Tape 17 - Views of 1969; FRB report; D-J adjustments

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-	Instructional Dynamics Incorporated welcomes you	0:02
	to this week's commentary on the current economic scene	0:04
	by Professor Paul Samuelson of MIT.	0:07
	Professor Samuelson, a number of our subscribers	0:11
	find themself rather confused	0:13
	about the present outlook for business.	0:16
	Here for instance is a typical inquiry.	0:18
	Dr. Samuelson, we realize that you have been devoting	0:21
	a good deal of your time to the problems	0:23
	of forecasting the shape of things to come in 1969	0:25
	but at the risk of boring you,	0:29
	could we request a summary of your views	0:31
	in light of events that have already taken place this year?	0:33
	And further subscribers like us,	0:37
	they're probably in considerable confusion	0:39
	and could benefit from a restatement.	0:41
-	It would be rather a tall order	0:44
	to give a short restatement	0:46
	of the most probable pattern of things to come	0:48
	in our economy	0:51
	and actually many of my future tapes	0:52
	will be devoted to following the box score	0:54
	of the changing business news	0:57
	but let me devote some time once again to this problem.	1:00
	First, I don't wonder that subscribers might be confused	1:05
	because even the experts right now are rather confused.	1:08
	This is somewhat standard	1:13
	when the business wins are in the process of change.	1:16
	It's simple enough when you're in one weather pattern	1:21
	to continue in that pattern	1:25
	and to see where you're going	1:27
	but the meteorologists do their worse	1:29
	when there's a shift in the weather	1:31
	and maybe we're involved right now	1:33
	in a shift in the weather	1:35
	but among the experts, there's a debate	1:37
	because some say that inflation is stronger than ever	1:40
	and others are still worrying	1:42
	or beginning to worry anew	1:46
	about the possibility of overkill and a recession.	1:48
	Just this last week is was preparing for a TV debate	1:53
	on educational TV	1:56
	and the subject of the program was if I were president	1:58
	and the particular topic	2:03
	was would I extend the 10% tax surcharge?	2:04
	It will be no surprise to any of you subscribers	2:09
	that my answer would be definitely yes.	2:12
	But since the snows in New England,	2:17
	were making it impossible for a spokesman	2:19
	for the opposition to fly to Boston.	2:22
	I did get on the phone	2:25
	and I talked to quite a lot of experts on the monetary view	2:26
	on these matters as opposed to a fiscal view.	2:29
	Well, I can report to you	2:33
	that as of the end of February,	2:34
	there's no group of experts who seem to be more confused	2:37
	and divided among themselves than the monetarists.	2:40
	For example, one big bank	2:45
	that by and large claims to take this view	2:47
	has just jacked up its 1969 GNP forecast substantially	2:51
	to the 925 to $930 billion range	2:56
	which puts them towards the top	3:00
	of the office pool in these matters.	3:03
	Another group says that the Fed	3:08
	is now acting so abruptly	3:09
	as to make a weak half of the year practically inevitable	3:12
	and a writer of the Bond letters told me	3:17
	that he thought he could discern	3:20
	within the St. Louis Federal Reserve Bank itself	3:22
	two opposing views.	3:25
	Well, what are the facts?	3:29
	Perhaps this would be a time to try to stick to them.	3:30
	The facts are that the money supply narrowly defined	3:34
	has definitely stopped growing as fast as earlier.	3:38
	The broad definition of the money supply	3:42
	which is inclusive of commercial bank time deposits	3:45
	has slowed down even more drastically	3:48
	primarily as a result of regulation queue,	3:52
	the interest rates ceiling on deposits	3:57
	and the implied run-off of CDs, certificates of deposit.	3:59
	This would have been even more noticeable	4:05
	had it not been for the safety valve	4:08
	of the Euro bond dollar market.	4:11
	But some monetarists are saying	4:16
	that all this apparent slowing down	4:19
	is merely the result of shifts	4:22
	from private banks deposits to government deposits	4:25
