Tape 129 - GNP; interest rates; stock market
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- | Welcome once again as MIT Professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:05 | |
This program series is produced | 0:07 | |
by Instructional Dynamics Incorporated. | 0:09 | |
This program was recorded May 31st. | 0:11 | |
- | We're beginning to move into the summer season. | 0:15 |
As far as the domestic economy is concerned, | 0:19 | |
we're still in the same guessing game. | 0:22 | |
If you look at past and present statistics, | 0:26 | |
the economy is strong and it's overly strong. | 0:29 | |
If you look at the forecasts by most experts, | 0:32 | |
the economy is about to move into a mini recession | 0:36 | |
or a growth recession | 0:41 | |
or in the case of a minority of the experts, | 0:43 | |
the economy in 1974 will move into a full-fledged recession | 0:47 | |
in which for at least a couple of quarters, | 0:53 | |
the real GNP will actually move backwards, | 0:56 | |
it will show negative growth. | 1:02 | |
Let me today try | 1:06 | |
to comment on different viewpoints, | 1:08 | |
appraise and evaluate them | 1:13 | |
and if time permits, | 1:15 | |
perhaps we can say a word or two | 1:19 | |
about the so-called energy crisis. | 1:20 | |
I think I might begin today | 1:26 | |
by reading to you from a memorandum | 1:27 | |
of May 23rd 1973 | 1:31 | |
by a very able contemporary economist, | 1:33 | |
Albert T. Summers | 1:36 | |
who's a senior vice-president and chief economist | 1:37 | |
of the Conference Board. | 1:40 | |
Dr. Summers does a good deal | 1:42 | |
of lecturing before business and other groups | 1:45 | |
and in addition, aside from his official duties | 1:50 | |
as economist for the Conference Board, | 1:54 | |
he does a certain amount of forecasting | 1:58 | |
and consulting for financial groups. | 2:00 | |
I've found over the years | 2:04 | |
that his is a good voice to listen to | 2:05 | |
because he has a pretty good track record. | 2:08 | |
He keeps in close touch, he's a good analyst. | 2:10 | |
That's true by the way of a number people | 2:14 | |
at the Conference Board, | 2:16 | |
John Kendrick is the director of research there, | 2:17 | |
Martin Gainsborough who's now I guess emeritus | 2:21 | |
but still very active, | 2:24 | |
those are economists whom it's been worth listening to | 2:27 | |
in the past. | 2:33 | |
Well, now let me read you a couple of paragraphs | 2:34 | |
of views by Dr. Summers. | 2:37 | |
He says at least for this cycle, this business cycle, | 2:41 | |
and given the grave impairment of leadership | 2:44 | |
in Washington going into Watergate, | 2:46 | |
it is getting late to expect new policy arrangements capable | 2:48 | |
of calming an overwrought | 2:52 | |
and cyclically exposed business boom. | 2:53 | |
It is too late for monetary policy | 2:56 | |
to affect the consumer boom | 2:58 | |
which is nearing an end anyway. | 3:01 | |
And so many industries have touched the outer limits | 3:04 | |
of their productive capacity, | 3:07 | |
it is not likely that monetary policy | 3:08 | |
can affect the capital goods boom | 3:11 | |
which has now acquired | 3:13 | |
a long-term capacity expansion character. | 3:15 | |
All that can be hoped for | 3:18 | |
is that at least the speculative aspects | 3:20 | |
of an inventory boom | 3:22 | |
which might otherwise be achingly intense | 3:23 | |
both because of share need | 3:26 | |
and also because of rapidly rising commodity prices | 3:28 | |
can be truncated somewhat | 3:32 | |
before its normal cyclical completion. | 3:33 | |
In other words, we have done it again. | 3:36 | |
Those analysts who hope that monetary policy | 3:39 | |
in the political context | 3:42 | |
of the 1970s and hampered by the limitation | 3:43 | |
of its powers to the supply side of the money market | 3:48 | |
could achieve economic stability almost single handedly | 3:50 | |
have been disappointed for the third time | 3:54 | |
in seven years. | 3:56 | |
Three strikes the stock market has grimly concluded | 3:57 | |
and you're out. | 4:00 | |
Now, what's being said there | 4:02 | |
is the implicit view | 4:03 | |
of Dr. Summers that it's not enough to control | 4:08 | |
the supply of money | 4:12 | |
and it's not enough to control the supply of credit | 4:14 | |
