Tape 133 - Supporting the dollar; monetarism; US on the bargain block
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Transcripts may contain inaccuracies.
Narrator | Welcome once again as MIT professor, | 0:02 |
Paul Samuelson | 0:03 | |
discusses the current economic scene. | 0:04 | |
This series is produced | 0:06 | |
by Instructional Dynamics Incorporated. | 0:07 | |
This program was recorded July 30th. | 0:10 | |
- | [Professor Samuelson] Before I analyze | 0:13 |
where we now stand in the American economy | 0:14 | |
and where we're likely to be going til the end | 0:17 | |
of the year, | 0:20 | |
I'd like to try to field two questions that have been | 0:21 | |
sent in to me. | 0:23 | |
The first is from a retired investment banker. | 0:25 | |
The second is from a business school professor. | 0:28 | |
Here's the first question. | 0:31 | |
What are the arguments against the United States government | 0:33 | |
actively intervening to support the dollar? | 0:38 | |
Actually in recent times, I've veered over towards | 0:42 | |
counseling the treasury and the council reserve | 0:45 | |
to agree in principle to such support operations, | 0:48 | |
and I've subsequently learned from reading the newspapers | 0:53 | |
that we have in fact, changed over to that position. | 0:56 | |
The Fed seems in fact already to have engaged | 1:02 | |
in some support operations. | 1:05 | |
The details are not clear on the actual magnitudes | 1:08 | |
of such operations, | 1:12 | |
nor is it clear, or at least it's not clear to me, | 1:14 | |
whether this is in some kind of formerly agreed upon | 1:16 | |
concert, along with support operations by various | 1:20 | |
European countries, or whether we're going alone. | 1:24 | |
What does seem clear is that we are not now facing | 1:28 | |
absolutely clean floating. | 1:32 | |
And hence, I suppose, in a sense we can't be sure | 1:36 | |
in what directions the winds of unfederated competition | 1:40 | |
are really tending to push for an exchange rate. | 1:45 | |
For example, it might be the case that the underlying | 1:49 | |
speculative forces are still against the dollar. | 1:51 | |
But that these forces are being covered up by some amount | 1:55 | |
of defensive support. | 2:00 | |
Such a fundamental speculative trend, if indeed it does | 2:04 | |
exist, must of course be distinguished sharply | 2:07 | |
from the underlying basic trend in the balance of payments. | 2:11 | |
The basic balance of the United States | 2:16 | |
may well be improving, | 2:18 | |
as so many experts profess to be the case. | 2:21 | |
And yet at the same time, the speculative forces | 2:24 | |
could still be pushing in the other direction. | 2:27 | |
Well, why my own shift in position? | 2:31 | |
It certainly wasn't to accommodate the French, | 2:36 | |
or to gain favors with other nations abroad | 2:39 | |
that have been urging us to support our dollar. | 2:43 | |
This doesn't mean that I agree that giving such | 2:47 | |
accommodation in order to gain popularity with ones allies | 2:51 | |
is never to be recommended. | 2:55 | |
Often we still have good reason to wish to keep | 2:58 | |
the good will of Japan and western Europe. | 3:00 | |
I myself have never believed in the doctrine | 3:03 | |
that you can kick your allies around, | 3:07 | |
that you can treat them with benign neglect, | 3:11 | |
that you can just forget completely about their wishes, | 3:14 | |
and let them unilaterally appreciate their currencies | 3:17 | |
if they don't want to accumulate dollars. | 3:21 | |
But nonetheless, for a dozen years, I had to warn | 3:25 | |
against defending the indefensible. | 3:28 | |
When your good friend wants you to support your | 3:31 | |
overvalued currency, you must tell him politely | 3:34 | |
that this makes no sense. | 3:38 | |
No sense for you, the deficit country, | 3:40 | |
or for him, the surplus country. | 3:43 | |
The reason then for my changing over to the view | 3:46 | |
that the US government might now judiciously intervene | 3:49 | |
