Tape 60 - Pre-Election Economic Perspective, Real Money Supply, Residual Money Supply
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- | Hello. | 0:02 |
This is Instructional Dynamics, inviting you to another | 0:02 | |
of our bi-weekly interviews with Dr. Milton Friedman, | 0:06 | |
professor of Economics at the University of Chicago. | 0:08 | |
We are taping this interview on Wednesday, November 4th. | 0:12 | |
- | Before we go on with the regular interview, | 0:16 |
may I take this opportunity to extend | 0:19 | |
my heartiest congratulations to my colleague on these tapes, | 0:22 | |
Professor Paul Samuelson for having just been awarded | 0:26 | |
the Nobel Prize in Economics. | 0:29 | |
The prize was awarded to him, as you doubtless have read | 0:32 | |
in the papers, for his scientific work in mathematical | 0:34 | |
economist extending back over many years. | 0:39 | |
It is a well-merited award for this work. | 0:42 | |
The subscribers to this series know Paul Samuelson best | 0:46 | |
as a commentator on current affairs. | 0:51 | |
That is quite a different side of his activity | 0:54 | |
than his technical, scientific work | 0:56 | |
which I have described briefly in my regular column | 0:59 | |
in Newsweek appearing the week in which I am talking. | 1:02 | |
- | Professor Friedman, now that the election is over, | 1:08 |
this is a good time to look ahead and get some perspective | 1:10 | |
of the longer term trends ahead. | 1:14 | |
- | Yes, it is. | 1:17 |
The election rather confused issues | 1:18 | |
because with political considerations at stake, | 1:22 | |
we had all sorts of claims and counter-claims | 1:27 | |
flying through the air. | 1:29 | |
We had economists who had been associated | 1:30 | |
with the Democratic administrations complaining | 1:32 | |
that the Republican game plan hadn't worked. | 1:35 | |
On the other hand, we had the administration economist | 1:38 | |
proclaiming that it had and it was working. | 1:40 | |
The economic issues of relatively high unemployment, | 1:44 | |
of continued rising prices were stressed by the Democrats, | 1:48 | |
the social issues were stressed by the Republicans. | 1:52 | |
I may say that aspect of it was rather curious | 1:55 | |
just judged by its economic content. | 1:58 | |
It's easy enough to complain that things aren't well, | 2:01 | |
but one would expect an alternative to be suggested. | 2:03 | |
However, the only real alternative to the present policy | 2:07 | |
which the administration has been following | 2:10 | |
which was suggested by any of the critics | 2:14 | |
from the Democratic side was interestingly enough | 2:19 | |
wage price guidelines or job owning | 2:23 | |
or some kind of direct action on prices and wages, | 2:26 | |
of a kind which the Democratic administration had tried | 2:30 | |
with its guidelines in the 1960's | 2:33 | |
which it had found did not work | 2:35 | |
and which it had then suspended. | 2:37 | |
But enough for that past, let's go on to the future. | 2:39 | |
When we can look at the thing, at least for a little while, | 2:42 | |
without it's being clouded over | 2:45 | |
by the political considerations, one way or the other. | 2:47 | |
In some ways, the convenient time to take for such a survey | 2:51 | |
is between now and the next major political event | 2:54 | |
which will be the presidential election in 1972. | 2:57 | |
Undoubtedly, both the administration | 3:01 | |
in its economic policies and the opposition | 3:05 | |
in its economic commentaries will from now on out | 3:09 | |
be looking forward toward that situation. | 3:12 | |
I don't mean by these comments to suggest | 3:17 | |
that everything that happens between now and 1972 will | 3:20 | |
either be the deliberate result of or the consequence of | 3:23 | |
the policies followed by the administration, far from it. | 3:27 | |
We talk in these tapes a great deal about the policy | 3:30 | |
followed by the administration and government | 3:32 | |
because that is one thing you can lay your hand on, | 3:34 | |