and it's not enough for the Federal Reserve Board | 4:16 | |
using conventional open market operations, | 4:19 | |
using conventional discount rate policy, | 4:21 | |
using conventional legal reserve requirements policy | 4:24 | |
to effect interest rates. | 4:28 | |
In his view, we should have been long since getting on | 4:30 | |
with the problem of developing selective credit controls. | 4:35 | |
You couldn't tell that from the passage that I read | 4:38 | |
but elsewhere in the memorandum | 4:40 | |
that view becomes more explicit | 4:43 | |
and I have appeared on the same platform | 4:45 | |
with Al Summers | 4:48 | |
and he's made clear that that is his view. | 4:51 | |
In other words, he would like | 4:54 | |
to see some direct credit controls | 4:56 | |
that will limit consumer spending | 4:59 | |
and spread out the strength in consumers' spending | 5:02 | |
so we won't have feast and famine. | 5:05 | |
And what he's saying is that as far | 5:09 | |
as this business cycle is concerned, | 5:12 | |
it's too late really to perfect such instruments | 5:13 | |
and to use them. | 5:16 | |
But I think he's saying something more, | 5:18 | |
namely that his earlier optimism | 5:21 | |
that the government officials | 5:24 | |
and Congress and concerned and interested economists | 5:26 | |
and policy makers would be getting on | 5:30 | |
with the task of developing these tools, | 5:32 | |
that prospect has not materialized. | 5:36 | |
I never thought it would | 5:39 | |
and I wondered in sharing a platform with him | 5:41 | |
at his optimism that we were about to move | 5:45 | |
in that direction because I saw no particular traces | 5:47 | |
of it but I guess that Dr. Summers now sadly concludes | 5:50 | |
that as far as the immediate business cycle situation | 5:55 | |
is concerned, we can't expect to have much hope. | 5:59 | |
I may say that as of his early May model, | 6:04 | |
it calls for a weakening of real growth | 6:09 | |
from 8% down, I'm speaking now from memory, | 6:14 | |
to something like 6.5% in the second current quarter | 6:18 | |
down to something like 4% by the fourth quarter | 6:22 | |
and then down by the second quarter | 6:26 | |
of 1974 actually to a negative rate of growth, | 6:29 | |
that to be maintained in the middle of 1974. | 6:36 | |
I believe that the primary energy | 6:40 | |
for so dramatic a movement, | 6:42 | |
I call the movement dramatic, | 6:47 | |
in 1937 we would have considered such a movement gentle | 6:49 | |
but the business cycle has been tamed, | 6:53 | |
the business cycle no longer shows | 6:55 | |
the wild energy that used to be the case | 6:57 | |
and so, the Summers' scenarios | 7:00 | |
that I'm describing for you | 7:02 | |
is about as dramatic as any of the scenarios | 7:03 | |
of any of the forecasters | 7:06 | |
and in order to get the energy | 7:08 | |
to make things move that much that quickly, | 7:10 | |
Dr. Summers must rely primarily | 7:14 | |
upon an inventory swing. | 7:17 | |
He has by the first quarter of 1974 | 7:19 | |
inventory accumulation at the rate of $21 billion | 7:23 | |
according to my recollection. | 7:26 | |
Then it drops to $10 billion annual rate | 7:28 | |
in the second quarter | 7:30 | |
and then it drops if I remember correctly | 7:32 | |
to essentially the neighborhood of zero. | 7:34 | |
That's a $20 billion swing | 7:38 | |
in a couple of quarters | 7:40 | |
and if you couple that with a decline | 7:42 | |
in housing, residential construction expenditure | 7:46 | |
and with a reduction in the pace | 7:50 | |
of consumers' durable spending, | 7:54 | |
led no doubt by autos, | 7:57 | |
but augmented by other consumers' durable spending, | 7:58 | |
then you get his particular scenario. | 8:02 | |
Well, let me go from the dramatic | 8:06 | |
to the calm. | 8:08 | |
I now have before me | 8:12 | |
the publication in the middle of May | 8:15 | |
of the Argus Weekly Staff Report. | 8:19 | |
I can presume that the forecast | 8:22 | |
that I'm about to discuss | 8:25 | |
is the work of James Meigs, | 8:27 | |
formally of the First National City Bank, | 8:31 | |
formally before that of the Federal Reserve Bank | 8:33 | |
of St. Louis and trained at the University of Chicago | 8:35 | |
under Professor Milton Friedman, | 8:41 | |
