Tape 185 - Money Targets, Natural Gas, Moynihan, Canadian Dollar
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Transcript
Transcripts may contain inaccuracies.
- | Hello, this is William Clark of the Chicago Tribune | 0:02 |
saying welcome once again on behalf | 0:05 | |
of Instructional Dynamics Incorporated | 0:07 | |
to a visit with the distinguished economist | 0:09 | |
Professor Milton Friedman of the University of Chicago. | 0:12 | |
We're recording this interview | 0:15 | |
in the early days of February 1976. | 0:16 | |
And Milton, the stories are on the front page this morning | 0:20 | |
about Federal Reserve Board Chairman Arthur Burns | 0:23 | |
lowering his 1976 money growth target range | 0:26 | |
from the 5% to 7 1/2% range to 4 1/2% to 7 1/2%. | 0:31 | |
How significant do you think that is? | 0:40 | |
- | Well I must confess that when I read that story | 0:42 |
my reaction was Arthur is playing games | 0:44 | |
with the House Banking Committee. | 0:48 | |
This is one of the new quadrennial, | 0:51 | |
I guess quadrennial is right. | 0:54 | |
Once every three months, four times a year. | 0:56 | |
Not once every four years. | 0:59 | |
- | Oh, I see. | 1:00 |
- | Once every three months under the House resolution | 1:01 |
that was passed last spring he is required | 1:05 | |
to specify before the appropriate committee. | 1:08 | |
One time the Senate, one time the Bank and the House, | 1:12 | |
and this time it's the House Banking Committee. | 1:16 | |
He is required to specify the Federal Reserve target | 1:18 | |
for monetary growth for the coming year. | 1:21 | |
And this is the fourth such appearance | 1:25 | |
he has made pursuant to that resolution. | 1:26 | |
I might note, as an aside, that that is not | 1:29 | |
a continuing resolution and it will expire | 1:31 | |
with this Congress unless it is renewed. | 1:34 | |
But I think that there is every reason | 1:37 | |
to suppose it will be renewed. | 1:39 | |
Both the House and the Senate | 1:41 | |
Banking Committee are pleased by its existence. | 1:42 | |
So I think it will be renewed. | 1:46 | |
But at any rate, to go to my initial thing, | 1:49 | |
it seems as if he's really just having fun | 1:56 | |
and playing around is because it's a trivial | 1:59 | |
and unimportant and insignificant change he has made. | 2:02 | |
He's talking about changing a planned rate of growth | 2:05 | |
from five to 7 1/2% which it was before | 2:09 | |
and shifting that to 4 1/2 to 7 1/2. | 2:13 | |
But what has in fact been the performance? | 2:16 | |
From the last goals he specified which were | 2:19 | |
from the third quarter of 1975 on | 2:23 | |
if you look at what's happened from then | 2:26 | |
to now he then specified five to 7 1/2%. | 2:28 | |
What has been the actual rate of growth for M1? | 2:32 | |
It's been 2%. | 2:34 | |
So the difference he's been three | 2:36 | |
percentage points below his lower limit. | 2:38 | |
The total amount of M1 is now several billion dollars | 2:41 | |
below the numerical value of the | 2:44 | |
lower limit extrapolated for then. | 2:46 | |
What does it matter whether you widen the band | 2:49 | |
by a half of a percentage point | 2:55 | |
when you're two percentage points below | 2:57 | |
where you said you were going to be before? | 2:59 | |
Similarly, with respect to M2, the other band, | 3:03 | |
which has been a broader money supply | 3:06 | |
which he supposedly left unchanged at 7 1/2 to 10 1/2% | 3:08 | |
and yet the actual rate of growth of M2 has been | 3:13 | |
about 5.7% since the base he chose last time | 3:18 | |
which means that it's about nearly | 3:23 | |
two percentage points below his lower limit there. | 3:25 | |
So the plain fact is that these stated limits | 3:29 | |
have been a pure exercise, so far, in public relations. | 3:34 | |
Now you will never know this after the event | 3:38 | |
if you look at the figures because these new, | 3:40 | |
I haven't seen yet, the Chairman's testimony | 3:44 | |
but if he follows past practice | 3:48 | |
these new proposed rates of change will be expressed | 3:51 | |