	and then after you correct for this,	4:29
	there is no real slowing down	4:32
	in the excessive rate of growth of the money supply.	4:34
	Now, very often in the past,	4:37
	those who have had to rely primarily	4:39
	if not solely on the rate of growth of the money supply,	4:42
	have learned that there are wiggles	4:46
	in that series connected	4:49
	with the seasonal patterns of Federal finance.	4:51
	This first half of the year	4:57
	is the time of tax collections.	4:57
	The government builds up its deposits.	5:00
	In one or another definition of the money supply,	5:04
	those demand deposits are not included	5:07
	and so, you can get a Tower of Babel	5:10
	and a division of opinion depending	5:15
	upon whether somebody is using the money base	5:17
	which will allow for this	5:26
	or some money supply figure	5:28
	which excludes this particular figure.	5:30
	Seems to me that there's no particular reason	5:33
	to question that if a genuine slowing down	5:36
	in the rate of growth in the money supply	5:42
	is not already on us	5:44
	and I myself think it is,	5:46
	I think it has been with us,	5:48
	it will in any case soon be with us.	5:51
	I don't think that there's any question,	5:53
	certainly there's no question in my mind	5:56
	that the Federal Reserve does mean business	5:58
	and I think we're more at the beginning of a long campaign	6:00
	than at the end.	6:06
	In this connection, it made news of course	6:08
	when William McChesney Martin Junior,	6:12
	the Chairman of the Federal Reserve Board	6:15
	testified before Congress.	6:20
	He got quite a going over from Congressman Wright Patman	6:24
	and that made the headlines	6:30
	and that was what was carried on the television networks	6:32
	but I don't think that should be able to conclude	6:37
	from those headlines	6:40
	that Wright Patman's criticisms of Martin	6:42
	and they were very trenchant	6:46
	and very strong criticisms	6:47
	will carry the day	6:50
	and that Mr. Martin will go back	6:53
	to the Federal Reserve and to the Open Market Committee	6:55
	and say boys, the Texans	6:58
	and the populists in the country	7:03
	who don't like high interest rates	7:05
	are riding high in the saddle	7:07
	and if we know what's good for the long-run interest	7:09
	of central banking	7:12
	and the Federal Reserve and monetary stabilization,	7:14
	we had better not lean against this wind	7:18
	of populism and we have better see the errors	7:22
	of our ways in causing interest rates to be higher.	7:26
	On the contrary,	7:33
	Wright Patman criticizes the Federal Reserve	7:35
	in season and out of season.	7:39
	He really loses force in his criticism	7:41
	because it's a one-pitch pitch	7:43
	and I think that the Federal Reserve	7:49
	keeps in mind the Wright Patmans of this world	7:56
	and walks with caution	8:00
	but I don't think that it can be bamboozled out	8:03
	of doing what it thinks is right	8:06
	just because of this criticism.	8:09
	Now, if Congressman Wright Patman were correct,	8:12
	when he said in his Texas way,	8:16
	that the high interest rates	8:18
	are creating a crisis for the country	8:24
	and if they are maintained,	8:26
	we are gonna be in a depression.	8:28
	Let's make no mistake about it,	8:30
	a depression brought on by the Federal Reserve system	8:32
	would bring strong allies to Patmanism	8:35
	but you're interested in my views,	8:42
	let me state them very strongly.	8:46
	I don't see any likelihood	8:48
	that a continuation of Federal Reserve tightness	8:52
	such as we are beginning to see	8:57
	will plunge the country into a depression	9:00
	and I don't think that the staff	9:03
	of the Federal Reserve Board thinks that	9:04
	and I don't think that the board members themselves	9:06
	think that and I don't think	9:09
	that the economists in the Nixon Administration think that.	9:10
	So, I believe that they will let Patman talk	9:17
	and the Federal Reserve will continue	9:22
	to tighten up	9:25
	and that this will show itself	9:28
	in moderation if not stability	9:30
	in the rate of growth of the money supply.	9:34
	If I were a monetarist,	9:38
	I would spend a lot of time	9:41
	on making predictions of what's going to happen	9:43