also Dr. Waldman and other members | 8:44 | |
of that particular staff. | 8:49 | |
Now, what do they see in their crystal ball? | 8:51 | |
They expect that the real GNP | 8:56 | |
of 8% in the quarter which is behind us | 9:00 | |
will decline, it will decline rather steadily eight, | 9:04 | |
six and 3/4, | 9:12 | |
5.5 but it levels off at about 4% | 9:16 | |
or shows signs of leveling off | 9:23 | |
just below 4% by the end of 1974. | 9:24 | |
From my viewpoint, the scenario that is described there | 9:30 | |
would be a very good one. | 9:34 | |
This would mean we had made reentry | 9:36 | |
towards a high employment, maintainable rate of growth | 9:38 | |
without going in to even a growth recession. | 9:45 | |
Now, it's true we dip below the magic number | 9:50 | |
of four and 1/3% or four and 1/4% or 4% | 9:53 | |
which is what is presumably just needed | 9:58 | |
in order to absorb the growth of our labor force | 10:00 | |
because of population increase | 10:05 | |
and the normal growth in productivity | 10:07 | |
but we don't go below that number | 10:12 | |
by any appreciable degree | 10:13 | |
as far ahead as the eye can see | 10:15 | |
and I think that that's a pretty good scenario. | 10:17 | |
This is based of course since they are monitorists | 10:22 | |
upon an explicit forecast of what's going to happen | 10:25 | |
to the money supply. | 10:29 | |
I'm looking at the chart on their May 15th report | 10:31 | |
on page two | 10:37 | |
and in the upper panel it shows what's happened | 10:38 | |
to the money supply. | 10:41 | |
It shows what they think is going to happen | 10:42 | |
to the money supply | 10:43 | |
and that drives the system to produce | 10:45 | |
what they think is going to happen | 10:47 | |
to the real GNP growth of the system. | 10:48 | |
The money supply they think | 10:54 | |
is now coming down from something | 10:57 | |
above a 7% year-to-year percent change | 10:59 | |
and it will go down towards 6%, | 11:05 | |
actually it'll overshoot that | 11:09 | |
and go below 6% by the, | 11:12 | |
let's say the third quarter of the year, | 11:17 | |
it may be a little later than that, | 11:21 | |
Columbus Day or Thanksgiving if you lie | 11:23 | |
but then they have the money supply steady as a rock at 6%. | 11:25 | |
Apparently at that date Dr. Burns | 11:30 | |
will have gotten the election year out of his system, | 11:33 | |
the superiority of a stable money supply target | 11:37 | |
will have been realized. | 11:42 | |
I may mention this is a M1 target, | 11:45 | |
it's 6%, it's perhaps higher | 11:48 | |
than Professor Milton Friedman himself would advocate | 11:50 | |
because he would put it in terms | 11:54 | |
of a M2 target, | 11:57 | |
not much above that 6% rate if at all | 11:59 | |
which means that M1 which has a downward drift relative | 12:03 | |
to M2 would have to aim at I suppose no more than 4%. | 12:07 | |
If the Argus picture | 12:14 | |
were the majority consensus forecast, | 12:19 | |
I think you'd have a lot more happy people | 12:23 | |
around New York and Washington and Main Street | 12:25 | |
than you actually do. | 12:28 | |
In point of fact, | 12:30 | |
Argus and Kidder, Peabody, | 12:32 | |
two financial monitorist forecasting groups | 12:36 | |
have been much more optimistic | 12:42 | |
than the rest of the crew | 12:45 | |
and their readers have been waiting | 12:46 | |
for their optimism to take fruit | 12:50 | |
in terms of the stock market. | 12:52 | |
Well, I don't where the reality lies, | 12:56 | |
somewhere between the Summers' scenario. | 12:59 | |
The Summers' scenario, by the way, | 13:05 | |
is not one of the Doomsday scenarios, | 13:06 | |
if you would listen to an Eliot Janeway | 13:09 | |
or some other people, really big swingers, | 13:12 | |
you can get the Dow Jones averages down | 13:14 | |
to half their present levels | 13:16 | |
and all kinds of crises | 13:18 | |
but I think that among the responsible forecasters | 13:22 | |
with a pretty good track record, | 13:28 | |
you will bow most of them | 13:30 | |
in the limits set by the Summers' outlook | 13:33 | |
and by the Argus outlook. | 13:36 | |
Let me say by the way | 13:40 | |
that the worse of these outlooks, the Summers' one, | 13:42 | |
