an earlier nine million rate, | 6:43 | |
and as against the nine million production rate, | 6:45 | |
that's what all the indications are, | 6:48 | |
but nobody really knows just how | 6:50 | |
well the new models will catch on, | 6:53 | |
and that could change. | 6:55 | |
It could change in both directions, | 6:57 | |
it could change in an upward direction, | 6:58 | |
it could change in a downward direction. | 7:00 | |
I think it's best to stick with the existing figures | 7:03 | |
and assume autos a bit weaker than previously. | 7:06 | |
There's another bit of recent news which makes | 7:14 | |
the existing picture a little bit more coherent. | 7:18 | |
If the economy is slowing down one would expect that | 7:22 | |
to show up in piling up of inventory. | 7:25 | |
And yet up until recent reports, | 7:30 | |
inventory behavior has been extremely moderate. | 7:33 | |
You might almost say sedate. | 7:37 | |
I find it hard to believe that you can have | 7:39 | |
a really serious recession and a really big swing | 7:42 | |
in American business activity unless you have | 7:46 | |
considerable swings in inventory. | 7:50 | |
And yet most of the model forecast | 7:52 | |
that I have been looking at, | 7:56 | |
which show what will happen to GMP in the current | 7:58 | |
third quarter or what will | 8:01 | |
be estimated to happen in the fourth quarter, | 8:03 | |
what will has to happen next year. | 8:05 | |
So many of those models, until recently, | 8:07 | |
showed inventory accumulation | 8:09 | |
never deviating very much from $7 or 8 billion | 8:11 | |
and that doesn't seem to give the materials | 8:15 | |
for a real bonfire of a swing. | 8:17 | |
Just to orient ourselves I'll remind you | 8:21 | |
that in early 1967, | 8:25 | |
when we had a mini recession, | 8:30 | |
the retardation which was not a recession, | 8:32 | |
so just prior to it, | 8:35 | |
inventories were being accumulated | 8:38 | |
not at these modest and sedate | 8:39 | |
$7 or 8 billion that I've been talking about | 8:41 | |
but at a $20 billion rate. | 8:43 | |
Of course at the time we didn't know that. | 8:45 | |
It probably has something to do with the disappointing | 8:47 | |
Christmas season. | 8:49 | |
But it was at 20 billion rate | 8:50 | |
which represented an excess of inventory | 8:53 | |
probably in some sense and which | 8:56 | |
was followed by a slow down | 8:58 | |
in the rate of inventory accumulation. | 9:01 | |
That was what helped to provide the energy | 9:03 | |
for the retardation and for the decline. | 9:06 | |
Well, at long last, we are beginning to see | 9:11 | |
inventory accumulation in the statistics. | 9:16 | |
The first July reports showed more than | 9:21 | |
$1 billion worth of inventory accumulation. | 9:24 | |
This was inventory accumulation as I remember it | 9:28 | |
at retail and at manufacturing level, | 9:30 | |
not very much at the wholesale level. | 9:36 | |
And if you just multiply that number by 12, | 9:38 | |
you would speak of a $15 billion annual rate | 9:41 | |
of inventory accumulation. | 9:45 | |
However you would misspeak if you did that because | 9:46 | |
that's the change in book value. | 9:49 | |
And when the GNP statisticians | 9:51 | |
calculate the rate of change of inventory, | 9:54 | |
they try to correct for the change in book value. | 9:57 | |
So I'll try to make adjustment for that. | 9:59 | |
The so called inventory price change valuation | 10:02 | |
must be applied and that will bring | 10:06 | |
the figure down from 15 billion | 10:09 | |
somewhere toward 10 billion, | 10:12 | |
let's say somewhere between 10 and 15 billion, | 10:14 | |
11 or $12 billion. | 10:16 | |
It's interesting that although there are not | 10:20 | |
any great signs of inflation abating, | 10:23 | |
the inventory evaluation adjustment for the third quarter, | 10:26 | |
which is probably a reflection of the cost of | 10:29 | |
industry raw materials and industry fabricated products | 10:32 | |
is, I believe a more modest pace | 10:36 | |
than in the second quarter. | 10:40 | |
So some diminution of the inflation | 10:41 | |
in certain sectors is beginning to show up. | 10:45 | |
What's the outlook for the rate of price inflation? | 10:52 | |
We've been assured for a long time that | 10:57 | |
the more than 6% rate of increase | 11:01 | |
in the Cost of Living Consumers Price Index | 11:03 | |
is probably going to taper off a bit. | 11:07 | |
And the greatest hopes are in two areas. | 11:11 | |
Food, prices, and also the cost | 11:14 | |