on a new base equal to the actual level | 3:54 | |
of the money supply in the fourth quarter. | 3:58 | |
So, what's going to happen is that this shortfall | 4:00 | |
in their performance will now be washed out | 4:03 | |
by starting fresh over again | 4:06 | |
and each quarter he's been starting fresh over again | 4:07 | |
and therefore you do not have a cumulative picture | 4:10 | |
which is what you really need | 4:13 | |
of the performance since the beginning. | 4:14 | |
Now I could understand looking at it for a moment | 4:18 | |
as to goals, for a moment leaving aside this question | 4:24 | |
of performance, looking at the goal | 4:27 | |
there is great deal to be said for lowering | 4:29 | |
all these limits slightly and gradually | 4:31 | |
quarter after quarter because of the point | 4:34 | |
that Burns has made properly every time | 4:36 | |
he has testified that while these rates of change may | 4:38 | |
be appropriate at the moment they are much too high | 4:42 | |
for a long period price stability. | 4:45 | |
And, once again, he testified yesterday | 4:47 | |
or whenever it was the other day | 4:50 | |
that from the long run point of view | 4:52 | |
for price stability you needed | 4:54 | |
a one to 1 1/2 % per year rate of growth of M1. | 4:56 | |
Well somehow or other you have to get | 5:02 | |
from where you are now to where you're going | 5:04 | |
and it would make a great deal of sense, | 5:05 | |
let's say that this coming quarter will be four to seven, | 5:07 | |
the next quarter 3 1/2 to 6 1/2, | 5:11 | |
the next quarter three to six | 5:14 | |
and similarly with the M2 ranges. | 5:16 | |
But there's no sign that that's what he's doing. | 5:19 | |
The last time he testified he, in the same way, | 5:21 | |
widened slightly the range on M2. | 5:25 | |
Now he widened a little the range on M1. | 5:27 | |
As I said, it gives the impression | 5:30 | |
of fooling around in order to give | 5:32 | |
the Congress the impression that he's reacting | 5:35 | |
to their pressures, while at the same time, | 5:36 | |
what in his mind is the real business, | 5:39 | |
namely what the Fed is doing elsewhere is going on. | 5:41 | |
Now he made one point that I have heard | 5:44 | |
from other Federal Reserve people | 5:46 | |
and I am sure they take seriously | 5:48 | |
and I think it's worth mentioning | 5:50 | |
in justification of his lowering the range. | 5:54 | |
And this is the fact that last year | 5:57 | |
the Fed made it permissible, | 6:00 | |
and I'm not sure under exactly what regulation, | 6:03 | |
for corporations to hold time | 6:07 | |
deposits more than a certain size. | 6:09 | |
And there has been a big shift of corporate balances | 6:13 | |
out of demand deposits into savings accounts | 6:16 | |
and time deposits particularly in the savings accounts | 6:19 | |
and savings and loans associations. | 6:22 | |
The savings and loans associations | 6:24 | |
have been experimenting, as you know, | 6:26 | |
on new techniques of trying to attract demand deposits, | 6:30 | |
of creating the equivalent of demand deposits. | 6:34 | |
You have the explicit creation of demand deposits | 6:36 | |
in New Hampshire and Massachusetts | 6:40 | |
with the so called NOW accounts, | 6:42 | |
N-O-W, Negotiable Orders of Withdrawal. | 6:43 | |
Which essentially enables you to write checks | 6:46 | |
on interest paying time deposits. | 6:48 | |
That started through a loophole in the regulations | 6:52 | |
in New Hampshire and Massachusetts. | 6:55 | |
As soon as they got onto it they changed the regulation | 6:56 | |
so at the moment it's restricted | 7:01 | |
to New Hampshire and Massachusetts. | 7:02 | |
But the latest development along these lines | 7:04 | |
has been an offer by savings and loan mutual savings banks | 7:07 | |
to corporations that in response | 7:10 | |
to telephonic instructions they will transfer | 7:13 | |
by telegraph federal funds at the request of the depositor. | 7:17 | |
So you can deposit money in the savings account, | 7:21 | |
earn interest on it and, at the same time, | 7:25 | |