one thing that is central, but I feel it necessary | 3:36 | |
to keep on emphasizing | 3:40 | |
that many other factors enter the picture, | 3:42 | |
that there are all sorts of forces deriving from | 3:44 | |
outside governmental action which alter circumstances. | 3:47 | |
For example, it was those forces which meant | 3:51 | |
that the recessions through which we have just been coming | 3:54 | |
was much milder than there was reason to expect | 3:57 | |
on the average from the reaction of the economy | 4:00 | |
to past periods of monetary restrain or past periods | 4:04 | |
of monitoring fiscal action. | 4:09 | |
That route of mildness was caused by something | 4:11 | |
that the government had no control over. | 4:13 | |
Well now let's go back. | 4:15 | |
So far as the next six months or so are concerned, | 4:17 | |
and so far as the consequences | 4:20 | |
of government policy are concerned, those are already | 4:22 | |
as I have so often emphasized largely in the works. | 4:25 | |
The present appearances that we should continue to have | 4:29 | |
some tapering off of inflation, that we should continue | 4:35 | |
to have some rise in unemployment until the early part | 4:38 | |
of next year, but that we should have a rise | 4:41 | |
in economic activity. | 4:45 | |
The real output is going to go up and we have hit the bottom | 4:48 | |
and are on our way up. | 4:51 | |
Now the picture's, of course, very much confused | 4:52 | |
in the current figures by the General Motor strike. | 4:55 | |
The General Motor strike affects | 4:57 | |
a very appreciable amount of economic activity. | 5:01 | |
It is largely responsible for the sharp decline | 5:06 | |
in the industrial production index. | 5:08 | |
It is responsible for a smaller rise in GNP | 5:11 | |
in the third quarter and will be in the fourth quarter | 5:13 | |
than what otherwise would have been expected. | 5:16 | |
But almost everybody agrees | 5:18 | |
that that is a temporary disturbing phenomena | 5:21 | |
which just shifts activity in time to a greater extent | 5:23 | |
than to alter the general pattern of the activity. | 5:26 | |
Another thing that is very confusing and especially | 5:30 | |
because of the great political attention | 5:33 | |
that has been paid in recent months to these | 5:35 | |
are the month to month aberrations in the figures. | 5:37 | |
One month cost of living goes down, | 5:40 | |
the next month it goes up, the next month it goes down. | 5:42 | |
When it goes down or doesn't rise as rapidly, | 5:45 | |
the supporters of the administration assert | 5:47 | |
in loud and strong voices that this is evidence | 5:51 | |
that the game plan is working. | 5:54 | |
On the other hand when it goes up sharply, it's not. | 5:56 | |
Now one point about that that I should emphasize | 5:59 | |
is that these erratic ups and downs are in considerable part | 6:03 | |
of statistical origin and do not correspond | 6:09 | |
as similar ups and downs in the economy. | 6:12 | |
I stress this point because it is easy to be mislead. | 6:15 | |
When the cost of living shows a 2% rise, | 6:18 | |
annual rate of rise one month and a 6% annual rate of rise | 6:22 | |
in the next month, the natural inclination is to think | 6:26 | |
that prices are bobbling around like that. | 6:28 | |
That is not the case. | 6:30 | |
Our statistical measures are imperfect. | 6:32 | |
If we could have a satisfactory measure of the movements | 6:34 | |
of prices, I am absolutely convinced myself | 6:38 | |
that you would not find such aberrations. | 6:41 | |
It is a technical problem to explain why you get | 6:43 | |
these aberrations, but a couple of points may be mentioned | 6:46 | |
which will suggest the kind of thing that I have in mind. | 6:51 | |
For example, in the consumer price index, certain items | 6:54 | |
like the cost of housing, mortgage, insurance and the like | 6:59 | |
are priced only once a quarter. | 7:02 | |
Whatever happens over that quarter tends to get piled in | 7:04 | |
to the one month in which they are priced, | 7:07 | |
or again certain seasonal items are on the market | 7:09 | |