of running a home includes a generous allowance, | 11:20 | |
proper allowance for the cost of mortgages. | 11:23 | |
And up until recently mortgage rates have been rising | 11:26 | |
and some people are the opinion that | 11:30 | |
interest rates have reached their peak | 11:33 | |
and will be going down. | 11:34 | |
And this in relation to a decline in food prices | 11:36 | |
which has already taken place say in | 11:40 | |
meat at the wholesale level, | 11:42 | |
means that relief in the rate | 11:44 | |
of price increase is on the way. | 11:48 | |
I'd go along in a measure with this of you | 11:52 | |
but I wish that somebody would break down | 11:57 | |
the overall index of prices, | 12:01 | |
say that use in the GNP deflator | 12:04 | |
into that component which involves food, | 12:07 | |
that component which involves household care. | 12:11 | |
Make as generous allowance as you can | 12:15 | |
for improvement there. | 12:17 | |
And I would like to emphasize that in order | 12:19 | |
to have improvement, | 12:21 | |
you don't have to have a decline in the cost | 12:23 | |
of mortgage interest. | 12:25 | |
Let mortgage interests simply cease to grow | 12:27 | |
as fast as it has been growing. | 12:30 | |
And in that component of the overall price index | 12:32 | |
you will get some improvement | 12:35 | |
in the rate of price inflation. | 12:36 | |
My suspicion is that when you do that | 12:39 | |
you will find that the overall implicit price deflator | 12:41 | |
is rather sluggish. | 12:48 | |
And so I think I'm a bit of a pessimist. | 12:50 | |
I've seen Washington and I've seen New York | 12:54 | |
and other estimates showing the implicit price deflator | 12:56 | |
which was, perhaps, growing at an annual rate | 13:01 | |
in the second quarter of the year of 5.1%. | 13:05 | |
And which I suppose one can guess pretty well | 13:09 | |
to be in the third quarter | 13:13 | |
growing at 5.3 or 5.4%. | 13:15 | |
I'd like to emphasize that that increase | 13:20 | |
from the second quarter to the third quarter | 13:22 | |
is largely due to the government pay increase | 13:24 | |
that we've been talking about and which came in in July. | 13:27 | |
I think if you split up the implicit price deflator | 13:33 | |
into two components, the private and the government, | 13:35 | |
you would find that the government went way up | 13:38 | |
and in a way that will not be repeated | 13:41 | |
in the fourth quarter. | 13:43 | |
And it was all set by a slight decline | 13:46 | |
in the rate of increase of the private deflator. | 13:50 | |
I have to be very careful in my speech | 13:55 | |
because I'm not saying that prices have come down | 13:57 | |
in the private sector. | 13:59 | |
What I am saying is that prices have perhaps | 14:00 | |
been growing just a little bit more slowly | 14:04 | |
on an overall basis in the private sector. | 14:07 | |
I expect that to continue into the fourth quarter, | 14:11 | |
therefore without the government | 14:14 | |
bringing in a new pay increase and there is no such large, | 14:16 | |
new pay increase schedule for the fourth quarter. | 14:19 | |
I would think that one should drop the figure | 14:22 | |
from 5.3 or 5.4% of the third quarter | 14:24 | |
to 5% or | 14:28 | |
something like that. | 14:34 | |
Now in many of the estimates which I've seen, | 14:37 | |
it drops considerably below 5%, | 14:39 | |
drops say to 4.5%. | 14:42 | |
And then by the first quarter of next year | 14:44 | |
it drops to 4%. | 14:47 | |
And then in some of what I must regard as optimistic | 14:49 | |
forecast, that is optimistic on the price front, | 14:53 | |
the implicit deflator is shown at only | 14:56 | |
about 3.5% by the middle of next year. | 15:00 | |
Now you may say that price increase of 3.5% | 15:05 | |
are an intolerable thing and a very bad thing, | 15:11 | |
how in the world can one call this an optimistic solution? | 15:13 | |
My only reaction to that statement would be that | 15:21 | |
I think it is optimistic in the sense | 15:24 | |
of what we're likely to get. | 15:26 | |
I think we'll do very well indeed | 15:27 | |
and in fact better than I expect us to do | 15:29 | |
if you could actually get this very sluggish | 15:32 | |
price barometer to grow at only 3.5%. | 15:37 | |
My fear is that even if the coherent picture | 15:43 | |
that I've been discussing does materialize, | 15:47 | |
that rate of implicit price | 15:53 | |
deflator growth will not fall that much. | 15:58 | |
And so if I ask people or do say 3.5%, | 16:02 | |