have it available for essentially | 7:27 | |
the equivalent of checking account purposes. | 7:29 | |
Now Mr. Burns gave a number, which is interesting | 7:32 | |
in this respect, he said that they estimated | 7:34 | |
that roughly two billion dollars | 7:38 | |
had been taken out of demand deposits | 7:40 | |
and gone into this kind of savings deposits. | 7:42 | |
Now you're talking about a total sum, | 7:46 | |
of course, which is very large. | 7:50 | |
The total volume of demand deposits | 7:53 | |
(papers rustling) | 7:57 | |
The total volume of demand deposits is | 8:06 | |
in the order of 220 billion dollars. | 8:08 | |
So you're talking about a sum of two billion | 8:11 | |
which is not negligible, it's about 1%. | 8:13 | |
If that's taking place in the course | 8:16 | |
of three or four months, let's say it's taken place | 8:17 | |
in the course of three months, that would be a 4% per year | 8:19 | |
relative to client demand deposits. | 8:25 | |
And he cited that as a reason why it was desirable | 8:26 | |
to lower the lower band on the growth of demand deposits. | 8:30 | |
That's a valid point but I think | 8:35 | |
it should not be overestimated. | 8:37 | |
We have been having, over the past 20 years, | 8:39 | |
a development of ways of economizing our demand deposits | 8:43 | |
so that demand deposits have now become relatively small. | 8:47 | |
And this process is continuing. | 8:52 | |
Each year you have to have new inventions to keep it going. | 8:54 | |
Now, he also cited this as a reason why you might want | 8:59 | |
to pay more attention to the broader aggregate. | 9:03 | |
I agree with that, it is desirable | 9:05 | |
to pay more attention to the broader aggregate. | 9:07 | |
But I cite this for a different reason. | 9:10 | |
I have found often in the past | 9:12 | |
that whenever the Federal Reserve thinks it has something | 9:15 | |
to explain it finds some external source to explain it. | 9:18 | |
Now, at the moment, the Federal reserve | 9:21 | |
is on the defensive, and should be, | 9:23 | |
because it has not been sticking to its target. | 9:25 | |
Because it's been increasing the money supply too slowly. | 9:28 | |
And so it's trying to find some excuse | 9:31 | |
for its behavior that can blame it on something | 9:33 | |
outside itself and now this is its excuse. | 9:35 | |
Oh we intended to have it go up that rapidly | 9:37 | |
but there came this new institutional development | 9:39 | |
that we could not have forecast, | 9:43 | |
that we could not have put in our numbers | 9:44 | |
and therefore it explains why | 9:46 | |
it has been going up so slowly. | 9:48 | |
Now that's important from a different point of view. | 9:50 | |
As I think I said on this tape last time | 9:53 | |
I am very much disturbed by this slow rate | 9:56 | |
of monetary growth over the past six months. | 9:58 | |
And I think it may well be that we shall | 10:01 | |
be seeing a distinct slowdown in the rate | 10:03 | |
of economic expansion in the next six months. | 10:05 | |
Mr. Burns did not forecast anything like that. | 10:08 | |
He said the expansion is vigorous, | 10:11 | |
all the signs are that it will continue to be vigorous. | 10:13 | |
That he is a very skilled forecaster | 10:15 | |
of vigorous conditions and has a good record. | 10:18 | |
But he has to explain to himself how can I make this | 10:21 | |
in spite of this very slow rate of monetary growth. | 10:26 | |
And the rationalization he is giving | 10:28 | |
is that that slow rate of monetary growth | 10:30 | |
is misleading because of the | 10:31 | |
development of these other accounts. | 10:33 | |
And as I say, I have heard the same story | 10:35 | |
from other Federal Reserve people so I am sure | 10:36 | |
that that is the rationalization. | 10:39 | |
I think you want to take that with a big grain of salt. | 10:41 | |
I do not think it would be wise | 10:43 | |
to rule out the possibility that | 10:45 | |
within the very near future you may see | 10:47 | |
a distinct slowdown in the rate | 10:51 | |
of economic activity and growth. | 10:53 | |