only during some months of the year, | 7:14 | |
perhaps watermelons are off the market for part of the year. | 7:15 | |
When they come back on the market, there's a problem of | 7:18 | |
how you link that price with the behavior of other prices | 7:21 | |
and because of the technique by which it is done, | 7:25 | |
very often you have a large element stuck into one month | 7:27 | |
which really should have been spread over | 7:32 | |
a longer period of time. | 7:34 | |
Well, one could go on in great detail, | 7:36 | |
what I want to stress is that you must average out | 7:37 | |
these month to month aberrations. | 7:40 | |
You must not regard them as corresponding to | 7:42 | |
what is actually going on in the economy, | 7:44 | |
but as an imperfect measure of them. | 7:46 | |
Well when you do average them out, as I said, | 7:48 | |
the evidence for the next six months is fairly clear. | 7:51 | |
Now what about the period beyond that? | 7:53 | |
Here we have to face one of the best ways I think of facing | 7:56 | |
up to this issue is to ask yourself what the problem is | 8:00 | |
as it is viewed from Washington, as you or I would view it | 8:04 | |
if we were in Washington. | 8:07 | |
The problem is that, on the one hand, | 8:09 | |
we are trying to conquer inflation. | 8:11 | |
The rate of price rise seven, eight percent whatever, | 8:13 | |
depending on what price index number you look a year ago, | 8:17 | |
is down to something like four to 6%, | 8:20 | |
again depending on what price index you use. | 8:22 | |
For broad GNP indexes down to deflator index down | 8:26 | |
to a little over 4% per year. | 8:31 | |
The aim is to keep that going, that is to keep the decline | 8:34 | |
in the rate of price rise going. | 8:37 | |
To come down from 4% to 3% to 2%. | 8:38 | |
That's one side of the picture. | 8:43 | |
If that were the only thing you were concerned about | 8:45 | |
was getting inflation under control, | 8:47 | |
well the obvious policy would be to keep your foot | 8:49 | |
on the brake as hard as possible. | 8:52 | |
That would mean on the side of monetary policy, of zero | 8:54 | |
or slow rate of increase in the quantity of money. | 8:58 | |
It would mean on the side of fiscal policy | 9:01 | |
for whatever influence it may have keeping down spending, | 9:03 | |
keeping up taxes, trying to eliminate any deficit | 9:07 | |
around a surplus. | 9:12 | |
That would be a policy if you were concerned solely | 9:13 | |
and exclusively with stopping inflation. | 9:15 | |
When I say stopping inflation, | 9:18 | |
I mean really stopping inflation. | 9:19 | |
If you were, as I've already emphasized, | 9:21 | |
the policies already taken will lead to | 9:24 | |
a continuing tapering off of inflation, | 9:27 | |
but that's only a six, nine months, | 9:29 | |
10 months, 12 months lag. | 9:31 | |
The question is if you were trying to taper off inflation | 9:34 | |
as rapidly as possible and bring it right straight down | 9:38 | |
to zero, the only way you could do that in a short space | 9:41 | |
of time would be by continuing, | 9:44 | |
by even intensifying monetary restraint, | 9:47 | |
much stronger than it is now, keeping the quantity | 9:49 | |
of money constant or growing very slowly. | 9:52 | |
Of course, if you followed that policy | 9:55 | |
and were following it systematically | 9:57 | |
you would take your foot off the brake | 9:58 | |
before you would actually hit the zero inflation, | 10:00 | |
but even so, in the meantime, | 10:03 | |
you would have caused a continuation of the recession. | 10:05 | |
That would be the price, | 10:09 | |
the intensification of unemployment, | 10:11 | |
that would be a resumption of the rise of unemployment, | 10:12 | |
that would be the price you would pay | 10:16 | |
for bringing a very rapid and quick end to the inflation. | 10:18 | |
Now on the other side of the picture, | 10:21 | |
the one problem with inflation, the other problem is | 10:25 | |
that in the course of containing inflation we have produced | 10:28 | |
a mild recession and a gap | 10:32 | |
