Tape 63 - Outlook for 1971
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- | Hello. | 0:02 |
This is Instructional Dynamics, | 0:03 | |
inviting you to another of our bi-weekly interviews | 0:05 | |
with Dr. Milton Friedman, Professor of Economics | 0:07 | |
at the University of Chicago. | 0:10 | |
We are taping this interview | 0:12 | |
on Wednesday, December 16th. | 0:14 | |
Professor Friedman, this is the time when economists | 0:18 | |
are all forecasting what the new year will bring. | 0:21 | |
Would you join the game? | 0:25 | |
- | I shall be glad to but, in doing so, | 0:26 |
I would like to repeat the proviso I have made | 0:29 | |
in the past on these occasions. | 0:32 | |
I do not myself engage | 0:33 | |
in making numerical dollar forecasts | 0:35 | |
of total GNP or of its components. | 0:38 | |
That is not because such forecasts | 0:41 | |
aren't highly desirable and useful, they are. | 0:44 | |
But they require a degree of attention | 0:46 | |
to the numerical details of the... | 0:50 | |
GNP and its components, | 0:55 | |
that I do not myself have time to devote to it | 0:57 | |
and, consequently, I am inclined | 1:00 | |
to make my own projections, which I must say | 1:02 | |
are made largely on a judgemental basis. | 1:05 | |
I am inclined to make those projections | 1:08 | |
in rather qualitative terms rather than | 1:10 | |
pinning them down with numerical values. | 1:12 | |
- | First, for background, | 1:16 |
in your tape last year at this time, | 1:18 | |
I believe that you were predicting a recession. | 1:20 | |
How do you think your prediction stands up? | 1:23 | |
- | Well, so far, as the prediction | 1:26 |
of a recession is concerned, I think by now | 1:28 | |
almost everybody will agree | 1:30 | |
that we have been in a recession. | 1:32 | |
Indeed, if there is any argument about this question | 1:34 | |
it is whether the past tense is appropriate | 1:37 | |
or whether the present tense is appropriate. | 1:40 | |
That is, there are people now who tend to believe | 1:42 | |
that the recession is getting worse and deeper, | 1:46 | |
and that we're headed for still further recession. | 1:49 | |
So, in that qualitative sense, I would say | 1:52 | |
the prediction stood up. | 1:54 | |
On the other hand, in a quantitative sense, | 1:56 | |
I expected, at that time, a rather | 2:01 | |
deeper and shaper recession than we have, in fact, had. | 2:03 | |
I said then, if I recall it correctly, | 2:07 | |
that the odds were very strong | 2:10 | |
that the recession would be at least as deep | 2:12 | |
as the recession of 1960 to '61, | 2:15 | |
and might be deeper than that. | 2:18 | |
In fact, the recession has been mild. | 2:21 | |
It has been milder than that of '60 to '61. | 2:24 | |
In 1960 to '61 the unemployment rate went up to 7%. | 2:26 | |
So far, the unemployment rate has reached | 2:30 | |
a maximum of 5.8%, though, as I will indicate later, | 2:33 | |
I expect it to go somewhat higher, | 2:36 | |
but not to reach the 1961 level. | 2:38 | |
The question I ask myself is, | 2:42 | |
why was my prediction of a recession, | 2:44 | |
unduly, not of a recession | 2:48 | |
but of a more severe recession than we have had, | 2:51 | |
and why was I wrong? | 2:54 | |
Why, in fact, has the recession been | 2:56 | |
as mild as it has been, | 2:58 | |
considering the sharp monetary swing of the prior year? | 3:00 | |
Part of the answer, but only part, I believe, | 3:04 | |
is to be found in the fact that monetary expansion | 3:08 | |
during this past year has been | 3:10 | |
at an extraordinarily high rate. | 3:12 | |
Much higher than I anticipated and much higher, | 3:14 | |
I believe, than is generally appreciated. | 3:16 | |
I pointed out in a recent tape | 3:19 | |
that the very drastic revisions | 3:22 | |
that the Federal Reserve has made | 3:25 | |
in its figure for money, sharply raise | 3:27 | |
the estimated rate of monetary growth | 3:31 | |
over the earlier part of the year. | 3:35 | |
Taking the very latest figures, | 3:38 | |
and recalculate them on the basis | 3:41 | |
of the revised estimates, | 3:45 | |
even if we go from December 1969 | 3:49 | |
to the last four weeks for which data are available, | 3:53 | |