you could be wrong. | 16:06 | |
Do you think it's likely that it'll be 3? | 16:08 | |
Very few of them would go that far. | 16:10 | |
I say well you could be wrong on the other side. | 16:13 | |
Do you think that it's possible and even likely that | 16:15 | |
it might be more towards forward? | 16:18 | |
And they say, yes, we're not perfect. | 16:19 | |
Well I think at the least you should average | 16:22 | |
3.5 and 4 and come up with three and three quarters | 16:24 | |
or something in the upper range of that range | 16:28 | |
if that's what people's expectations | 16:33 | |
and predictions actually are. | 16:36 | |
Now according to this coherent picture | 16:40 | |
that I've been describing, | 16:43 | |
joy should come into the hearts | 16:46 | |
of people in the bond market because | 16:48 | |
it should mean that at long last | 16:50 | |
those bulls on bonds, those people who have been saying | 16:53 | |
that the rate of interest has just about | 16:57 | |
reached its peak now, | 17:01 | |
if it hasn't reached at this instant | 17:02 | |
it will do so just about this afternoon. | 17:03 | |
They may finally get their innings. | 17:08 | |
However I'm not so sure and now I want to | 17:13 | |
not stress the coherence of the picture. | 17:18 | |
I wanna stress the discordance that's in the picture | 17:20 | |
and the incoherence of the picture | 17:24 | |
because some new evidence has come to light | 17:25 | |
which suggests that the typical fashionable forecast | 17:29 | |
that I've just described may not tell | 17:32 | |
the whole story or may not even tell the correct story. | 17:36 | |
Before I do that I guess I ought to say that | 17:39 | |
I think that the fashionable forecast | 17:43 | |
that I just described, | 17:45 | |
it is general numerical outlines, | 17:48 | |
quantitatively would run about the same | 17:50 | |
for the monitorists as it would | 17:53 | |
for the more eclectic model builders | 17:56 | |
because although the reasoning | 18:00 | |
as to the causation is different, | 18:03 | |
both of them using each separate theories | 18:06 | |
come up with about the same result. | 18:10 | |
The model builders for all the reasons | 18:14 | |
that I've discussed suggest | 18:18 | |
that this is about to happen. | 18:22 | |
Government expenditure is very slow in growing now. | 18:25 | |
There's a very strong clamp upon expenditures. | 18:29 | |
I think the administration means business on this. | 18:32 | |
I think they'll be very low to exceed | 18:37 | |
their estimates by very much | 18:40 | |
so that if certain things go up very much | 18:42 | |
beyond expectation, let's say for example | 18:44 | |
that farm support programs cost half a billion more | 18:47 | |
than the government had reckoned. | 18:51 | |
And the government can't do anything about that | 18:53 | |
because existing legislation says | 18:54 | |
that it's up to the birds and the bees | 18:56 | |
and the corn borer and cotton borer | 18:59 | |
that determines how much the government will have to pay. | 19:04 | |
If those expenditures go up | 19:06 | |
I suspect that some part of the defense program | 19:08 | |
is just gonna be told you just cannot have it | 19:11 | |
because we're firmly bound to keep within the totals. | 19:13 | |
With housing down, with government expenditure down, | 19:19 | |
with inventories finally perhaps beginning to pile up | 19:23 | |
so that the growth in the GNP that's still taking place | 19:27 | |
is beginning to be of a less healthy kind, | 19:32 | |
inventory accumulation rather than final demand, | 19:35 | |
final demand is beginning to languish | 19:39 | |
even more than the overall figures would show. | 19:41 | |
So the model builders call for this slow down. | 19:45 | |
The monitorists say, of course all these things | 19:49 | |
will happen the way you say, | 19:55 | |
but the reason for it has been | 19:57 | |
that since some time after April, | 20:00 | |
no matter how you reckon the money supply, | 20:02 | |
no matter whether you include in the new definition | 20:06 | |
the euro-dollar component which had earlier | 20:11 | |
been unconsciously neglected, | 20:15 | |
and once you make the new seasonal corrections | 20:19 | |
do some new benchmarks, | 20:22 | |
even though the new series is a little bit | 20:23 | |
stronger than the first part of the year | 20:26 | |
than the old series by any reckoning | 20:27 | |
in the last few months, | 20:31 | |
the reserve base and the money supply have been | 20:33 | |
virtually flat and experience, | 20:37 | |