to support a dollar that is being depressed | 3:53 | |
only because of Watergate jitters, | 3:56 | |
and because of self fulfilling but wrong minded | 3:58 | |
speculative hopes and fears, is this- | 4:02 | |
there's now accumulating evidence that the dollar | 4:06 | |
is no longer overvalued at a long term basis. | 4:09 | |
Therefore, the smart long run position, both for the | 4:13 | |
speculator and the so called investor, | 4:16 | |
is against betting on further depreciation of the dollar. | 4:19 | |
I see no reason why our government, | 4:24 | |
if it has carefully analyzed the odds, | 4:27 | |
should not invest on the right side, | 4:29 | |
on the long run profitable side. | 4:32 | |
In doing this successfully, it will inflict losses | 4:36 | |
on the speculators and on the nervous hedgers. | 4:39 | |
But I must say, that couldn't happen to a nicer bunch | 4:43 | |
of guys. | 4:45 | |
I do not believe that the government has no business | 4:48 | |
in principle, in investing or speculating. | 4:52 | |
On the contrary, I think it has a duty | 4:56 | |
to counter speculate when reason and information | 5:00 | |
convince rational and well informed authorities | 5:03 | |
that the market is temporarily speculating | 5:07 | |
against fundamental economic forces. | 5:10 | |
Now of course I do recognize that there's always a danger | 5:14 | |
that governments will not act in a well informed | 5:16 | |
and reasonable way for clearly legitimate goals. | 5:19 | |
Thus, because of political pressures, | 5:25 | |
a government may support the price of wheat | 5:28 | |
when fundamental economic forces say that its market | 5:30 | |
price should be tending downward. | 5:33 | |
Maybe doing that just to curry favor with farmers. | 5:35 | |
It may be doing that in austriacus, irrational fashion. | 5:38 | |
But 1973 support of the dollar does not in my view | 5:43 | |
fall into such a category. | 5:47 | |
And actually, those among us who favor flexible | 5:50 | |
exchange rates, ought to realize that the apparent | 5:54 | |
instability of the dollar in the face of what seems | 5:58 | |
to be an improving basic balance, | 6:01 | |
is itself definitely undermining their good cause | 6:04 | |
of greater flexibility in the exchange rates. | 6:10 | |
Judicious support that is likely to make the government | 6:13 | |
win money in the long run, and is likely to speed up | 6:18 | |
the approach to the true emerging nonequilibrium, | 6:22 | |
is therefore a desirable thing. | 6:27 | |
Now, those are the reasons upon which I would rest | 6:30 | |
my case for such support. | 6:34 | |
But let me try to be responsive to the question asked. | 6:37 | |
What are the arguments against this position of mine? | 6:42 | |
Well, first there is the argument that we should | 6:47 | |
give clean floating a chance, so that the market | 6:48 | |
can prove to doubters that it will rapidly adjust | 6:52 | |
its speculative flurries to long run equilibrium trends. | 6:55 | |
And in a measure, I suppose that's what we've been doing | 7:01 | |
in delaying our support so long. | 7:04 | |
But there's not very much interesting that I know | 7:08 | |
of to say about that first argument. | 7:11 | |
More weighty is the following second argument | 7:14 | |
against support of the dollar by the US government. | 7:16 | |
We have the recognize that there may be up to | 7:20 | |
80 billion dollars of unwanted reserves abroad | 7:23 | |
in the hands of the central banks. | 7:26 | |
Suppose that every time the dollar improves, | 7:30 | |
those unwanted dollars try to come back here | 7:33 | |
in exchange for francs, marks, and other currencies. | 7:36 | |
Indeed, even in the absence of such improvement | 7:40 | |
of the dollar, suppose such unwanted dollars keep | 7:44 | |
trying to get converted back into foreign currencies. | 7:47 | |
Then the dollar will always tend to sag. | 7:52 | |
Indeed, if we include a big item of such returning dollars | 7:56 | |