it doesn't seem to me to be a terribly pessimistic picture. | 13:45 | |
There have been many previous decades | 13:51 | |
in which we would have settled | 13:53 | |
for far less in the way of trouble. | 13:54 | |
I wouldn't welcome the Summers' outcome | 13:57 | |
but it would not mean the end of the economic system | 14:01 | |
as we have known it. | 14:04 | |
It would not necessarily mean | 14:05 | |
very much of an erosion of profits | 14:09 | |
and actually if you read all | 14:12 | |
of Dr. Summers' accompanying memoranda, | 14:15 | |
he is fairly optimistic as a whole. | 14:18 | |
I think it's fair to say | 14:23 | |
that he believes that the stock market, | 14:24 | |
the money market generally | 14:27 | |
has discounted about every kind of trouble it can think of | 14:28 | |
and that maybe it's reached by now pretty much | 14:32 | |
the full discounting so that even if the news turns out | 14:37 | |
to be as bad as he thinks it's likely to be, | 14:42 | |
that would not necessarily have much of a shock | 14:45 | |
on the stock market. | 14:47 | |
The stock market is already prepared for that | 14:49 | |
and for worse | 14:51 | |
and in particular it seems to me | 14:53 | |
you can be quite optimistic | 14:54 | |
about the general, longer-term movement of stock prices, | 14:56 | |
if you take the position which Dr. Summers argues, | 15:00 | |
argues forcefully, that the profitability | 15:04 | |
of American enterprise | 15:09 | |
has now been restored. | 15:13 | |
In other words, according to Dr. Summers, | 15:16 | |
the increase in profits | 15:18 | |
which we've seen in the last couple of years | 15:19 | |
is more than just a cyclical upswing | 15:21 | |
in the profits which is gonna be taken away | 15:25 | |
from us the moment the business cycle turns | 15:27 | |
in the other direction. | 15:29 | |
On the contrary, what he thinks is | 15:31 | |
that there is going to be a better longer-term alignment | 15:33 | |
between cost trends and price trends | 15:36 | |
so that a profitability is really much better | 15:40 | |
than it was in 1970 | 15:44 | |
after you correct for cyclical factors | 15:46 | |
and therefore we can look ahead | 15:49 | |
after the cyclical downturn of 1974 | 15:50 | |
has begun to spend itself | 15:55 | |
after we begin once again | 15:57 | |
to make our advance in the last part of '74, | 16:00 | |
we can look forward to a very nice continuing growth | 16:03 | |
of profits and I must say | 16:11 | |
that if I could share his confidence | 16:14 | |
about what's happening to the profitability | 16:18 | |
of American enterprise, American corporate enterprise | 16:21 | |
in the 1970s, I think that I could make out | 16:24 | |
a pretty good case that the stock market | 16:27 | |
with the Dow Jones averages | 16:30 | |
in the general neighborhood of 900/925 | 16:33 | |
is not a bad buy | 16:38 | |
because an awful lot of irreversible inflation | 16:40 | |
which has raised the value and the reproduction cost | 16:45 | |
of the plant and equipment of American industry | 16:48 | |
has gone by in the years | 16:51 | |
since the stock market generally | 16:55 | |
was at the same level. | 16:58 | |
Now before I move on to other matters, | 17:01 | |
is there any new information available to me | 17:03 | |
or any new method of analyzing the old information | 17:08 | |
that enables me to state more precisely | 17:12 | |
where I would think we would come | 17:17 | |
between the Summers' scenario | 17:19 | |
and the Argus scenario? | 17:23 | |
I can't really say that enough has happened. | 17:26 | |
We did have, for example, | 17:30 | |
in the month of April, | 17:31 | |
the leading indicators actually turned down. | 17:35 | |
This is the first the leading indicators have turned down | 17:37 | |
in a long time. | 17:40 | |
The list is not complete, | 17:41 | |
not all 12 of the items in the index | 17:44 | |
are now available | 17:49 | |
but I think it is a warning sign | 17:51 | |
that we definitely have passed the inflection point | 17:54 | |
of most rapid rate of growth. | 17:57 | |
Probably some of you have seen in the press | 17:59 | |
that Dr. Geoffrey Moore who used to be the Commissioner | 18:01 | |
of the Bureau of Labor Statistics | 18:05 | |
in the first Nixon administration | 18:07 | |
and who has been a long-time worker | 18:09 | |