I hope that doesn't happen. | 10:56 | |
And you can't say it's certain | 10:58 | |
but I think there's a good chance it will. | 10:59 | |
- | You were commenting before we | 11:02 |
started the tape for this interview Milton, | 11:04 | |
on the possibility of removing price control | 11:07 | |
from natural gas and I think your subscribers | 11:10 | |
would be interested in your comments on that. | 11:12 | |
- | Well this seems to me to be the first break | 11:15 |
in the log jam and I think all of us ought | 11:18 | |
to give three cheers if in fact | 11:20 | |
the price ceiling on natural gas is eliminated. | 11:23 | |
As you know the Senate has voted | 11:26 | |
already for a decontrolled bill. | 11:32 | |
A gradual decontrolled bill. | 11:35 | |
The House voted in a procedural vote | 11:37 | |
to force a committee to release a bill | 11:43 | |
or to permit consideration on the floor | 11:46 | |
of a bill which would immediately remove price controls | 11:51 | |
on all so called new gas on shore, drilled on shore. | 11:54 | |
The procedural vote has been taken as evidence | 12:00 | |
that the House has the majority to pass the bill. | 12:02 | |
And therefore, the predictions now are that sometime | 12:06 | |
within the very near future, maybe in a day or two, | 12:09 | |
the House will pass a bill providing | 12:12 | |
for immediate decontrol of new natural gas. | 12:14 | |
If so it will have to go to conference | 12:19 | |
but it looks as if there's a good chance that, | 12:21 | |
within the next week or two, | 12:22 | |
you might have such a bill passed by Congress | 12:24 | |
and the president of course would sign it. | 12:26 | |
And that would, as I say, be the first favorable break | 12:29 | |
in this energy picture that we've had for a long time. | 12:33 | |
The ceiling on natural gas is the oldest of these. | 12:36 | |
It was put on over 15 years ago. | 12:40 | |
It has nothing whatsoever to do with the Arab oil crisis. | 12:41 | |
It had to do with other considerations. | 12:46 | |
And it has been a devastating ceiling. | 12:48 | |
It's been raised even so, as of the moment, | 12:52 | |
the ceiling on new gas produced | 12:55 | |
is 52 cents a thousand cubic feet. | 12:57 | |
The gas companies, in order to get supplies, | 13:00 | |
getting shortages under those circumstances | 13:03 | |
have been importing liquified natural gas | 13:05 | |
from abroad at something like two dollars a thousand | 13:07 | |
cubic feet or about four times as much. | 13:10 | |
And the regulations apply only to interstate gas. | 13:12 | |
So you'll have intrastate gas, | 13:16 | |
gas being used intra, also selling at two dollars. | 13:18 | |
Moreover, you'll have what is just from | 13:22 | |
an economic point of view exactly equivalent | 13:23 | |
of a business and imposing tariffs | 13:26 | |
on growing bananas in the United States. | 13:28 | |
There was a TV piece the other day on how people in Ohio | 13:32 | |
are drilling wells to get natural gas wells | 13:35 | |
for themselves there, consumers of natural gas. | 13:38 | |
I certainly suspect that Ohio may well be a bad place | 13:43 | |
to do this commercially but because the law puts no limit | 13:47 | |
on intrastate gas but does on interstate gas | 13:50 | |
it's the equivalent of a tariff. | 13:54 | |
And therefore it means that it may pay people | 13:56 | |
to drill for natural gas in Ohio | 13:58 | |
even though that would end up costing them | 14:02 | |
two dollars a thousand cubic feet | 14:03 | |
because they are not permitted by law to pay a dollar | 14:05 | |
a thousand cubic feet for gas obtained elsewhere. | 14:09 | |
So, as I say, it's been doing an enormous amount | 14:13 | |
of harm in the way of wide diversities | 14:15 | |
in the prices different people are paying for natural gas. | 14:18 | |
And it would be a major step forward | 14:21 | |
if you could eliminate that ceiling | 14:23 | |
and have natural gas sold freely. | 14:25 | |
It would be a major step forward for natural gas | 14:28 | |
but it would also contribute | 14:30 | |
to easing the whole energy and oil business. | 14:31 | |