between actual and potential outcome. | 10:34 | |
As I've emphasized before, | 10:37 | |
the recession has been relatively mild. | 10:39 | |
It has been a necessary price to pay, | 10:41 | |
but nonetheless it's not a desirable one. | 10:43 | |
There are various estimates about | 10:47 | |
how much of a gap has been produced, | 10:49 | |
how much our actual output today is below the output | 10:52 | |
that could be produced with a, | 10:56 | |
which you might call a normal frictional amount | 10:59 | |
of unemployment. | 11:01 | |
You always have some unemployment people changing | 11:02 | |
from one job to another job to another. | 11:04 | |
People who are newly entering the labor force, | 11:08 | |
students who are leaving school, | 11:10 | |
youngsters who are growing up who are trying to find jobs. | 11:11 | |
The question is, however, that the problem is, however, | 11:14 | |
that unemployment today is by almost everybody's view, | 11:18 | |
larger than this normal frictional amount of unemployment. | 11:24 | |
And the result of this is that you have a gap | 11:27 | |
between what the economy could produce | 11:30 | |
and what it actually is producing. | 11:32 | |
Of course, the unemployment is not only of men, | 11:34 | |
but also of machines. | 11:36 | |
You have a rather low rate of utilization of capital. | 11:37 | |
There's no way of estimating precisely of what this gap is | 11:42 | |
because there's no precise way of estimating | 11:45 | |
what the potential output of the economy is. | 11:48 | |
Under great stress and stimulus, the economy can produce | 11:50 | |
more than it could produce for a sustained period of time. | 11:53 | |
But most commentators would say that the gap is perhaps | 11:56 | |
roughly of the order of 4%. | 11:59 | |
That is to say that potential output with normal kinds | 12:02 | |
of unemployment, frictional unemployment, is about 4% higher | 12:07 | |
than the actual output. | 12:11 | |
This gap of 4% corresponds to a higher unemployment rate | 12:13 | |
of about two percentage points of about 6%, not quite, | 12:17 | |
it's five and a half, six, versus something like | 12:20 | |
three and half to 4% as a reasonable frictional level | 12:23 | |
of unemployment. | 12:26 | |
Now in addition to this gap between actual | 12:28 | |
and potential output now, of course potential output | 12:31 | |
continues to increase. | 12:34 | |
It increases because population and labor force grow | 12:36 | |
because you have new people coming into the labor force. | 12:38 | |
It increases because capital expenditures | 12:41 | |
raise the capacity. | 12:45 | |
Capital spending is much less buoyant now | 12:48 | |
than it was a while back, but nonetheless it is positive. | 12:51 | |
We are adding to our stock of machines, of buildings, | 12:54 | |
of factories, and so on. | 12:57 | |
Again, there's no precise way of making an estimate | 13:00 | |
of the rate at which potential output is increasing, | 13:03 | |
but most estimates would be that it's somewhere | 13:06 | |
of the neighborhood of 4% per year. | 13:08 | |
That's perhaps a little on the high side | 13:10 | |
over the last hundred years. | 13:12 | |
Three, 3.5% would have been | 13:13 | |
a better average rate of increase in our potential capacity. | 13:15 | |
But let's take it at 4% a year. | 13:19 | |
Now that means that the other side of the problem is | 13:22 | |
how do we follow a policy, or try to follow a policy | 13:27 | |
which will bring back output to its potential | 13:31 | |
which will eliminate the present gap and permit output | 13:36 | |
to expand by enough to match the growth of potential output? | 13:39 | |
If that were to be achieved by, let us say, two years | 13:44 | |
from now, election day 1972, that would require something | 13:48 | |
like an 8% increase in output between now and then | 13:52 | |
to match the increase of potential output plus a 4% increase | 13:56 | |
to match the gap which would mean a 12% increase | 13:59 | |
from now to then, and so therefore the other horn of this | 14:02 | |