at the National Bureau of Economic Research | 18:12 | |
on the leading coincidental and lagging indicator approach | 18:14 | |
that he has a new method of analysis | 18:20 | |
which suggests that the bloom | 18:23 | |
is off the boom. | 18:27 | |
As I recall and here I must just rely | 18:29 | |
upon vague press references | 18:32 | |
because I haven't yet been able | 18:36 | |
to see the memorandum by Dr. Moore, | 18:37 | |
he has found | 18:42 | |
that if you take the lagging indicators | 18:44 | |
and if you compare them in a certain way | 18:46 | |
with the coincidental indicators, | 18:48 | |
oddly enough you get a good leading indicator | 18:51 | |
and he has a measure | 18:56 | |
which has tended in post-war business cycles | 18:58 | |
to turn down about 13 months | 19:02 | |
before general business turns down. | 19:05 | |
Well, what does this measure show | 19:09 | |
for the current economy? | 19:10 | |
I believe it shows that for some months now, | 19:13 | |
some few months, that wasn't given in the news item | 19:15 | |
which I saw but let's say four/five months | 19:19 | |
that that measure has been trending downward. | 19:22 | |
If I'm about right in my guess | 19:28 | |
that it's a four or five-month down trend, | 19:30 | |
if we take that from 13 months, | 19:34 | |
we get something like eight or nine months left | 19:37 | |
before the down turn can be expected in the business cycle. | 19:42 | |
Now, we are as I speak just beginning | 19:48 | |
to move into June, | 19:51 | |
so seven months gets us to the end of the year, | 19:53 | |
eight months gets us to February, | 19:57 | |
nine months gets us to March, | 19:59 | |
that pretty much agrees | 20:01 | |
with the Al Summers' timetable | 20:05 | |
because you recall that in the second quarter | 20:09 | |
the rate of growth goes negative, | 20:11 | |
that means between the first and the second quarter | 20:12 | |
which we can put that around April 1, | 20:15 | |
the economy is just passing through the zero level | 20:19 | |
from growth to stagnation, negative growth. | 20:25 | |
This is more than a mini recession, | 20:32 | |
this is more than a growth recession, | 20:34 | |
this is a full-fledged recession | 20:37 | |
but don't be frightened | 20:40 | |
by the expression full-fledged recession | 20:41 | |
because it's not a full-fledged recession | 20:43 | |
of the sort we used to have before the war. | 20:45 | |
In a year like 1937, | 20:47 | |
the Federal Reserve Board Index of Physical Production | 20:49 | |
dropped as I recall more than 25% | 20:53 | |
and from '37 to '38 and from '38 to '39, | 20:57 | |
it recovered more than 25%. | 21:03 | |
Well, I don't think that the Summers' scenario | 21:05 | |
calls for any such extensive an amplitude as that | 21:09 | |
but we would be talking about something | 21:14 | |
that's not dissimilar | 21:16 | |
from what we experienced in 1970. | 21:19 | |
A weak genuine recession | 21:26 | |
more than a growth recession or a mini recession. | 21:30 | |
I don't think you can put much weight | 21:36 | |
on one month's decline in the leading indicators. | 21:38 | |
For that matter, one month's decline | 21:42 | |
in the lead indicator suggests | 21:44 | |
that there still is some way to go | 21:46 | |
in the present expansion. | 21:49 | |
I don't think that the new method of Dr. Moore | 21:51 | |
has been tested enough | 21:54 | |
for me to have much confidence | 21:55 | |
that it can adjudicate for us | 21:58 | |
as to whether we will have a growth recession, | 22:00 | |
a mini recession at the end of '73 | 22:04 | |
and going into 1974 | 22:07 | |
or a genuine recession or whether as with the Argus model, | 22:09 | |
we will have actual stability. | 22:14 | |
I should in this connection to help you appraise the odds. | 22:18 | |
I mention that Dr. Otto Eckstein | 22:22 | |
of Data Resources Incorporated | 22:26 | |
has looked at the data very carefully | 22:28 | |
and he is of the opinion that the excessive inventory swing, | 22:31 | |
the kind of swing that Dr. Summers is relying upon | 22:39 | |
for his scenario | 22:42 | |
and the kind of swing | 22:43 | |
which Alan Greenspan of Townsend-Greenspan | 22:44 | |
is envisaging in his slightly more optimistic scenario | 22:50 | |