in the basic predictable balance of the next five years, | 8:00 | |
then perhaps our basic balance, even though it's improving, | 8:06 | |
is still in deficit. | 8:09 | |
In other words, taking into account such a predictable | 8:12 | |
return flow of several billions of dollars per year, | 8:16 | |
the dollar may still be overvalued on a half decade basis. | 8:19 | |
In that case, it would indeed be a mistake for us | 8:25 | |
to be supporting an overvalued dollar. | 8:27 | |
Of course, in that case it's even sillier for France | 8:31 | |
and other countries to be objecting to the sagging | 8:33 | |
of the dollar. | 8:35 | |
The dollar rate should, under this assumption, sag. | 8:37 | |
The other countries can't have their cake and eat it too. | 8:41 | |
They can't want to redeem dollars, | 8:44 | |
and also refuse the United States a whopping surplus | 8:46 | |
in its merchandising current accounts | 8:49 | |
to give it the where with all to redeem those dollars. | 8:51 | |
So in effect, under those circumstances, | 8:55 | |
when other countries encourage us to support the dollar | 8:58 | |
under the assumption that the 80 billion of past | 9:01 | |
overhang is not removed from the picture, | 9:03 | |
they are in effect asking us to do surreptitiously | 9:07 | |
what we have rightly refused to do on an outright basis. | 9:10 | |
Namely, they are asking us to use our support operations | 9:15 | |
as a leaver to fund our dollar debts abroad, | 9:19 | |
in effect granting them some kind of an exchange rate | 9:25 | |
guarantee on those dollar obligations. | 9:28 | |
And in effect committing out government | 9:32 | |
through the mechanism of swap loan agreements | 9:34 | |
to stand behind those dollars in terms of some | 9:37 | |
foreign currencies. | 9:41 | |
Now, that kind of support I'm not in favor of, | 9:43 | |
and if it appears that in the future, | 9:47 | |
as we do support the dollar, that the response | 9:51 | |
is a return of these past dollars of overhang, | 9:55 | |
then I shall counsel cessation of such support. | 10:02 | |
Well, after answering the second question, | 10:07 | |
if time permits, I'd like to return to the question | 10:10 | |
of whether this is not a good time for foreigners | 10:13 | |
actually to be buying up our capital, | 10:15 | |
to be buying up our stocks, to be buying up our plants, | 10:18 | |
and also to be buying up our going concerns. | 10:20 | |
Let me turn now to the second question. | 10:24 | |
It reads as follows- | 10:28 | |
I heard a rumor that you had taken monetarism apart | 10:30 | |
at a forecasting conference somewhere this summer. | 10:34 | |
How did that analysis go? | 10:37 | |
On July 13th I took part in a seminar here in Cambridge | 10:40 | |
that dealt with forecasting. | 10:44 | |
And my morning's assignment was to conduct a dialog | 10:47 | |
on monetaristic methods. | 10:50 | |
I believe the members of the seminar had heard | 10:52 | |
the case for monetarism on an earlier day. | 10:54 | |
I don't think it's quite correct to say that I took | 10:59 | |
monetarism apart. | 11:01 | |
Actually, I had then the say that the monetarism stock, | 11:03 | |
it's quotation in the market as a technique | 11:13 | |
of policy analysis, has been depressed so low | 11:16 | |
at the present time, that there's danger the people | 11:20 | |
will overlook the element of value in the stress | 11:24 | |
that among the many factors that forecasters | 11:27 | |
and policy advisors must taken account of, | 11:30 | |
ought to be given to the behavior of the money supply | 11:34 | |
and of the credit markets. | 11:36 | |
What I did first was to review the record. | 11:40 | |
For a few years, the federal reserve bank of St. Louis | 11:42 | |
had pretty good success in its quarter to quarter | 11:45 | |
forecasting. | 11:47 | |
And then its year to year forecasting. | 11:48 | |
And indeed, at that time, it seemed to do better | 11:51 | |
than most of the other monetarists. | 11:53 | |