is that it would be highly desirable if you could | 14:06 | |
to get a rate of increase in real output of 6% per year | 14:10 | |
for each of the next two years in order to get real output | 14:13 | |
back on a potential level. | 14:16 | |
Now, if that were all you were concerned with, | 14:19 | |
if you weren't worried about inflation, if you were willing | 14:21 | |
to take only that tapering off of inflation | 14:25 | |
which is already in the cards, but then if necessary | 14:27 | |
see a resumption of inflation, the most rapid way | 14:30 | |
to achieve that increase in output, | 14:33 | |
at least for a temporary period would be to step | 14:35 | |
on the accelerator, to pour on money, to raise the quantity | 14:38 | |
of money fairly rapidly. | 14:41 | |
On the one hand, to have government spending, lower taxes | 14:43 | |
on the other, and then in this way, as people view it, | 14:47 | |
provide great impetus to the economy. | 14:52 | |
I am trying to avoid here, I should say, any arguments | 14:56 | |
about the merits or relative importance of fiscal | 14:58 | |
and monetary policy. | 15:02 | |
My own view is that of the package | 15:03 | |
I have been talking about, both on the downside | 15:05 | |
and on the upside, the really important component of it | 15:07 | |
is the monetary policy but that really doesn't affect | 15:10 | |
the nature of the present issue and really doesn't matter | 15:12 | |
and so I'm leaving that to one side | 15:15 | |
and begging that question. | 15:17 | |
Well, now why not do that? | 15:20 | |
If you need a real output increase of 6% per year | 15:24 | |
for the next two years, if prices are now rising at 4%, | 15:28 | |
if you think that the next six months will bring you down | 15:31 | |
to maybe about 3%, then why not increase the quantity | 15:34 | |
of money at a rate of 9% per year over the next two years | 15:37 | |
and say, "Okay, we'll be satisfied | 15:41 | |
"with a 3% inflation." | 15:42 | |
Well, that would be one way to do it, | 15:45 | |
but the problem with that is, | 15:49 | |
and this is the real dilemma of policy, | 15:51 | |
that the odds are that if you tried to do that | 15:55 | |
that isn't what would happen. | 15:57 | |
Arithmetic is not economics. | 15:59 | |
If in fact, you started to increase the quantity of money | 16:01 | |
at nine or 10% per year, then I do not believe, in fact, | 16:04 | |
that the outcome would be a 6% rate of real growth | 16:08 | |
plus a 3% rate of price rise. | 16:11 | |
Instead what would happen would be that after four or five | 16:14 | |
or six months, as people got on to what was going on, | 16:18 | |
as demand started to react to the increased rate of growth | 16:21 | |
of the quantity of money, instead of the tapering off | 16:24 | |
of inflation continuing, instead of prices going down | 16:27 | |
to 3%, instead of interest rates continually go down | 16:30 | |
as they have been going down, what would happen instead | 16:34 | |
under that scenario would be that you would have | 16:37 | |
a resumption of rising inflation, | 16:40 | |
that the price rise would start to go up from 3% to 4% to 5% | 16:44 | |
that by 1972 the place you would find yourself would be | 16:49 | |
still not having obtained your objective | 16:53 | |
of hitting potential. | 16:56 | |
But with the price rise back up to five, 6% per year, | 16:57 | |
so instead of a combination of a 6% real output growth | 17:01 | |
with a 3% price growth, what you would have had is maybe | 17:04 | |
a combination of a four or 5% average real output growth | 17:09 | |
with a price rise of maybe something like 5, 6% | 17:13 | |
at the rate of 5, 6%. | 17:16 | |
But you may interject at this time, | 17:18 | |
where will the money come from? | 17:20 | |
If I did the arithmetic, | 17:21 | |
I found that I need a real output growth of 6%. | 17:23 | |
I said, "Let's suppose | 17:27 | |
"that the price inflation tapers off to 3%." | 17:28 | |
Then you would say to me, | 17:31 | |
"But now isn't your arithmetic array? | 17:32 | |
"If the Fed increases the quantity of money by 9%, | 17:35 | |