which shows real output continuing to grow | 22:56 | |
all through 1974 | 23:00 | |
and only just barely hitting zero at the end of '74, | 23:01 | |
well, Eckstein thinks that business has smartened up | 23:05 | |
and that you're not gonna get this time any increase | 23:09 | |
in inventory accumulation | 23:12 | |
from the present level of seven, eight, nine, | 23:14 | |
$10 billion, I put it very vaguely | 23:18 | |
because there is some lack of confidence | 23:21 | |
that the first quarter number | 23:22 | |
by the Department of Commerce can really be correct. | 23:24 | |
Let's say the most recent level of about 10 billion, | 23:27 | |
well, Dr. Eckstein thinks that the business | 23:32 | |
is not gonna go very much above this any time | 23:34 | |
during the current expansion | 23:37 | |
and if they don't go very much above this, | 23:41 | |
he doesn't think you're gonna get a big slingshot effect | 23:43 | |
which is gonna send the economy very far down below | 23:46 | |
the four and 1/4% rate of growth. | 23:50 | |
In fact his scenario calls | 23:53 | |
by the third quarter of this year | 23:56 | |
for our being less than 4% | 23:58 | |
but that is a fairly happy eventuality | 23:59 | |
because it means we're getting the misery out | 24:04 | |
of our system, the heat out of the system | 24:06 | |
and we are moving to something like an Argus pattern | 24:09 | |
a bit faster than would otherwise be the case. | 24:15 | |
I don't know what the Argus Group would say | 24:21 | |
if the Federal Reserve is building up | 24:23 | |
towards some kind of a money crunch | 24:25 | |
as is fairly widely believed. | 24:27 | |
If we take the numbers that I quoted to you | 24:34 | |
where the rate of growth of money supply shoots down | 24:36 | |
just a bit below 6% | 24:38 | |
but then levels off at 6%, | 24:40 | |
and if we use the Argus methodology | 24:42 | |
and suppose that the money supply | 24:45 | |
later in this year will actually move down | 24:47 | |
to a 3% rate of growth | 24:51 | |
and be held there for let's say four months, let's say, | 24:53 | |
six months, then I presume | 24:57 | |
if you're gonna continue to be a good card carrying member | 24:59 | |
of the monetary school, | 25:02 | |
you would have to give a lot of weight to that | 25:04 | |
and then the Argus Group | 25:05 | |
would join the rest of the crowd. | 25:09 | |
I might just mention | 25:12 | |
that yesterday while Secretary of Treasury George Shultz | 25:14 | |
was giving a fairly cheerful, optimistic description | 25:19 | |
of the American economy, | 25:25 | |
the securities analysts in New York | 25:27 | |
were being addressed by Henry Kaufman | 25:29 | |
of Salomon Brothers | 25:31 | |
and he was giving them the blood and thunder and fire | 25:32 | |
that I mentioned on an earlier tape here | 25:35 | |
and namely that there's a lot of excess in the system | 25:39 | |
that we have been wicked, we have sinned | 25:41 | |
and that that excess can only be got out of the system | 25:44 | |
by a money crunch | 25:49 | |
and we are well on our way towards that money crunch. | 25:51 | |
What I think we are entitled to say | 25:56 | |
is that the Federal Reserve | 25:57 | |
in its open market deliberations | 26:01 | |
has tightened up its goal, | 26:03 | |
it has agreed to countenance a Federal funds rate | 26:05 | |
of 8%, that's my guess | 26:10 | |
and that it is aiming for some kind | 26:13 | |
of an overshoot down, | 26:18 | |
undershoot I guess it would be the more descriptive word, | 26:21 | |
down below that increase in the monetary aggregates | 26:24 | |
which it thinks is appropriate for the long pull. | 26:27 | |
It means business. | 26:31 | |
There has been a letter signed | 26:32 | |
by Dr. Arthur Burns, the Chairman of the Board of Governors | 26:36 | |
of the Federal Reserve System, | 26:40 | |
instructing the banks | 26:41 | |
to be negridly in their rationing out of credit, | 26:42 | |
not to refuse good Main Street customers, | 26:47 | |
the backbone of the country | 26:51 | |
but all the froth on the boom | 26:52 | |
should be avoided | 26:55 | |
by the discretion of bankers. | 26:57 | |
Most economists have very little good to say | 27:01 | |
about moral persuasion. | 27:05 | |
They don't think that this means anything. | 27:07 | |