Better than the city bank, for example. | 11:55 | |
Better than the three leading academic monetaristic | 11:57 | |
forecasters, whose forecasts I've informally monitored | 12:00 | |
over the years. | 12:03 | |
But as I think I must have mentioned before in these tapes, | 12:06 | |
in recent years, St. Louis has been running | 12:09 | |
into worse luck in its forecast of nominal GNP. | 12:12 | |
I'm not now referring to its abandoning of its forecast | 12:16 | |
of real GNP, of the breakdown of nominal GNP | 12:21 | |
into real end price factor. | 12:25 | |
Their phases one, two, three, three and a half, four, | 12:28 | |
perhaps have contaminated their record. | 12:34 | |
But I'm not referring to that which monetarism | 12:37 | |
is supposed to be able to deliver the goods on, | 12:40 | |
nominal GNP forecast. | 12:42 | |
Indeed, when Professor Fare of Princeton | 12:44 | |
did a recent roundup, which I mentioned, | 12:48 | |
of ten or so different forecasters, | 12:50 | |
the only method that did worse in recent years | 12:53 | |
than a straight mechanical computer forecast | 12:56 | |
with no adjustment of the coefficients for judgment, | 12:59 | |
was the St. Louis reduced form model. | 13:02 | |
Not only did Fare's own mechanical computer | 13:05 | |
do better than the reduced form of monetarism, | 13:08 | |
but so did Epstein at resources they'd incorporated. | 13:11 | |
The unkindest blow of all is that even the median | 13:18 | |
business forecaster reporting to the national bureau | 13:21 | |
did better in at least square sense, | 13:24 | |
and the Wharton school and the Chase Evans model | 13:28 | |
and the University of Michigan and a number of other | 13:30 | |
models which Fare didn't keep track of, | 13:33 | |
but which I informally monitor in my own records, | 13:35 | |
did better. | 13:40 | |
I also cited, and here I had to be very impressionistic, | 13:43 | |
from my informal collection of forecasters, | 13:46 | |
any monetarists other monetarist forecasts, | 13:52 | |
which I've been able to collect over the recent years. | 13:56 | |
And indeed I had to report that I couldn't find | 14:01 | |
in my records a single monetarist who deviated | 14:03 | |
systematically from the consensus for clearly | 14:07 | |
monetarist factors, came out with a long run batting | 14:11 | |
average as measured by squared error, | 14:16 | |
which was very good in recent years. | 14:19 | |
But I warned against making the fundamental error | 14:23 | |
of some of the monetarists themselves, | 14:27 | |
namely trying to judge the worth of a method | 14:30 | |
by its crypto positivistic correlation coefficients. | 14:33 | |
Although, those who claim to triumph by the sword | 14:38 | |
must in a sense be prepared to die by the sword. | 14:42 | |
I don't think we can take such rash warriors | 14:45 | |
at their own word, at their own crude methodology. | 14:48 | |
Then I described some of the methods used by monetarists | 14:56 | |
to dig themselves out of the hole of their own making. | 14:59 | |
As for example, to put in an odd hope trend | 15:02 | |
into velocity, so as to enable you to lift | 15:04 | |
the St. Louis kind of estimate to the neighborhood | 15:08 | |
of the consensus crowd. | 15:10 | |
Or, you can call yourself a monetarist by putting | 15:12 | |
enough fudge factors so as to give you the typical | 15:16 | |
ecclesiastic forecast. | 15:18 | |
In short, I suggested that recent skepticism | 15:21 | |
of coincidental empirical irregularities | 15:25 | |
that lack prior probability ought to be entertained. | 15:29 | |
Thus, anyone who knows neoclassical economics, | 15:35 | |
why should he think that one M1 measure, or M2, or M7, | 15:39 | |
or M39 measure, ought to be in the future, a simple | 15:45 | |
causal, reversible relationship with nominal GNP | 15:51 | |
So that it can do better for policy purposes, | 15:55 | |
for forecasting purposes, then a more complicated model | 16:00 | |
that takes into account investment intentions, | 16:04 | |