"you've just said that what you might have is | 17:39 | |
"a real output growth at the annual rate of say 5% | 17:42 | |
"and price is rising at 5 or 6%. | 17:45 | |
"That's 10 or 11%. | 17:47 | |
"Where does the money come from?" | 17:48 | |
Well the answer to that is very simple. | 17:50 | |
We know over and over again that whenever you start | 17:52 | |
with expansion at a rapid rate, | 17:57 | |
spending goes up more rapidly than the quantity of money. | 18:00 | |
In technical term, velocity rises. | 18:03 | |
Movements in velocity tend to reinforce the movements | 18:06 | |
in the quantity of money, | 18:09 | |
particularly in the narrow money supply M1, | 18:10 | |
which is the one I have for the moment been talking about | 18:14 | |
because the Fed has been stating its objectives | 18:17 | |
in terms of that narrow money supply. | 18:19 | |
Now if that narrow money supply were to go up | 18:22 | |
at anything like the rate of 9% per year, | 18:25 | |
which is a distinct acceleration over the 5% | 18:29 | |
at which it has been going up, well then you would have | 18:32 | |
an income spending going up not at 9% a year, | 18:36 | |
but maybe at 11, 12% a year. | 18:39 | |
Let me carry you back to the experience | 18:42 | |
between 1967 and '69. | 18:45 | |
From early 1967, | 18:47 | |
say January 1967 to January 1969, | 18:51 | |
during that two year period, the quantity of money | 18:56 | |
narrowly defined currency and demand deposit was rising | 18:59 | |
at the annual rate of 7.3% per year. | 19:02 | |
Over a period which has shifted about six months later | 19:06 | |
to allow for the usual lag, personal income was rising | 19:09 | |
at the rate of about 9.3% a year or about | 19:14 | |
two percentage points more. | 19:17 | |
Over that period prices were rising at an annual rate | 19:19 | |
of about 5% a year, and even a little over 4% a year | 19:22 | |
for real output. | 19:25 | |
Similarly, if we go ahead and if you were | 19:26 | |
to follow the policy of a rapid rate of increase | 19:29 | |
of about 9% per year in M1, then the expectation would be | 19:31 | |
an even more rapid rate of increase in personal income | 19:36 | |
or dollar income with a resumption of inflation | 19:40 | |
and acceleration of inflation ending up in 1972 | 19:47 | |
in a position where you still haven't eliminated the gap | 19:51 | |
and yet you haven't accelerated inflation. | 19:53 | |
So, it seems to me that what you must do, | 19:57 | |
and what the administration is trying to do at the moment, | 20:01 | |
or whether they will continue to be able to resist | 20:04 | |
the pressures is not clear, is that you must | 20:06 | |
try to steer some middle course between these. | 20:10 | |
That is the real dilemma of policy. | 20:13 | |
How do you choose a middle course which will not be | 20:15 | |
so restrictive as to get the rate of inflation decline | 20:19 | |
that you would like, but not so expansive as to get | 20:23 | |
the rate of output increase you would like? | 20:26 | |
I should also emphasize that picking a particular period | 20:29 | |
like two years between now and the elections of '72, | 20:32 | |
there may be no policy, no conceivable policy | 20:37 | |
which will enable you to combine | 20:42 | |
the two things you would like to combine, | 20:44 | |
a continued and substantial reduction in the rate | 20:46 | |
of inflation and an elimination of a gap between actual | 20:49 | |
and potential output, if you have a problem | 20:53 | |
of making a compromise between these. | 20:57 | |
Now the Federal Reserve has indicated | 21:01 | |
that its aim is something like a 5% increase | 21:04 | |
in the quantity of money per year. | 21:08 | |
If it were to stick to that aim, which in my opinion is | 21:09 | |
a very sensible compromise between those two, | 21:13 | |
then let's see what the arithmetic looks like. | 21:17 | |
Once again we may expect that if M1, the narrow money supply | 21:19 | |
increases at 5% a year, personal income will go up | 21:23 | |
at a more rapid rate than that. | 21:27 | |