according to the monitorists leads view | 20:42 | |
that any time the money supply grows | 20:45 | |
less than 3 or 4% for any sustained period of time, | 20:48 | |
there must inevitably follow as the day the night, | 20:53 | |
that there will be a slow down and even a recession. | 20:57 | |
All these views are agreed. | 21:04 | |
They are part of the coherent picture, | 21:07 | |
but let me turn to the discordant elements. | 21:09 | |
First there is Pierre. | 21:14 | |
I mean of course Pierre Rinfret. | 21:16 | |
The Boston Rinfret Association | 21:19 | |
is taking a poll of its survey group | 21:22 | |
as it has for many years or for some years, | 21:26 | |
and it's come out, as I remember, | 21:29 | |
it was an estimate that plant | 21:31 | |
equipment expenditure for 1970 will go up by | 21:33 | |
9% over 1969, a shocking figure because | 21:36 | |
according to the coherent picture | 21:42 | |
you would expect that with profits being eroded away | 21:44 | |
with a cashflow down with overcapacity mounting up | 21:48 | |
with profitability and incentives down | 21:54 | |
that there would be virtually no growth | 21:58 | |
in plant and equipment expenditure, | 22:04 | |
and some people would fear that it would turn down. | 22:06 | |
Or if they want to cool off inflation | 22:10 | |
they would be hoping that it would turn down. | 22:13 | |
The Rinfret straw in the wind is confirmed | 22:18 | |
by his old firm, Lionel Edie. | 22:22 | |
When Rinfret left I guess he must have left | 22:26 | |
the typewriters and the computers and a lot of the staff. | 22:28 | |
Well, when he left Lionel Edie where he used to work, | 22:32 | |
and so they continued their survey | 22:36 | |
and they show a 7% increase. | 22:38 | |
I believe there are some technical discrepancies | 22:41 | |
between the composition of their 7% | 22:44 | |
and the Rinfret 9%. | 22:46 | |
For example Rinfret, I believe, | 22:48 | |
shows no increase in the durable sector in investment | 22:51 | |
and a whopping 10% increase in the non-durable sector. | 22:55 | |
And I'm not sure that the Edie figures show | 22:59 | |
quite that discrepancy. | 23:03 | |
But there we have 9 and 7%. | 23:05 | |
This is in comparison with the McGraw-Hill | 23:08 | |
estimate of a little earlier date of 5%. | 23:10 | |
And so if this straw in the wind is really | 23:14 | |
showing the wind, we may, later in the year, | 23:17 | |
get the official SEC survey which will confirm this | 23:21 | |
and show an element of strength in the picture | 23:26 | |
which is rather inconsistent with any | 23:29 | |
very pessimistic view that inflation, | 23:32 | |
well, I'm sorry, I shouldn't say pessimistic, | 23:35 | |
but any bearish view that inflation will be | 23:37 | |
on the way to being extinguished by | 23:42 | |
a contrived retardation in the economy. | 23:46 | |
I might mention I have no idea whether this | 23:50 | |
bit of gossip is worth anything, | 23:53 | |
but in one of the columnists, | 23:55 | |
and it wasn't a financial columnist, | 23:58 | |
I think probably it was Evans and Novak | 23:59 | |
or somebody like that. | 24:02 | |
There was an assertion that there's a secret, | 24:04 | |
super secret government survey, | 24:07 | |
and that that's been suppressed because, | 24:10 | |
or at least kep highly secretive, | 24:13 | |
and I don't know whether it was intended it would | 24:16 | |
ever be published but there certainly | 24:19 | |
is no intention now according to this gossip | 24:20 | |
of publishing it which has caused | 24:23 | |
consternation in the ranks of the administration | 24:27 | |
economist because it confirms that Rinfret | 24:30 | |
finding which is that plant and equipment expenditures | 24:35 | |
will be very high. | 24:38 | |
How do I counsel that we praise this bit of news? | 24:40 | |
First I do not think that survey by Lionel Edie | 24:48 | |
or by Rinfret or by any similar group | 24:51 | |
can be taken as a solid indication | 24:54 | |
of what's going to happen in plant and equipment. | 24:56 | |
You're not under oath | 25:00 | |
when you fill out those questionnaires, | 25:01 | |
and you don't have to do what you say will be done. | 25:04 | |
And so I wouldn't treat them as the gospel. | 25:10 | |
But I do think that one should shade one's | 25:15 | |
probabilities by taking them into account | 25:18 | |
because at the worst this represents | 25:22 | |
a kind of a gala poll which tells you | 25:24 | |
something about businessmen's feelings | 25:26 | |