which are the four weeks ending December 2nd, as I speak, | 3:56 | |
even from December 1969, the narrow money supply, | 4:00 | |
currency and demand deposits, | 4:04 | |
has risen at an average annual rate of 5.5%. | 4:05 | |
And from February, which, I think, | 4:09 | |
is a more meaningful turning point, | 4:11 | |
the rate of rise of M1 has been 6% per year. | 4:13 | |
Moreover, if you look at the broader magnitudes, | 4:18 | |
the total, including all commercial bank deposits, | 4:22 | |
has risen at no less than 12% per year | 4:26 | |
since last December and nearly 14% since February. | 4:29 | |
As you know, I regard these as overestimates | 4:34 | |
because they are so much affected | 4:36 | |
by what's happened to Regulation Q and CDs. | 4:38 | |
But even leaving out CDs, | 4:41 | |
you have currency plus all demand deposits | 4:44 | |
at commercial banks minus CDs rising at 8% | 4:47 | |
since December and at over 9% since February. | 4:51 | |
These are extremely high rates of monetary growth, | 4:55 | |
as I shall refer to again later, | 4:58 | |
and it may be that these very high rates | 5:01 | |
of monetary growth, partly, were responsible | 5:04 | |
for the recession being kept milder | 5:08 | |
than I anticipated that it would indeed be. | 5:11 | |
But I believe that's only part of the answer. | 5:15 | |
I believe the other part of the answer is, | 5:17 | |
so far, as I now can see, we have one | 5:19 | |
of those random variations. | 5:23 | |
Anybody who predicts anything | 5:26 | |
is always gonna predict it within a range, | 5:27 | |
if we look at past experience, | 5:29 | |
a given monetary impulse has had an effect | 5:31 | |
that is not precise but has to be figured | 5:33 | |
plus or minus a random variation. | 5:36 | |
And this time, the random variation | 5:39 | |
was on the milder side. | 5:42 | |
Hopefully, when we get to know enough | 5:43 | |
about the economy, we will go beyond that | 5:45 | |
and say why it was on the milder side. | 5:47 | |
One possible explanation, | 5:49 | |
and one that I think is very, very likely, | 5:52 | |
is that the relative mildness of the recession | 5:56 | |
was a tribute to the strength | 5:59 | |
of the inflationary expectations of the public at large. | 6:01 | |
Now, the strength of those inflationary expectations | 6:05 | |
I underestimated in my projection last year. | 6:08 | |
That shows up, not so much in my estimate | 6:11 | |
about a recession, but in what I thought | 6:13 | |
would happen to long-term interest rates. | 6:15 | |
I thought, at that time, | 6:17 | |
that long-term interest rates had peaked | 6:18 | |
and would continue down. | 6:21 | |
I was too early. | 6:23 | |
Long-term interest rates continued to go up | 6:25 | |
until the first, some time earlier this year | 6:27 | |
in the first half of this year, | 6:30 | |
though they have since then been going down, | 6:31 | |
as I had expected them to do throughout the year. | 6:33 | |
I now am inclined to interpret | 6:36 | |
this behavior of long-term interest rates | 6:38 | |
as a reflection of the much more deeply held, | 6:40 | |
the much stronger inflationary anticipations | 6:44 | |
on the part of the bondholding public, | 6:48 | |
than I included in my | 6:52 | |
projections a year ago. | 6:55 | |
These inflationary expectations, | 6:57 | |
which show up in bond prices, | 6:59 | |
presumably also show up in the pattern of price change | 7:03 | |
or inflation during the year. | 7:08 | |
I expected, a year ago, that there would be | 7:10 | |
a substantial tapering off of inflation during the year. | 7:12 | |
That expectation has been fulfilled. | 7:15 | |
Consumer prices are rising now at the rate | 7:19 | |
of something a little around 4%, | 7:21 | |
maybe a little bit higher than that, | 7:23 | |
maybe a little lower, depending | 7:25 | |
on what few months you average out. | 7:27 | |
At the beginning of the year, the end of last year, | 7:30 | |
they were rising somewhere between six and 7% per year, | 7:32 | |
so that is a substantial tapering off. | 7:36 | |
Yet again, while the direction has been | 7:39 | |
the one I expected, I clearly anticipated | 7:41 | |
a more rapid, sharper decline | 7:45 | |
in the rate of inflation than has occurred. | 7:48 | |