What is also impressive about this, | 14:34 | |
I heard on TV last night, I happened to be listening | 14:37 | |
to John Chancellor and he reported this and what did he say? | 14:40 | |
He said the House has acted in this way this looks | 14:43 | |
as if it's going to mean a removal of the controls | 14:46 | |
on oil and therefore a rise in the price of natural gas. | 14:48 | |
Now, in a way, it's a miracle we can get decent legislation | 14:53 | |
when you have that kind of bad economics put forth | 14:59 | |
night after night over the TV tube. | 15:02 | |
What are the facts? | 15:04 | |
What good does it do someone who would like | 15:06 | |
to consume natural gas if the price were low | 15:09 | |
if he got it when he can't get it? | 15:12 | |
The actual effect of the present procedure | 15:15 | |
is to mean that lots of people who would like | 15:19 | |
to buy natural gas can't do it. | 15:20 | |
Last winter you had lots of industrial consumers | 15:22 | |
of natural gas that were simply cut off | 15:24 | |
from natural gas and they had to use much more | 15:26 | |
expensive fuels like oil or coal instead. | 15:28 | |
Now is the price of natural gas going to go up | 15:32 | |
to them because you eliminate the ceiling? | 15:34 | |
On the contrary, it's gonna go down. | 15:37 | |
The price that's relevant, namely the price of fuel, | 15:39 | |
is going to go down. | 15:41 | |
But even if you look at those who have | 15:43 | |
been using natural gas here is a natural gas | 15:44 | |
that has imported from abroad | 15:47 | |
at two dollars a thousand cubic feet. | 15:48 | |
Is the price of natural gas to the purchasers | 15:51 | |
of that natural gas going to go up or down? | 15:53 | |
It's going to go down if you eliminate the price control. | 15:55 | |
The actual argument and case | 15:58 | |
for eliminating the price control is precisely | 16:00 | |
that it will lower the cost of natural gas and energy | 16:03 | |
to the consumers of it on the average. | 16:06 | |
Now there will be some particular individuals | 16:08 | |
for whom the price will go up. | 16:10 | |
If I have a particular utility that made | 16:11 | |
a long term contract for natural gas | 16:17 | |
at a very low price and if in fact it's passing that on | 16:19 | |
to its consumers which is another question mark, | 16:22 | |
well then those consumers | 16:24 | |
are getting away with a very low price. | 16:25 | |
So I won't deny that some consumers | 16:28 | |
will have the price go up but | 16:30 | |
in the main the effect will be to have it go down. | 16:31 | |
At any rate, if that really goes through | 16:34 | |
we can all give one big cheer for the great exception | 16:36 | |
which has been a move in the direction | 16:39 | |
of freer rather than more controlled prices. | 16:41 | |
- | Good enough. | 16:43 |
Milton, we've noticed of course | 16:45 | |
that Daniel Patrick Moynihan is not going | 16:47 | |
to be our voice in the United Nations anymore | 16:50 | |
apparently go back to Harvard. | 16:53 | |
I dare say you have some acquaintanceship with Mr. Moynihan. | 16:55 | |
- | Oh yes, I've known Pat for a long time | 16:59 |
and he is very able of course. | 17:02 | |
In fact an intelligent person and I regret exceedingly | 17:05 | |
his loss at the United Nations. | 17:08 | |
The big question mark has been, | 17:11 | |
and the thing people are worried about | 17:12 | |
and I think understandably, is whether he is doing this | 17:14 | |
in order to open the way to run for Senate | 17:18 | |
on the Democratic ticket in New York State | 17:21 | |
opposing Senator James Buckley | 17:24 | |
who is up for re-election this fall. | 17:26 | |
And there is also the matter of newspaper speculation | 17:30 | |
on it I have no idea about the insight | 17:32 | |
but I do know that Moynihan himself | 17:35 | |
said over the TV not long ago that it would | 17:38 | |
be discreditable for him to use the U.N. experience | 17:40 | |
as a platform for such a political event. | 17:46 | |
And the one think I do know about Pat | 17:48 | |