and verbalizations and expectations. | 25:30 | |
And as far as this gala poll straw in the wind is concerned, | 25:33 | |
we have evidence that they are not turning tail | 25:36 | |
and cutting back deeply on plant and equipment thinking. | 25:40 | |
So I think we just have to leave it there until we get | 25:45 | |
later in the year the official, more comprehensive survey. | 25:50 | |
It is not the gospel either but it's a little bit closer | 25:55 | |
to what's actually gonna happen both in time | 25:59 | |
and in reliability than these private surveys. | 26:02 | |
Now I have only a few minutes left, | 26:11 | |
but I should certainly mention another doubt | 26:14 | |
about the coherent picture. | 26:20 | |
Do you recall that it wasn't very long ago | 26:22 | |
that bankers like Gaylord Freeman | 26:25 | |
of the First National Bank of Boston | 26:28 | |
were saying that the prime rate's about to go down? | 26:31 | |
It was 8.5%, and it is 8.5% as I talk, | 26:35 | |
and that its next move is down | 26:41 | |
and that next down isn't very far off. | 26:42 | |
And I think I've quoted Henry Kaufman of Solomon Brothers, | 26:45 | |
that there would be a big bull market in bonds. | 26:48 | |
There was a certain amount of confirmation to this | 26:52 | |
expectation in the sluggishness of bank credit loans | 26:56 | |
in the big city banks earlier in the summer. | 27:02 | |
Well, the reports have come in for the last few weeks | 27:06 | |
on every hand show a tremendous upswing | 27:09 | |
in the demand for bank credit. | 27:14 | |
And so Gaylord Freeman said in a trans-continental broadcast | 27:18 | |
to a business group carried on a Bell System video line | 27:25 | |
that he's not so sure about that imminent decline. | 27:31 | |
The Federal Reserve's tightening | 27:38 | |
which made it difficult for the banks | 27:39 | |
in the normal course of affairs to extend | 27:41 | |
credit to business corporations | 27:46 | |
has been driving those business corporations | 27:49 | |
toward the bond market and toward | 27:51 | |
other methods of finance. | 27:52 | |
It's just as inevitable a process | 27:54 | |
as when cowboys with their guns and lassos | 27:58 | |
and shouts go behind cattle | 28:03 | |
and push them into the corral. | 28:05 | |
Well, the Federal Reserve, by this tightening, | 28:06 | |
month after month day after day | 28:10 | |
is driving business into a liquidity shortage. | 28:12 | |
Even if the Fed were to ease up a little bit, | 28:18 | |
that liquidity shortage could still | 28:20 | |
continue to grow and to accumulate | 28:21 | |
because since '66 and prior to the last turn of the screw, | 28:24 | |
business had tried to become liquid | 28:30 | |
so as to protect itself against the liquidity squeeze. | 28:32 | |
That liquidity squeeze has finally | 28:35 | |
cut through the blubber and is down to blood. | 28:38 | |
And so it looks to me as if it's a rather foolhardy trader | 28:41 | |
in the bond market who'd go out with | 28:47 | |
heavily borrowed money at this time | 28:50 | |
and think he's caught the peak in yields | 28:52 | |
and the trough in bond prices. | 28:56 | |
I think that with the new plant and equipment news | 29:00 | |
with still no signs of overt reduction | 29:05 | |
in the rate of price inflation, | 29:10 | |
if I were to put myself in the shoes | 29:13 | |
of the federal reserve, | 29:17 | |
not to decide things the way I would decide | 29:18 | |
if I were a Federal Reserve member, | 29:20 | |
but put myself in their shoes | 29:21 | |
and decide it the way the I think they think, | 29:24 | |
it seems to me that some of them will say | 29:26 | |
let's not turn tail, let's not ease things yet. | 29:29 | |
Let's wait until after say the international meetings | 29:34 | |
when all the foreigners will come and ask | 29:39 | |
whether America is really resolved to save the dollar. | 29:41 | |
And let's look for few token signs at least | 29:44 | |
of inflation reduction before we do any | 29:49 | |
agonizing reappraisals and making any massive changes | 29:55 | |
towards easier money. | 29:59 | |
In my view the bond market is not likely for sometime | 30:02 | |
to take a tremendous upward increase | 30:07 | |
in the prices on the market of bonds. | 30:10 | |
- | Thank you, Professor Paul Samuelson of MIT. | 30:14 |
We welcome your comments and questions. | 30:17 | |
Write Instructional Dynamics Incorporated, | 30:19 | |
166 East Superior Street Chicago, Illinois. | 30:21 |
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