Now, partly, the fact that inflation | 7:51 | |
hasn't tapered off as much as I thought | 7:54 | |
is the other side of the fact | 7:56 | |
that the recession hasn't been as deep | 7:58 | |
as I thought it would be. | 7:59 | |
Obviously, a deeper recession would've | 8:00 | |
been accompanied by more price effects. | 8:02 | |
But all of these together, I think, | 8:05 | |
can be explained as a common consequence | 8:07 | |
of these more widely, strongly held | 8:10 | |
inflationary anticipations. | 8:12 | |
And in making projections for the year ahead, | 8:14 | |
we should keep in mind that | 8:16 | |
those inflationary anticipations, | 8:17 | |
while they may somewhat be dulled, | 8:19 | |
may be somewhat dulled, are still extremely strong, | 8:21 | |
as reflected both in the | 8:25 | |
moderate extent to which long-term interest rates | 8:28 | |
have come down, | 8:31 | |
and in the assertions that investors make | 8:33 | |
when they are asked questions | 8:34 | |
about what they anticipate. | 8:37 | |
I just saw a story in which a large number | 8:39 | |
of large investors estimated an average rate | 8:42 | |
of increase of 4% per year over the next 10 years, | 8:44 | |
which certainly suggests a continuance | 8:48 | |
of inflationary expectations. | 8:51 | |
- | What do you expect | 8:54 |
to happen to GNP in dollar terms? | 8:55 | |
- | Well now, if we come | 8:59 |
to the projections for 1971, | 9:00 | |
I believe the essential thing to keep in mind | 9:04 | |
is that there is an enormous amount | 9:06 | |
of steam in the monetary boiler. | 9:08 | |
I have been stressing the extremely rapid rates | 9:11 | |
of monetary growth of the period since February. | 9:14 | |
As yet, it is very hard to see any sign | 9:18 | |
of their effect on the economy. | 9:21 | |
That, I believe, is largely because | 9:23 | |
of the GM strike and its distorting effect | 9:26 | |
on economic figures. | 9:30 | |
But that money is going to have | 9:32 | |
to come out somewhere, | 9:33 | |
and the time is approaching when | 9:35 | |
it must be coming out very soon. | 9:36 | |
As you know, on the average, | 9:39 | |
the delay between a change in monetary growth | 9:41 | |
and the effect on economic activity | 9:45 | |
is somewhere around six to nine months. | 9:48 | |
Well, I date the changes having | 9:50 | |
taken place in February, which means | 9:52 | |
that November is the ninth month. | 9:55 | |
Now, of course it's not always within that range, | 9:58 | |
but that's the usual range. | 10:00 | |
And so we are at the period where | 10:03 | |
the lag is, if anything, threatening | 10:05 | |
to get abnormally long, | 10:07 | |
and I believe that what we will see | 10:08 | |
is that that monetary impulse is having its effect, | 10:12 | |
and that we are going to get a rather more rapid, | 10:15 | |
rather more sustained rise in nominal GNP | 10:18 | |
over the next six, nine, 12 months, | 10:22 | |
than people have been anticipating. | 10:25 | |
The great vice in most current commentary | 10:27 | |
on economic affairs, is the failure to allow | 10:31 | |
for lagged effects, for the pipeline | 10:35 | |
for things that are already in process. | 10:39 | |
As I look over the past history | 10:44 | |
of the Federal Reserve policy over 50 years, | 10:46 | |
this has been a recurrent mistake in their policy. | 10:50 | |
A major reason why they have, time and again, | 10:53 | |
moved too far when they have moved, | 10:56 | |
is because they have looked | 10:59 | |
at everything contemporaneously. | 11:01 | |
They have looked at today's income, | 11:03 | |
today's money supply, today's prices. | 11:05 | |
They have not taken account of the delayed effect | 11:07 | |
of the policies they have followed in the past. | 11:11 | |
Well, again, I believe that, | 11:14 | |
in looking forward to 1971, | 11:15 | |
the major general point I would want to make, | 11:18 | |
is that we must look forward to 1971 | 11:21 | |
in the light of what is already in the pipeline, | 11:24 | |
as the result of policies already taken. | 11:27 | |
Now, if we look into that pipeline, what do we find? | 11:29 | |
We find, since February, an extraordinarily expansive | 11:32 | |
rate of growth of money. | 11:36 | |