	to the rate of growth of the money supply.	9:47
	In my telephone calls of last week,	9:50
	I was really astonished to find	9:53
	how little of that there is among the camps	9:55
	of the monetarists.	9:59
	Why?	10:03
	Well, one reason of course is that you can regard	10:04
	the money supply as simply the volitional act	10:07
	of the Federal Reserve.	10:10
	The money supply's whatever the Federal Reserve says	10:12
	it is going to be	10:14
	and who can read the minds of seven crazy people	10:16
	or the Open Market Committee?	10:21
	This is an act of freewill,	10:24
	it is not yet determined in the room of history	10:26
	and so, from that viewpoint,	10:30
	it's absolutely impossible to give any forecast let's say	10:35
	of what the fourth quarter GNP will do,	10:37
	whether the fourth quarter GNP will be exuberant,	10:41
	whether the fourth quarter GNP will be weak	10:43
	because that depends so much	10:45
	upon what the Federal Reserve is doing in the second quarter	10:48
	with the money supply	10:50
	and we don't know what the Federal Reserve's going	10:51
	to do with the money supply.	10:54
	Now, that's a perfectly logical position	10:56
	if I were an executive of a large bank	11:00
	or of a large corporation	11:03
	or of an investment counseling firm,	11:04
	I guess probably wouldn't have much use	11:07
	for a monetarist who took that position	11:09
	because he couldn't give me the figures	11:13
	which I need ahead	11:15
	which are guesses on fourth quarter GNP	11:17
	because so many of my plans	11:21
	are future oriented.	11:22
	The monetarist who's just been turned down	11:24
	in that job or who's just been fired,	11:27
	of course would have his answer,	11:30
	he say I can't give you what nobody can give you	11:31
	because it doesn't exist	11:34
	and you'd better just be content with that.	11:35
	Of course, he'd say I could make up a figure	11:38
	and write it down on paper	11:40
	but it isn't worth the paper that it's written on.	11:41
	I don't think one has to be quite that skeptical.	11:45
	Errors of forecasting of the GNP	11:47
	even within the current quarter	11:50
	will be considerable	11:52
	and the size of those errors will increase	11:54
	and will increase exponentially	11:59
	as we move ahead in time.	12:01
	It's like the science of weather forecasting, meteorology.	12:04
	It's not much of a science,	12:08
	if anything it's softer than economics.	12:09
	Well, the weatherman outside of New England	12:12
	does pretty well on a one-day or two-day basis.	12:14
	He does quite poorly	12:18
	on a five-day basis and on a 15-day basis,	12:20
	you might as well go to the old Farmers Almanac	12:23
	and just use the law of averages from climatology	12:26
	and to try to study the Navier-Stokes equations,	12:31
	partial differential equations of error diffusion.	12:37
	I think one can do better than that	12:42
	and I would suspect	12:43
	that there will grow up a school of monetarists	12:47
	who will try to forecast ahead	12:49
	the most important variable,	12:53
	at least the one that they think is most important	12:57
	which is the rate of the growth of the money supply	12:58
	and they will make this forecast based	13:00
	upon what they believe to be the style	13:03
	of the Federal Reserve Board	13:06
	and how it will react to different kinds	13:11
	of business conditions.	13:15
	Speaking of the style of the Federal Reserve Board,	13:17
	we perhaps ought to take notice of something new	13:21
	and perhaps important in American life,	13:23
	namely the Joint Economic Committee	13:28
	has forced out of the Federal Reserve Board	13:31
	an advanced forecast	13:38
	by the Federal Reserve Board staff	13:40
	of what's going to happen to business conditions.	13:44
	I realize that the forecast comes out grudgingly	13:47
	and I also realize that it would not be admitted	13:54
	by the Federal Reserve Board	13:59
	that this is an outright forecast.	14:01
	It is a projection based	14:03
	upon certain assumptions	14:06
	which the Board would say are given to it	14:08
	by the economic policies	14:11
	as announced by the new administration.	14:14
	Nevertheless, the projection made	14:18