I myself give it a little weight | 27:11 | |
and I think it's an omen of things to come | 27:13 | |
from the Federal Reserve Boards becoming still tighter. | 27:16 | |
I would not be surprised to see the prime rate continue | 27:22 | |
to rise, to rise again | 27:25 | |
to see the discount rate | 27:27 | |
which again is looking low, | 27:29 | |
rise in the near future. | 27:31 | |
Well, I guess there really isn't time left | 27:37 | |
to go into the energy crisis. | 27:40 | |
I think that the big guessing game | 27:43 | |
is about the stock market | 27:48 | |
and so let me depart from my usual caution | 27:50 | |
and try to weigh the pro and con elements | 27:54 | |
for the stock market holding up at this level | 28:00 | |
going forward or going down. | 28:04 | |
I perhaps have mentioned in this tape | 28:09 | |
that I've had an unprecedented number | 28:10 | |
of alarmist phone calls, | 28:12 | |
sometimes from complete strangers | 28:14 | |
asking whether this is 1929 | 28:17 | |
and whether this isn't the time to sell? | 28:19 | |
Obviously I don't have any opinion | 28:21 | |
to pass upon that question. | 28:27 | |
It's a very dangerous game to call up a professor | 28:29 | |
of economics and ask for his opinion on the stock market. | 28:31 | |
The danger is that you'll get his opinion | 28:34 | |
and that'll do you a lot of harm | 28:37 | |
but I do say and I do say it candidly and frankly | 28:40 | |
that I can think of 10 good reasons | 28:44 | |
why the stock market should be going up | 28:46 | |
and I can think of 10 good reasons why it still has plenty | 28:49 | |
of room to go down. | 28:53 | |
The whole art of investing, | 28:55 | |
I won't say of economic analysis | 28:57 | |
is to adjudicate between those 10 different reasons | 28:59 | |
but I do wanna call your attention, | 29:02 | |
one possible pattern, | 29:04 | |
it's a pattern which has been alluded to | 29:07 | |
in the public press and attributed to Alan Greenspan | 29:09 | |
because in one of his letters to his clients, | 29:13 | |
he's gone into the problem of the stock market. | 29:16 | |
There is a possibility that events | 29:20 | |
will move the way most of the fashionable forecasters think, | 29:24 | |
mainly towards some kind at least | 29:28 | |
of a mini recession | 29:30 | |
and yet the stock market | 29:31 | |
can be fairly strong. | 29:34 | |
I'm recalling for you the 1953 experience. | 29:37 | |
In September of 1953, | 29:42 | |
all the experts for the first time | 29:44 | |
became convinced that we were gonna go | 29:46 | |
into the recession of 1953/54 | 29:47 | |
which indeed we did go into. | 29:50 | |
The cause of that recession | 29:52 | |
was primarily the cessation of the Korean War | 29:53 | |
but the stock market in 1953 | 29:57 | |
just as it got that same news | 30:00 | |
continued to go upward | 30:02 | |
at a new and faster rate | 30:04 | |
and didn't look backwards really | 30:06 | |
by and large for the whole of the next business cycle. | 30:09 | |
In fact, you might say from 1953 to 1961/62, | 30:13 | |
the stock market was catching up to the post-war. | 30:18 | |
Why? | 30:21 | |
I think the gloss given, | 30:22 | |
the explanation given and it makes some sense to me | 30:24 | |
was that the stock market decided | 30:26 | |
that the recession really wasn't gonna be a very bad one | 30:29 | |
and it was so glad to have the shoe fall, | 30:31 | |
so I'm just warning any short sellers | 30:34 | |
who aren't nimble | 30:37 | |
that it could be that just at a time | 30:39 | |
when the mini recession is confirmed | 30:41 | |
in the minds of everybody, | 30:44 | |
the stock market will take the view | 30:46 | |
that the bad news is out | 30:48 | |
and it's not gonna be a very bad mini recession | 30:50 | |
and profitability is not gonna be very much eroded | 30:52 | |
and paradoxically that could be a signal | 30:56 | |
for the rise of the stock market | 30:59 | |
right in the face of a decline in real growth | 31:01 | |
in the American economy. | 31:05 | |
- | If you have any comments or questions | 31:08 |
for Professor Samuelson, | 31:10 | |
address them to Instructional Dynamics Incorporated, | 31:11 | |
166 East Superior Street, Chicago, Illinois, 60611. | 31:14 |
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