You look back over American economic history | 11:37 | |
and you will not find many years | 11:39 | |
with monetary growth at so high a rate. | 11:42 | |
The only years that do qualify, | 11:44 | |
that are at that rate, are either years of war, | 11:47 | |
like World War I, World War II, | 11:50 | |
or years of inflation, | 11:54 | |
like the 1967 and '68, | 11:58 | |
from the beginning of '67 to the beginning of '69. | 12:01 | |
Outside of that, you will not find | 12:05 | |
any periods in which you have such very high rate. | 12:07 | |
So, on the monetary side, | 12:10 | |
what's in the pipeline is a lot of steam. | 12:12 | |
As you know, I put greater stress | 12:16 | |
on the monetary side than on the fiscal side, | 12:19 | |
so far as the behavior of nominal GNP is concerned. | 12:22 | |
But suppose you take the viewpoint | 12:25 | |
of those who look at fiscal magnitude, | 12:27 | |
and ask, what is in the pipeline on the fiscal side? | 12:29 | |
And here, too, you will find that there's | 12:32 | |
quite a head of steam that's been built up. | 12:34 | |
Government spending has been very high | 12:36 | |
and has been growing. | 12:38 | |
The prospect is for a very substantial deficit, | 12:39 | |
for the year, fiscal year ending June 30th, 1971, | 12:43 | |
estimates range up to at least $15 billion. | 12:48 | |
Now, that is not really an accurate measure | 12:51 | |
of the steam in the boiler, because a large part | 12:54 | |
of that deficit is, itself, a consequence | 12:57 | |
of the lower level of economic activity and will disappear. | 12:59 | |
However, if you look just at what | 13:03 | |
has been happening to government spending, | 13:04 | |
and don't look at the receipt side, | 13:07 | |
you will see that it's at a very high level, | 13:08 | |
and at a continuing high level, | 13:11 | |
and thus, even if you stress fiscal effects | 13:12 | |
far more than I do, you must say | 13:16 | |
that there is a good deal of steam in the boiler. | 13:19 | |
Now, on the basis of this, | 13:22 | |
my own expectation, therefore, | 13:24 | |
is for a fairly substantial | 13:26 | |
rise in nominal GNP during the next year. | 13:29 | |
Now, you can ask me, what do I mean by fairly substantial? | 13:32 | |
This is a kind of tricky question, | 13:35 | |
you have to ask what dates you're comparing. | 13:36 | |
If you compare the fourth quarter 1970 | 13:40 | |
with the fourth quarter 1971, | 13:44 | |
you have to go outside the range | 13:46 | |
of monetary policy already completed | 13:49 | |
and ask what's going to happen to monetary policy. | 13:51 | |
Here, I think we can be reasonably sure of one thing: | 13:54 | |
you are not going to have | 13:57 | |
a highly restrictive monetary policy. | 13:58 | |
That's about as certain as anything can be. | 14:00 | |
In the first place, all of the political pressures | 14:03 | |
on the president, on the administration, | 14:06 | |
are to expand, not to contract. | 14:08 | |
In the second place, the Federal Reserve | 14:10 | |
is now very sensitive to public opinion | 14:13 | |
and it particularly, and this is a crucial thing, | 14:18 | |
by contrast with earlier periods, | 14:21 | |
it's looking at money supply | 14:23 | |
and not simply at interest rates. | 14:24 | |
If it were only looking at interest rates, | 14:26 | |
you might very well get a replay | 14:28 | |
of earlier periods, when the Fed | 14:30 | |
talked ease, but was very tight. | 14:32 | |
However, it's looking at money supply. | 14:35 | |
It is almost inconceivable to me | 14:37 | |
that they will let the rate of money supply increase | 14:39 | |
go below the 5%, which they have themselves | 14:41 | |
stated over and over again, is their target. | 14:44 | |
Personally, I believe, if anything, | 14:47 | |
that's too high a rate. | 14:49 | |
I would like to see them get down | 14:50 | |
to about 4% for a healthy growth, | 14:51 | |
but now I'm talking about what they will do. | 14:53 | |
So I think it's very unlikely | 14:55 | |
that they will get below 5%. | 14:57 | |
On the other side, I think it's also very unlikely | 15:00 | |
that they will take all bars off | 15:02 | |
and go for the eight, 10% that some people | 15:05 | |