	by the Federal Reserve Board	14:25
	may be of some interest	14:26
	and I suppose that my subscribers did see it	14:28
	in the paper recently.	14:31
	Let me try to summarize some of its main features.	14:36
	The Federal Reserve Board thinks	14:42
	that the Gross National Product	14:44
	will grow in 1969	14:47
	to an average level of about 919 billion.	14:52
	I think 918, 920 billion is the range	14:55
	which they give.	14:58
	This is interesting because it's a bit lower	15:01
	than that of the outgoing administration	15:03
	in the economic reports of the president.	15:08
	It is lower than the forecast which I gave	15:12
	at the turn of the year	15:17
	and it is lower than Paul McCracken's revised forecast	15:19
	as representing the opinion of the New Council	15:25
	of Economic Advisers in its recent testimony	15:28
	before the Joint Economic Committee.	15:31
	That forecast by the way	15:34
	of Chairman McCracken	15:37
	was if I remember correctly for $921 billion,	15:39
	almost precisely the same figure	15:43
	which Chairman Arthur Oakland,	15:46
	the retiring Chairman of the Council	15:49
	of Economic Advisers had given.	15:51
	What about unemployment?	15:55
	The Federal Reserve Board staff,	15:57
	this is not the Board itself, this is the staff,	16:00
	Daniel Brill is the head of that staff,	16:03
	so it's a report signed nominally by him	16:06
	but of course a joint effort,	16:10
	they think unemployment will rise	16:12
	to an average of 3.8% to 4% this year.	16:13
	That means not very much of an increase over the average	16:19
	of 1968, 3.6%	16:24
	but we should be present and future oriented	16:27
	and we should think of it this way,	16:31
	unemployment has been 3.3% seasonally corrective	16:36
	and this is a fairly substantial increase	16:38
	in unemployment above the present level.	16:42
	Now, since unemployment generally creeps upward	16:44
	and doesn't leap upward,	16:47
	if the year as a whole	16:49
	which has 3.3% for its first month	16:51
	is to average out 3.8 to 4%,	16:55
	if the Federal Reserve staff really means that,	16:59
	then I don't see how we can preclude the unemployment rate	17:01
	being at some time during the year	17:07
	in excess of 4%	17:10
	and maybe even a good deal in excess of 4%.	17:13
	And what about corporate profits?	17:18
	Well, with this somewhat softer economy	17:20
	that is envisaged here,	17:22
	corporate profits aren't gonna be as good as last year.	17:24
	Last year corporate profits before taxes	17:29
	were 92.3 billion	17:31
	and this year the board looks for corporate profits	17:34
	before taxes to be 89 billion to 92 billion.	17:39
	Since I don't think that the 10% surcharge	17:42
	is going to be allowed to die	17:45
	or to be repealed,	17:49
	that means that after-tax profits	17:51
	will not get any help from that source	17:54
	and so, they look to be down a little bit.	17:57
	The Federal Reserve Board staff	18:04
	has tried to estimate the rate of growth	18:08
	of the money supply.	18:10
	I'll read from The Wall Street Journal dispatch	18:13
	on this matter.	18:16
	Assuming monetary strength quote	18:18
	is maintained during most of 1969 quote,	18:21
	the staff wrote the money supply of private demand deposits	18:25
	and currency will be limited	18:29
	to expansion in a range of 3% to 6%,	18:31
	following a 6.5% growth in 1968.	18:36
	The effect would be even more marked	18:41
	on time deposits at commercial banks staff said,	18:43
	estimating that they will grow by only 1% to 5% this year	18:47
	following an 11.3% rise in 1968.	18:51
	So, that means that the broad definition of the money supply	18:56
	will have in value,	19:00
	this is my back-of-the-envelope calculation,	19:05
	at the very least in comparison	19:10
	with recent behavior.	19:12
	This is gonna put a strain on credit.	19:15
	There's gonna have to be more rationing credit to business	19:20
	and the staff figures that corporations	19:23
	will issue about 20% or 25% more securities	19:26
	on the market this year than last	19:29
	and they say quote this would presumably raise the cost	19:31
	of capital financing to large business.	19:37
	So, we can certainly see	19:39
	that hard money,	19:41