is that he is an honorable man. | 17:51 | |
Everything I have seen about his past behavior, | 17:53 | |
personally and otherwise, would suggest that he | 17:56 | |
is very unlikely to take an action | 17:59 | |
that he regards as discreditable. | 18:02 | |
So unless there's some new element of the situation | 18:04 | |
I should be very much surprised if he did enter that race. | 18:06 | |
On the other hand, through the longer run, | 18:11 | |
there's just no doubt that his fundamental interests are | 18:14 | |
in the public arena and not as an academic scholar. | 18:16 | |
His position at Harvard is a rather anomalous one. | 18:20 | |
He is, believe it or not, his professorship | 18:23 | |
is in the school of education. | 18:26 | |
- | Oh really, I didn't know that. | 18:29 |
- | He is a sociologist, political scientist. | 18:31 |
In the past been connected with urban studies | 18:34 | |
has been his main field of work. | 18:36 | |
And for a time he was, I think, | 18:38 | |
a co-director or something of an urban institute | 18:40 | |
at Harvard but I believe unless I'm very mistaken, | 18:43 | |
his basic chair is somehow | 18:45 | |
or the other in the field of education. | 18:48 | |
How it got in there I have no idea. | 18:49 | |
And it's clear for the way he's allowed himself | 18:51 | |
to be attracted to Washington when Mr. Nixon was there, | 18:55 | |
to India as an ambassador and so on, | 18:58 | |
it is clear that he has a great yearning for public life | 19:01 | |
and obviously he has great facility for it. | 19:08 | |
So I shall, I think we can look forward | 19:11 | |
to his re-entering the public life. | 19:14 | |
Now I think Moynihan would make a splendid Senator | 19:16 | |
but I think there are other possibilities for him. | 19:21 | |
If I were Mr. Ford or Mr. Reagan, | 19:26 | |
I don't know what I would think of him | 19:32 | |
as a possible vice-presidential candidate. | 19:34 | |
- | That's interesting. | 19:37 |
- | He would have an appeal to a class of people | 19:38 |
to whom neither Ford nor Reagan has a great appeal. | 19:41 | |
He is a very able person, and more importantly, | 19:45 | |
the outstanding feature of Moynihan has been | 19:48 | |
his willingness to face up to realities | 19:51 | |
and to alter his own opinions in the face of evidence. | 19:54 | |
Now Pat started out as absolutely, | 19:59 | |
straightforward, knee jerk left liberal. | 20:01 | |
And he has moved a great deal. | 20:05 | |
He was at the Department of Labor | 20:11 | |
under a democratic administration. | 20:12 | |
I guess it was Mr. Johnson's administration, | 20:14 | |
I'm not sure if it was Johnson or Kennedy, | 20:16 | |
he was an Assistant Secretary of Labor | 20:18 | |
or something like that. | 20:20 | |
He wrote and participated in a very interesting report | 20:22 | |
on the role of family structure | 20:27 | |
among blacks in their urban difficulties. | 20:29 | |
And it was a courageous thing to do. | 20:34 | |
It went against the grain of the group | 20:35 | |
with which he identified and this has | 20:38 | |
been true over and over again. | 20:40 | |
His memo to Mr. Nixon about benign neglect | 20:42 | |
which was an excellent memo. | 20:45 | |
Faced up to reality, was inspired by the belief that many | 20:46 | |
of the things that were being done in the name | 20:52 | |
of racial equality were really harming racial equality. | 20:54 | |
So you have a man who is very open-minded, | 20:58 | |
very honest, very able and it seems to me | 21:00 | |
he has potentially a great political future. | 21:04 | |
Now I guess he's, technically speaking, a Democrat. | 21:07 | |
Maybe one of the Democratic presidential | 21:11 | |
candidates might get this idea as well. | 21:13 | |
- | He's a great articulator certainly that's a good word. | 21:16 |
- | Well he certainly is. | 21:19 |
His main activity when he was with Mr. Nixon was, | 21:22 | |
of course, developing the family assistance plan. | 21:25 | |
An attempt to reform welfare through | 21:29 | |
a negative income tax arrangement. | 21:33 | |