in Washington and some outside Washington, | 15:07 | |
some former Democratic advisors and so on, are urging. | 15:10 | |
And, consequently, I think that, | 15:14 | |
on this occasion, unlike most other occasions, | 15:16 | |
we can be rather more confident about what's going | 15:19 | |
to happen on the money supply side, than we typically could. | 15:21 | |
And, therefore, in everything I say from here on out, | 15:24 | |
I am implicitly assuming that the rate of growth | 15:27 | |
of the money supply from now on out | 15:30 | |
will not be less for M1, | 15:33 | |
for the narrow money supply, than 5%, | 15:35 | |
probably will not be higher than something like 7%, | 15:38 | |
it will be somewhere in that range. | 15:41 | |
Now that leaves some uncertainty about what that means | 15:43 | |
for the broader money total, and particularly, | 15:46 | |
for the one I prefer, which excludes CDs. | 15:49 | |
Because the effects of Regulation Q | 15:52 | |
are tapering off and diminishing | 15:54 | |
as interest rates come down and come below Regulation Q, | 15:55 | |
I suspect the Fed will seek | 15:58 | |
to get rid of Regulation Q to an even larger extent. | 16:00 | |
As a result, it is well very possible, to me, | 16:04 | |
that the five to 7% rate of growth of M1 | 16:08 | |
will be associated with a lower rate | 16:11 | |
of growth of M2, minus CDs, | 16:14 | |
than we've observed in the past year. | 16:17 | |
That, instead of that being somewhere | 16:18 | |
in the order of 9%, that may well come down | 16:20 | |
to somewhere in the order of seven or 8%. | 16:22 | |
Well, if I now assume that that is the pattern | 16:26 | |
of money supply, then, as I say, | 16:31 | |
if you go from the fourth quarter of '70 | 16:32 | |
to the fourth quarter of '71, | 16:34 | |
I would look for something of the order | 16:37 | |
of an eight to 10% rate of increase in nominal GNP. | 16:39 | |
Now, but this is, I'm playing a little bit | 16:44 | |
fast and loose, the cards are stacked in my favor, | 16:47 | |
because the fourth quarter '70 is abnormally low | 16:51 | |
because of the GM strike. | 16:54 | |
If you take it on the average of 1970 | 16:57 | |
to the average of 1971, you'll get a lower number. | 16:59 | |
And I would suppose somewhere | 17:03 | |
around six to 8% in nominal GNP | 17:05 | |
is well within the range of possibility. | 17:07 | |
If you look at the pattern within the year, | 17:10 | |
the first quarter of '71 is likely | 17:13 | |
to be rather buoyant because of the aftermath | 17:15 | |
of the GM strike and the stockpiling for steel. | 17:18 | |
The exact pattern during the year | 17:23 | |
will undoubtedly depend, partly, | 17:24 | |
on what happens in the steel situation, | 17:27 | |
whether you have another big strike, | 17:30 | |
as well as what happens in railroads. | 17:31 | |
But I see no reason to suppose that, | 17:34 | |
aside from these aberrations, | 17:37 | |
you wont have a rather consistent, | 17:38 | |
accelerating rate of rise in nominal GNP, throughout 1971. | 17:43 | |
- | What do you foresee | 17:50 |
about the breakdown between prices and output? | 17:52 | |
- | Well, that is, of course, the $64 question, | 17:56 |
and it's a very, very hard one to answer. | 17:59 | |
As I indicated, I was unduly optimistic last year | 18:02 | |
about the extent to which price inflation | 18:05 | |
would come down, so were a lot of other people | 18:08 | |
who were talking about the projections. | 18:11 | |
And, as a result, everybody has tended | 18:13 | |
to be backing off from optimistic projections | 18:15 | |
about the rate of price rise. | 18:18 | |
I'm inclined, myself, not to do so. | 18:21 | |
I believe that these things have momentum that build up, | 18:25 | |
and that, once you get the momentum flowing | 18:30 | |
in the direction of a lower rate of price increase, | 18:33 | |
that momentum is substantial, | 18:36 | |
as I've indicated, on the average, | 18:39 | |
you have something like a 12 to 18-month gap | 18:42 | |
between the effect of a change, | 18:47 | |
between a change in monetary growth | 18:50 | |
and its effect on prices. | 18:52 | |
If you extrapolate this, that means | 18:54 | |
that the adverse effect on the slowing off | 18:56 | |