	high interest rates are gonna be with us.	19:46
	In fact I can't see the basis for the statement	19:50
	which Chairman Martin made	19:53
	that he thought the interest rates were gonna be about	19:55
	as high for the rest of the year as they are now.	19:58
	The risk it would seem to me	20:02
	would be that interest rates may be even higher	20:03
	in the rest of the year	20:07
	than they are now.	20:08
	The balance of payments	20:11
	still according to the staff of the Federal Reserve	20:15
	looks to be a problem.	20:19
	They think that the surplus on merchandise trade	20:22
	might improve by a couple billion dollars	20:25
	which certainly would be a welcome improvement	20:28
	because that would give us a balance	20:31
	on merchandise trade of about plus two billion surplus	20:34
	as against a nothing surplus or deficit this last year.	20:37
	They expect this to come about	20:45
	because they expect exports to rise	20:46
	by about three billion	20:49
	and imports to climb only around one billion.	20:50
	All that I will say is that we shall be very lucky	20:53
	if this particular pattern develops.	20:58
	It may well develop, I don't mean to say that	21:00
	on the basis of any profound studies.	21:02
	I have reason to doubt it	21:05
	but I do recall that where the balance	21:07
	of international payments to the United States is concerned,	21:12
	there has been much whistling in the dark	21:15
	and much bottle courage	21:18
	and over-optimism has been the general rule	21:20
	in that endeavor.	21:27
-	Professor Samuelson, what about the stock market?	21:30
-	Well, what about the stock market?	21:32
	Of course, it's been weak	21:35
	in recent weeks.	21:39
	It went down in a very short time	21:41
	and lost all that it had painfully gained	21:45
	in the way of advance over a much longer period of time.	21:48
	Actually I am devoting a few words	21:54
	to this subject in my more or less current Newsweek column.	21:58
	I try not to duplicate in this tape series	22:05
	the content of that column	22:10
	and what I say here	22:13
	but the stock market is always a matter	22:14
	of very great interest	22:18
	and I can perhaps develop at greater length	22:20
	what's in the back of my mind	22:26
	with respect to the stock market.	22:30
	In that Newsweek column,	22:33
	I take a view which will get me a lot of hot letters	22:36
	from the brokerage fraternity,	22:40
	namely that it's not a bad thing for the country	22:43
	at this stage of the game	22:49
	for the stock market to decline	22:50
	so that speaking as a political economist,	22:53
	as a economist interested in the health of the economy,	22:57
	and not speaking in my capacity as the husband	23:02
	and father of children,	23:05
	I say very boldly	23:09
	that the Dow Jones Industrial Averages at 900	23:12
	is probably a better thing for the country	23:18
	than the Dow Jones Industrial Average at 950	23:20
	if we are still as most of the experts believe	23:24
	in a period of inflation.	23:29
	I should emphasize that the difference	23:31
	in the experts on how strong the economy is	23:33
	is much greater than the difference in the experts	23:38
	on the question as to whether we have too rapid an increase	23:43
	in the price level	23:46
	because even some of those who are rather pessimistic	23:47
	about the economy	23:53
	still think that price inflation	23:56
	will be with us.	24:00
	We could have the worse of both worlds	24:03
	in other words in 1969,	24:05
	a definite weakening in real output growth	24:07
	and an increase in unemployment	24:12
	and excess capacity at the same time	24:14
	that there is very little dent made	24:17
	in the rate of price inflation.	24:19
	A careful look at the historical record	24:27
	will show I think	24:30
	that the benefit you get from price inflation	24:31
	from reducing price inflation	24:34
	by slowing down real growth	24:36
	is a delayed benefit	24:38
	and so, the test of the correctness	24:40
	and social good of a policy of slowing things down a bit	24:43
	isn't simply whether we get a reduction	24:47
	from a 5% rate of price inflation	24:51
	as was typical at the end of the year	24:55
	to a 3% immediately	24:58