He wrote a book on his experiences there which | 21:35 | |
is very interesting from a political point of view. | 21:40 | |
He argues that the main opponents, | 21:43 | |
the people who really killed the family assistance plan, | 21:47 | |
were the welfare bureaucracy. | 21:50 | |
I've forgotten the exact term. | 21:57 | |
I think maybe that's the term | 21:58 | |
he uses for them though I'm not sure. | 21:59 | |
But at any rate the people he was referring to | 22:01 | |
are the people who were administering the myriad | 22:04 | |
of present welfare programs and that fundamentally | 22:06 | |
had a vested interest in their continuing | 22:09 | |
who professed to be opposing it on the interests | 22:11 | |
of the poor whom they supposedly represented | 22:14 | |
but who is his argument were fundamentally opposing it | 22:16 | |
on the grounds of maintaining their own | 22:20 | |
bureaucratic power and prestige and position. | 22:21 | |
And he attributed them more significance | 22:24 | |
in defeating that than he did to what publicly | 22:27 | |
has been argued much more which was somehow or other | 22:30 | |
it was a right wing only unwillingness | 22:32 | |
to have a minimum guaranteed income. | 22:35 | |
- | Milton, the Canadian dollar has been rising | 22:38 |
vis-a-vis the U.S. dollar and just | 22:41 | |
in the last few days I think is now at a premium. | 22:43 | |
Is that justified by conditions in Canada? | 22:46 | |
- | Well you have a market in which the Canadian dollar | 22:51 |
trades and so there's a sense in which it is justified. | 22:55 | |
But I think in a more fundamental sense | 22:58 | |
I think it must be a temporary phenomenon. | 23:00 | |
If you look at the underlying realities what are they? | 23:03 | |
At the moment Canada has a decidedly higher rate | 23:06 | |
of inflation than the United States. | 23:09 | |
In the second place, Canada recently introduced | 23:11 | |
a price and wage control program. | 23:14 | |
A price and wage control program | 23:17 | |
is always introduced when you're going to have | 23:19 | |
a great deal more inflation after a while. | 23:21 | |
It's always a means for covering up inflationary policies. | 23:23 | |
If you look at the actual monetary policy | 23:28 | |
of the Central Bank of Canada you'll have | 23:30 | |
a curious paradox of nobody gives better speeches | 23:32 | |
about monetary policy than the head | 23:35 | |
of the Central Bank of Canada. | 23:38 | |
But when you come to actual performance, as always, | 23:43 | |
there is almost no relationship | 23:46 | |
between the speeches and the performance. | 23:48 | |
I read last spring a speech by the head | 23:51 | |
of the Central Bank of Canada | 23:53 | |
which was absolutely marvelous. | 23:55 | |
I could've written it myself about he took the blame | 23:56 | |
on the Bank of Canada for Canada's inflation. | 23:59 | |
He said that the only way to stop it was | 24:01 | |
to slow down the rate on monetary growth | 24:03 | |
and they were going to it. | 24:05 | |
In fact, the rate of monetary growth | 24:06 | |
in Canada has been zooming ahead. | 24:08 | |
I think it's been somewhere in the | 24:10 | |
neighborhood of 20% a year annual rate. | 24:11 | |
So there is every sign or reason | 24:14 | |
to expect that not only is Canada's inflation today | 24:16 | |
higher than the U.S.'s but it's going | 24:19 | |
to be still higher in the future. | 24:22 | |
Ours is coming down, it may be that | 24:23 | |
theirs is getting ready to go up. | 24:26 | |
How then can you explain the enormous strength | 24:29 | |
of the Canadian dollar because it is | 24:32 | |
a very strong currency at the moment? | 24:34 | |
The explanation that has been given, | 24:36 | |
and I have no reason to doubt that it is the correct one, | 24:39 | |
though I'm not myself an expert on this | 24:41 | |
and I can't check the figures, | 24:43 | |
is that Canada has been borrowing | 24:45 | |
heavily in the U.S. market. | 24:48 | |
Apparently a single utility issue put out | 24:53 | |
by a utility which I believe is a governmental utility | 24:58 | |