of inflation from the rapid monetary growth | 18:59 | |
will not really begin to hit until sometime | 19:02 | |
in the period from February to December of 1971. | 19:05 | |
As a result, throughout most of that period, | 19:12 | |
the delayed anti-inflationary impact of earlier measures | 19:14 | |
should still be operating. | 19:18 | |
And, as a consequence, I am, myself, | 19:20 | |
rather optimistic that you will get | 19:22 | |
a continued tapering off of inflation | 19:25 | |
at a rather faster rate than most people | 19:27 | |
have been expecting. | 19:29 | |
That is, I should not be at all surprised if, | 19:30 | |
by the end of 1971, | 19:32 | |
consumer prices, instead of rising as they now are | 19:35 | |
at somewhere in the four, 4.5% range, | 19:39 | |
are rising somewhere in the 2.5 to 3.5% range. | 19:42 | |
Once bitten, twice shy, and yet that seems to me | 19:48 | |
to be the way in which the indications are. | 19:53 | |
Now, if that's so, then that means | 19:57 | |
that you will get, in real terms, over the next year, | 19:59 | |
a rather substantial increase. | 20:02 | |
You will get something ranging, | 20:04 | |
at the one extreme, from, say, | 20:07 | |
4% per year increase in real output, | 20:09 | |
to something like more nearly six or 7%, | 20:13 | |
with perhaps the more rapid increases | 20:15 | |
in real output coming in the latter part of the year, | 20:18 | |
rather than in the earlier, | 20:20 | |
if you abstract from the distorting effect | 20:22 | |
of the strikes we were talking about. | 20:25 | |
- | What does this mean for unemployment? | 20:27 |
- | Well, unemployment, of course, | 20:30 |
will continue to go up for a time, | 20:32 | |
until the rate of increase of real output | 20:35 | |
matches the rate of increase of potential output. | 20:38 | |
Historically, unemployment is always a lagging series. | 20:42 | |
After the economy hits bottom and turns up, | 20:45 | |
unemployment continues to rise. | 20:48 | |
And thus, I would expect unemployment to continue to rise | 20:50 | |
for another three, four, five, six months, | 20:54 | |
I'm not sure exactly how much. | 20:57 | |
It's hard to believe that it will hit | 20:59 | |
a much higher level than it has now, | 21:01 | |
it's at 5.8, it might go up to 6.25%, | 21:03 | |
somewhere around that range, before it hits its peak. | 21:06 | |
And I would expect it, then, | 21:10 | |
to turn around and start coming down, | 21:11 | |
and to come down again, on the basis | 21:13 | |
of the earlier expectations, rather more rapidly | 21:15 | |
than most people anticipate. | 21:18 | |
Thus, again, by the end of '71, | 21:20 | |
I should not be at all surprised | 21:22 | |
to see the unemployment rate down | 21:23 | |
in the range of 5% or maybe a little lower, | 21:25 | |
maybe a little higher. | 21:28 | |
- | What about short-term interest rates? | 21:30 |
- | Well, short-term interest rates | 21:32 |
have, of course, been coming down | 21:33 | |
in an absolutely dramatic and almost unprecedented fashion | 21:35 | |
over the past few months. | 21:39 | |
You now have short-term interest rates at levels that | 21:41 | |
begin to sound familiar | 21:46 | |
to the pre-1970, | 21:48 | |
1969 experience, | 21:52 | |
with three month's treasury bill yield | 21:55 | |
down in the range under 5%, | 21:58 | |
you're getting numbers that sort of look historic. | 22:01 | |
However, the recent decline in short-term interest rates | 22:07 | |
has owed, as I have emphasized in previous tapes, | 22:11 | |
a good deal to the accidental effects | 22:14 | |
of the General Motors strike | 22:16 | |
and its effect on the demand for loans. | 22:18 | |
That's temporary, it's not going to remain there. | 22:21 | |
It's typical that, ordinarily, | 22:26 | |
when an economy goes through a recession, | 22:28 | |
short-term interest rates decline | 22:30 | |
at the bottom of the recession, | 22:32 | |
and then turn around and come back again. | 22:33 | |
On this occasion, the ending of the GM strike | 22:36 | |
will be an additional force that will operate | 22:41 | |
on short-term interest rates. | 22:44 | |
Thus, I would not be surprised | 22:45 | |
if short-term interest rates had | 22:50 | |