	but whether looking ahead 15 months from now,	25:02
	we have some benefit accruing to us.	25:07
	Wouldn't it be a bad thing	25:14
	if the stock market were soaring,	25:16
	if business found it could raise capital very easily	25:18
	in the stock market	25:22
	by means of new issues and otherwise	25:24
	at a time when the Federal Reserve	25:27
	is trying to tighten down?	25:29
	If the stock market were exuberant,	25:31
	then I think the housing industry	25:36
	would take it in the chin much harder	25:38
	from Federal Reserve restrictive policy,	25:41
	so I have to welcome some moderation	25:43
	and even some weakness on the part	25:48
	of the stock market.	25:50
	How much weakness can I welcome?	25:52
	I don't really suppose that the macroeconomic situation	25:57
	would deteriorate if the Dow Jones Industrial stocks	26:02
	dropped another 100 points.	26:08
	There'll be plenty of shocks	26:11
	over the airwaves if I were to go on television	26:12
	and make that statement	26:16
	but this is a private off-the-record service,	26:19
	so I can be more candid	26:25
	and say that although I don't particularly expect	26:31
	the Dow Jones Industrial Averages	26:35
	to be that weak,	26:37
	I have no reasoned expectation on this matter at this time.	26:40
	I would not say that it would be a bad thing	26:46
	if it became that weak.	26:48
	It would be a bad thing	26:50
	for lots of leveraged speculators,	26:51
	it would be a bad thing for lots of go-go performance funds.	26:55
	It would be psychologically a thing	26:59
	which would make people feel poorer	27:03
	but that's precisely what the doctor orders	27:05
	in a time when there is too much money spending	27:08
	compared to our capacity to produce at stable prices.	27:13
	I should add that I take absolutely no stock	27:20
	in the resistance levels	27:23
	which people have been talking about.	27:25
	This is all just verbiage.	27:28
	The 920 resistance level didn't hold,	27:30
	so now we're supposed to look at the 870 one.	27:32
	I don't mean that the 870 one isn't gonna hold,	27:36
	what I mean is that there's no such thing	27:39
	as a meaningful difference	27:41
	that takes place at 870	27:45
	as compared to 860 or as compared to 880	27:47
	and only the chartist withholding their shoes	27:51
	really take this kind of thing very seriously.	27:56
	Let me wrap up then the discussion	28:00
	about the stock market	28:02
	by saying that there is a rational reason	28:04
	for the market to be weak	28:08
	as it reads the forecast	28:10
	of say the Federal Reserve Board staff	28:12
	and senses the determination	28:15
	of Martin and the Federal Reserve	28:17
	to keep money tight,	28:20
	not just for a little while in the first part of the year	28:22
	but for a longer campaign	28:24
	and secondly as has been noted many times,	28:27
	the higher interest rates offered	28:30
	on bonds and on mortgages and on fixed principal securities	28:35
	is a direct competition with the high price earnings ratios	28:39
	on stocks and even with the same macroeconomic situation	28:45
	that would tend to make the stock market weak.	28:48
	But I make no forecast at this time	28:53
	about whether the Dow Jones stocks will go up	28:57
	or whether they'll go down.	29:00
	I just simply say that it will not be a bad thing	29:01
	if they go down somewhat further.	29:05
-	Thank you, Professor Paul Samuelson of MIT	29:10
	in Cambridge, Massachusetts.	29:13
	IDI welcomes your questions, comments and suggestions.	29:15
	The address is 166 East Superior Street, Chicago, 60611.	29:20

Item Info

Title:

Tape 17 - Views of 1969; FRB report; D-J adjustments

Date:

1969

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

CC BY-NC 4.0

Rights Note:

This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0017
ref2173_lxr
samuelsonpaul
duke:325040
pstau001017
ark:/87924/r48g8g05m
092de5ad-1ae7-48b3-9324-cd4cbc513967

Permalink:

https://idn.duke.edu/ark:/87924/r48g8g05m

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Tape 17 - Views of 1969; FRB report; D-J adjustments

Transcript

Item Info

Economists' Papers Archive

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