in New York is for a sum which is that one issue | 25:02 | |
alone roughly equal to half of the expected balance | 25:05 | |
of payments deficit of Canada over the future. | 25:09 | |
Well any such extensive borrowing abroad does, | 25:13 | |
of course, tend to strengthen a currency | 25:19 | |
because what's happening is that the balance | 25:21 | |
of payment problem of Canada is that | 25:28 | |
it must acquire dollars over and above the amount | 25:30 | |
it acquires by exports to pay | 25:33 | |
for it's balance in payments deficit. | 25:36 | |
If it acquires those dollars by floating a loan | 25:38 | |
those dollars are available and do not have | 25:41 | |
to be obtained by selling Canadian dollars for U.S. dollars. | 25:43 | |
If it does not obtain it that way it has to obtain it | 25:48 | |
by a depreciation in the exchange rate. | 25:50 | |
So it may well be that the current price | 25:55 | |
is being artificially held up | 25:57 | |
by these large flotations which may not | 26:00 | |
be strictly economically justified. | 26:07 | |
That is to say they are officially sanctioned. | 26:09 | |
If this were private borrowing you would say | 26:12 | |
well Canadians would not be borrowing that much abroad | 26:14 | |
if they anticipated that the Canadian dollar | 26:18 | |
was going to depreciate because | 26:21 | |
they got to pay back in dollars. | 26:22 | |
You see, if I look at the cost to a Canadian of borrowing | 26:24 | |
in the U.S., he has to figure it in Canadian dollars. | 26:28 | |
The interest rate he pays is not | 26:33 | |
merely the dollar interest rate | 26:35 | |
but also the cost to him of any | 26:37 | |
future depreciation in the price of the dollar. | 26:39 | |
You have what's known in the technical | 26:45 | |
literature as interest arbitrage. | 26:47 | |
Take a very, very simple example. | 26:50 | |
Right now interest rates in Mexico | 26:53 | |
or for short-term money is something 12 or 14%. | 26:55 | |
Interest rates in the United States are say six or 7%. | 26:59 | |
Does that mean that you can earn 7% or 8% cost free | 27:02 | |
by going down to Mexico and investing your money? | 27:06 | |
Many Americans do so and believe it. | 27:08 | |
But if you look at the international money market | 27:11 | |
at the future price of the Mexican peso | 27:12 | |
in terms of the dollar you will find that | 27:15 | |
there's something like a seven to 10% depreciation. | 27:17 | |
That is to say that the number of Mexican pesos | 27:22 | |
you can now buy for delivery six months from now, | 27:27 | |
is about three to 5% less than the number you can buy | 27:31 | |
for delivery right now for a given amount of dollars. | 27:35 | |
And therefore you'll have a 14% interest rate | 27:38 | |
which is offset by a 7% shortfall in the price | 27:40 | |
of the peso, you're back earning the 7%. | 27:45 | |
Well similarly in the Canadian case, | 27:48 | |
the loan would not be shoring up the dollar | 27:51 | |
if it were all being private | 27:53 | |
because they would have to be taking | 27:55 | |
into account these future changes. | 27:56 | |
But if it is a governmental project | 27:58 | |
for the purpose and part of shoring up the dollar | 28:00 | |
the situation is quite different. | 28:03 | |
My conclusion therefore is that the Canadian dollar is at | 28:05 | |
a level now that it cannot be maintained at for long. | 28:08 | |
It may, in the short run, go up some more | 28:10 | |
but I would be amazed if six to nine months | 28:14 | |
from now it were still at a premium. | 28:16 | |
- | Thank you very much. | 28:19 |
We've been talking with Professor Milton Friedman | 28:20 | |
of the University of Chicago. | 28:22 | |
If you subscribers would like to ask questions | 28:24 | |
for Dr. Friedman to comment on on future tapes, | 28:26 | |
or suggest subjects for him to discuss, | 28:29 | |
please write to Instructional Dynamics Incorporated, | 28:31 | |
450 East Ohio Street, Chicago, Illinois 60611. | 28:34 | |
We'll be back with Professor Friedman in a couple of weeks. | 28:41 |
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