reached fairly near to their bottoms now. | 22:54 | |
This is a complicated matter, | 22:58 | |
and one needs more expertise on the details | 22:59 | |
of it than I have, because there's | 23:02 | |
a seasonal pattern in short-term interest rates, | 23:05 | |
and the first quarter of the year | 23:07 | |
is when short-term interest rates | 23:08 | |
tend, seasonally, to be relatively low. | 23:12 | |
So it may be that short-term rates | 23:14 | |
will decline somewhat more. | 23:15 | |
But, if I'm right about an expansion, | 23:17 | |
starting in and taking place next year, | 23:19 | |
that should, very shortly, | 23:22 | |
start to raise the demand for loans | 23:23 | |
and, as a result, start to raise short-term interest rates. | 23:26 | |
So I expect that, sometime early next year, | 23:28 | |
short-term interest rates will bottom out, | 23:31 | |
if they have not already done so, | 23:33 | |
and that we will have a rise in short-term interest rates | 23:35 | |
throughout a good part of next year. | 23:38 | |
This is indicated also by the extraordinary | 23:41 | |
gap spread, as the people | 23:47 | |
in this market refer to it, | 23:51 | |
between long rates and short rates. | 23:54 | |
That spread is very much larger | 23:56 | |
than it ordinarily is. | 23:58 | |
And so, one way in which it may be closed, | 24:00 | |
is by short-term rates stopping their decline | 24:02 | |
and starting to rise somewhat. | 24:05 | |
- | What do you foresee for long-term rates? | 24:08 |
- | Well, long-term rates | 24:11 |
are a somewhat different matter. | 24:14 | |
They are much more affected | 24:17 | |
by the longer period inflationary expectations | 24:18 | |
and less by the immediate market demands | 24:21 | |
for funds than are the short rates. | 24:24 | |
They have been relatively slow to come down, | 24:27 | |
but they have been coming down, | 24:30 | |
and there has been an extraordinary amount | 24:32 | |
of financing at the long end. | 24:34 | |
This has largely been a refinancing, a refunding | 24:36 | |
by enterprises, which have been replacing | 24:40 | |
short-term loans by long-term funds. | 24:41 | |
And it has, as I indicated, oh, six months or so, | 24:47 | |
was likely, it has not prevented long-term rates | 24:51 | |
from coming down, but has meant | 24:55 | |
that short-term rates came down | 24:57 | |
much faster than long-term rates. | 24:58 | |
Well, that refunding and refinancing | 25:01 | |
cannot continue indefinitely. | 25:04 | |
And, moreover, if I am right about what's going | 25:07 | |
to be happening to inflation over | 25:09 | |
the next six or nine months, | 25:11 | |
this should temper the strongly held | 25:12 | |
inflationary expectations. | 25:15 | |
It should cause people to look with more favor | 25:16 | |
on bonds, as opposed to other assets. | 25:18 | |
If this is right, then the expectation | 25:24 | |
is that long-term rates will continue to come down | 25:27 | |
and will continue to come down | 25:30 | |
beyond the upturn in business. | 25:32 | |
Just as, last year, I would set the peak in business | 25:35 | |
as having been reached sometime, maybe, | 25:39 | |
between September and December. | 25:41 | |
And short-term rates peaked | 25:43 | |
at the end of the year and then moved down, | 25:45 | |
while long-term rates continued to go up | 25:47 | |
for perhaps another six, seven months. | 25:49 | |
In the same way, on the upturn, | 25:51 | |
I expect long-term rates to continue | 25:54 | |
to come down for something like six, seven months, | 25:56 | |
maybe more, after the economy turns up, | 25:59 | |
and perhaps even after short-term rates come up. | 26:02 | |
This would mean that the spread | 26:05 | |
between long and short rates | 26:07 | |
would be narrowed from both sides. | 26:09 | |
It would be narrowed by a rise in short rates, | 26:10 | |
as well as by a further decline in long rates. | 26:13 | |
- | What do you see | 26:16 |
in the future for the stock market? | 26:17 | |
- | Well, that's, of course, | 26:20 |
a very difficult question, and one that I try | 26:21 | |
to avoid as much as I can, | 26:24 | |
because I believe that predicting the stock market | 26:26 | |
is a much more hazardous undertaking | 26:28 | |