This is partly because a broader money supply, | 21:30 | |
something like M2 which includes time deposits | 21:32 | |
with or without CDs will go up at a more rapid rate than M1. | 21:35 | |
But our past experience suggests that you would expect | 21:40 | |
a more rapid rate of growth in personal income, | 21:43 | |
the quantity of money, at least for a time | 21:46 | |
after you have had an acceleration of monetary growth. | 21:48 | |
That would mean that you would have over the next couple | 21:51 | |
of years something like a 7% per year rate of growth | 21:53 | |
of personal income, of dollar nominal GNP. | 21:58 | |
If indeed by 1972 you have tapered off the rate of inflation | 22:03 | |
from 4% to something like 2%, that would mean that | 22:10 | |
by that time you would have a output increasing | 22:14 | |
at something like 5% per year. | 22:16 | |
On that scenario, you would be reducing the gap | 22:19 | |
between actual and potential, but you would not have reached | 22:22 | |
a reduction, because you cannot with 5% a year in 1972 | 22:25 | |
average 6% per year in real output between now and then. | 22:29 | |
You would have compromised. | 22:33 | |
You would have gotten the rate of inflation down to 2%, | 22:34 | |
the rate of unemployment down to something, let's say, | 22:38 | |
like 5% not back to your 4%. | 22:40 | |
You would still have a way to go, but you would then be | 22:43 | |
in a position where you weren't faced again | 22:46 | |
with the dilemma of having to produce a recession to stop | 22:49 | |
an unacceptably high rate of inflation. | 22:53 | |
You would be in a position from which you could continue | 22:56 | |
to go forth to consolidate. | 22:58 | |
If you continue to increase the quantity of money | 23:00 | |
under those circumstances at 5%, | 23:02 | |
you could for a time continue to have output increase | 23:05 | |
at about 5% per year until you would reached a position | 23:07 | |
at which you are on a non-inflationary | 23:11 | |
full potential growth. | 23:14 | |
Now that's what I've described as a scenario, | 23:15 | |
it's a plan, it's an aim. | 23:18 | |
It doesn't mean it will be followed. | 23:20 | |
Indeed, as you look forward to what's likely to happen | 23:22 | |
and get a perspective over the next year and a half, | 23:25 | |
the likely course of events is that | 23:27 | |
as what I've been describing persists, | 23:30 | |
there will be increasing pressure on the administration | 23:32 | |
from the administration, and this is already been happening | 23:35 | |
to some extent, to try to go more rapidly than that. | 23:38 | |
There's a tendency to be rather short-sighted | 23:41 | |
and look only toward the next election. | 23:44 | |
There will be a desire to achieve a better result | 23:46 | |
on unemployment and output than I've described by that time, | 23:49 | |
and if that happens, there will be pressure on the Fed | 23:52 | |
to step the quantity of money rate of increase up above 5% | 23:55 | |
and you may very well have a slower tapering off | 24:00 | |
of inflation than I have described, | 24:03 | |
or a turnabout in a resumption of inflation. | 24:05 | |
I think the key issue, the key thing one ought to watch | 24:07 | |
over this next year and a half, from the point of view | 24:10 | |
of the long run potentialities of, and inflationary | 24:13 | |
or a non-inflationary economy is precisely how resistant | 24:16 | |
the administration and Federal Reserve board are | 24:21 | |
to this kind of pressure, to what extent they hold firm, | 24:23 | |
to what extent the public at large can be persuaded | 24:26 | |
to go along with this firm and steady policy? | 24:28 | |
- | Questions and comments from readers have accumulated | 24:32 |
and I had hoped that we could cover several of them | 24:35 | |
in this session, but I'm afraid we're not going | 24:38 | |
to have very much time. | 24:41 | |
However, let's try to do what we can with them. | 24:42 | |
One subscriber writes, "If inflation is at a 5% annual rate | 24:46 | |