than predicting most of these other things. | 26:30 | |
However, this much can be said. | 26:32 | |
Ordinarily, when economic activity rises, | 26:34 | |
the stock market rises in the early stages. | 26:39 | |
The stock market has a tendency | 26:42 | |
of reaching its bottom earlier | 26:43 | |
than business reaches its bottom, | 26:47 | |
and reaching its top earlier | 26:49 | |
than business reaches its top. | 26:50 | |
I believe that this is a common consequence | 26:52 | |
of the changes in monetary growth, | 26:55 | |
and monetary growth affects the stock market | 26:58 | |
earlier than it affects other things. | 27:00 | |
And, so far, the stock market has been behaving | 27:02 | |
very much on target. | 27:04 | |
Monetary growth, as I've emphasized, | 27:06 | |
resumed sharply in February. | 27:10 | |
The stock market reached its trough | 27:12 | |
maybe sometimes in May, in June, | 27:15 | |
depending on which particular index, | 27:17 | |
but it clearly has been rising | 27:18 | |
over the rest of the year. | 27:20 | |
And so, on the whole, in terms of past relations, | 27:21 | |
you would expect the stock market | 27:24 | |
to continue to rise throughout 1971. | 27:26 | |
However, the stock market is more sensitive | 27:29 | |
to special factors affecting psychology | 27:32 | |
or influencing confidence, than is the rest of the economy. | 27:36 | |
And, therefore, in the stock market, | 27:40 | |
you have many independent moves that seem | 27:42 | |
to have not too close a relationship | 27:45 | |
to other economic magnitudes, | 27:49 | |
and that's why I say I am much more hesitant | 27:51 | |
about any prediction of the stock market | 27:53 | |
than I am about some of these other magnitudes. | 27:55 | |
- | Professor Friedman, | 27:58 |
there's been much talk currently about incomes policy. | 27:59 | |
What is your reaction to this talk? | 28:04 | |
- | Well, if I make projections | 28:06 |
about incomes policy, I think that's very clear. | 28:08 | |
You will have a continued enormous amount | 28:12 | |
of talk about incomes policy, | 28:15 | |
and you will have nothing done and no effect from it. | 28:17 | |
In other fields, we have the saying | 28:20 | |
that nothing succeeds like success. | 28:22 | |
In the field of incomes policy, | 28:24 | |
it seems to be that nothing succeeds like failure. | 28:26 | |
In the same month, the month of October, | 28:29 | |
it was announced by the British government | 28:33 | |
that their prices and income boards | 28:37 | |
were being abolished. | 28:38 | |
It was announced by the Canadian government | 28:40 | |
that their voluntary wage-price control | 28:42 | |
was being terminated on January 1st, 1971. | 28:45 | |
In that same month, the Committee for Economic Development | 28:48 | |
issued a report recommending | 28:52 | |
a British-style price and incomes board, | 28:55 | |
and a Canadian-style voluntary price and wage control. | 28:58 | |
At the same time, the president, in his speech | 29:02 | |
before the National Association of Manufacturers, | 29:06 | |
made some timid moves in a jawboning direction, | 29:09 | |
presumably to appease his critics. | 29:13 | |
Well, you can add to that record of failure, | 29:15 | |
the failure of guidelines during the Johnson administration. | 29:18 | |
In fact, there is no known case | 29:21 | |
of incomes policy which has been successful. | 29:23 | |
But, as I say, in this area, failure breeds success, | 29:26 | |
so I expect that there will be no shortage of talk | 29:30 | |
about incomes policy, no shortage of jawboning | 29:34 | |
by many sorts of people. | 29:37 | |
But I also expect that it will have | 29:39 | |
negligible effect on anything expect | 29:40 | |
to confuse the mind of the public about what's going on. | 29:43 | |
- | Thank you very much, Professor Friedman. | 29:46 |
Remember, subscribers, | 29:48 | |
if you have any questions or comments, | 29:49 | |
or topics you would like to hear discussed in this series, | 29:51 | |
please send them to Instructional Dynamics Incorporated, | 29:54 | |
166 East Superior Street, Chicago, Illinois, 60611. | 29:58 | |
Dr. Friedman will be visiting with you again in two weeks. | 30:04 |
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