"and the money supply increases at a 5% annual rate, | 24:50 | |
"is there any real increase in the money supply? | 24:54 | |
"Please explain answer." | 24:58 | |
- | The answer is that under the circumstances specified, | 25:01 |
the real money supply defined as command over good | 25:04 | |
and services stays constant. | 25:09 | |
There is no change in the real money supply. | 25:10 | |
But the important point to understand in connection | 25:13 | |
with this question is that the real money supply is | 25:15 | |
at the discretion of the holders of money, | 25:18 | |
that the Federal Reserve, the government can only change | 25:20 | |
the nominal money supply. | 25:23 | |
Whether the real money supply rises or not depends entirely | 25:25 | |
on whether people at large wish to have smaller or larger | 25:29 | |
ratios of nominal amount of money to their income. | 25:33 | |
That is it depends on what they desire to do about velocity. | 25:36 | |
- | Another subscriber asks, "Do you agree that what causes | 25:39 |
"high interest rates is the downward direction | 25:43 | |
"in the residual money supply, what remains | 25:45 | |
"after all debts and loans are subtracted | 25:48 | |
"from cash and assets?" | 25:52 | |
- | No, I do not agree. | 25:54 |
I do not believe the concept of the residual money supply is | 25:55 | |
a useful or good concept. | 25:58 | |
The problem is | 26:02 | |
if I take all cash and assets on the one hand | 26:08 | |
and all debts and loans on the other, | 26:10 | |
the balance sheets must balance, | 26:13 | |
that's what double entry bookkeeping is about. | 26:14 | |
The difference between those two is zero. | 26:16 | |
There is no difference and in that sense | 26:19 | |
the residual money supply as this fellow defines it | 26:20 | |
is always zero. | 26:23 | |
Just as on a balance sheet assets always equal liability. | 26:24 | |
What he presumably has in mind is subtracting | 26:28 | |
some debts and loans from some cash and assets. | 26:33 | |
He has in mind taking a partial balance sheet on which | 26:37 | |
the two sides need not balance. | 26:41 | |
Now it's conceivable that there is such a balance sheet | 26:42 | |
which would be useful. | 26:45 | |
I have never seen one which has been worked out | 26:46 | |
which is useful. | 26:49 | |
I think the subscriber who asked this question should | 26:50 | |
set down for himself a more precise and specific definition | 26:55 | |
of what he means by the residual money supply and justify | 26:59 | |
in his own mind why he includes only some assets | 27:04 | |
on the one side and only some debts and loans in the other. | 27:08 | |
I believe that what causes high interest rates, | 27:12 | |
the kind we've been experiencing in the past few years | 27:18 | |
is primarily the anticipation of high inflation. | 27:20 | |
What causes the anticipation of high inflation is primarily | 27:24 | |
the experience of high inflation. | 27:28 | |
What causes the experience of high inflation is primarily | 27:30 | |
a rapid increase in the quantity of money, | 27:33 | |
and thus what causes high interest rates today, | 27:35 | |
what has caused the high interest rates today is | 27:39 | |
the rapid increase in the quantity of money over the period | 27:42 | |
from '64 to '69, or early '69, end of '68. | 27:46 | |
Interest rates are coming down, | 27:52 | |
short-term interest rates are coming down much more sharply | 27:53 | |
than long-term interest rates. | 27:56 | |
What has been causing that to come down has been | 27:57 | |
the restraint in the rate of growth of the quantity of money | 27:59 | |
since the end of 1968. | 28:03 | |
- | Thank you very much Professor Friedman. | 28:07 |
Remember subscribers if you have any questions or comments | 28:09 | |
for topics you would like to hear discussed in this series, | 28:12 | |
please send them to Instructional Dynamics Incorporated, | 28:16 | |
166 East Superior Street, Chicago, Illinois 60611. | 28:19 | |
Dr. Friedman will be visiting with you again in two weeks. | 28:25 |
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