technical changes, crop phases, and a host of other | 16:08 | |
dull things? | 16:10 | |
So, I guess some of my message is that monetarism | 16:14 | |
is now somewhat subject to overvaluation, | 16:19 | |
but if you believe in contrary opinion, | 16:24 | |
if you believe in sticking to value as against price, | 16:27 | |
maybe a canny investor might in this time | 16:32 | |
pick up a little of the monetarism stock for his portfolio. | 16:35 | |
Let me turn to the current situation of business | 16:42 | |
before I go back to the subject of whether this is or | 16:49 | |
isn't a good time for foreigners to be buying up | 16:53 | |
American capital. | 16:57 | |
We still are in a period of some confusion. | 17:00 | |
The second quarter, first estimates of GNP | 17:03 | |
have now come in. | 17:08 | |
They're even lower than the forecast I gave you | 17:11 | |
which was to take the eight percent first quarter | 17:16 | |
rate of growth and bring it down to three and a half | 17:21 | |
percent. | 17:25 | |
The first estimate actually is, there's only two point six | 17:27 | |
percent a real growth in the second quarter. | 17:30 | |
But I want to warn you against attaching too much | 17:36 | |
importance to that weak number | 17:39 | |
because there's quite a debate going on among | 17:43 | |
the experts as to whether it's really credible. | 17:45 | |
We may be running into a problem here | 17:50 | |
involved in seasonal correction. | 17:53 | |
It's proper I think to seasonally adjust economic data | 17:56 | |
so we can get out of them the mirror vicissitudes | 18:01 | |
of the changing weather. | 18:06 | |
We expect retail sales to be up at Christmas, | 18:09 | |
and if retail sales are up that doesn't mean we're | 18:12 | |
in a boom, it just means that the snow is beginning | 18:14 | |
to fall and Santa Claus will soon be here, | 18:16 | |
so we properly deflate as best we can for seasonal trends. | 18:19 | |
But I want to emphasize that as best we can. | 18:25 | |
We're not dealing here with something here like | 18:28 | |
Plutonian tide tables. | 18:31 | |
You can predict the position of a comet | 18:33 | |
several centuries ahead. | 18:37 | |
You can predict tides with great accuracy. | 18:40 | |
You can predict the way a pendulum will osculate | 18:44 | |
to a microsecond of precision, | 18:47 | |
but you cannot by fore analysis or spectral analysis | 18:51 | |
or by any method known to mankind | 18:56 | |
get accurately the seasonal element out. | 19:02 | |
Now, what I've been saying of course should be | 19:07 | |
remembered at all times, | 19:09 | |
but it's especially appropriate now | 19:10 | |
because here's how the argument goes. | 19:12 | |
Your argument goes that the weakening in the second | 19:14 | |
quarter, part of which is certainly genuine, | 19:17 | |
may be due to reasons of supply and not to a weakening | 19:21 | |
of demand. | 19:26 | |
I've already commented on that view, | 19:27 | |
in my last tape I mentioned the view of | 19:30 | |
Al Summers of the conference board, | 19:33 | |
and I think of Greenspan and some others, | 19:37 | |
as against the view of data resources | 19:42 | |
that there was a substantial weakening in demand, | 19:45 | |
these authorities have argued that the economy | 19:47 | |
is still running flat out, but we are pressing up | 19:51 | |
against capacity limitations. | 19:55 | |
Good man power is no longer available. | 19:57 | |
The federal reserve index of surplus capacity | 20:01 | |
isn't to be trusted, according to this group of observers, | 20:04 | |
and you better look at the Wharton measures of capacity, | 20:09 | |
which show very little surplus. | 20:13 | |
Now if the economy is running flat out, | 20:17 | |
that means that the normal ups and downs | 20:21 | |
of production, which can be associated | 20:25 | |
with the first quarter and the second quarter, | 20:29 | |
with the third quarter, and with the fourth quarter, | 20:33 | |
can't work themselves out, | 20:36 | |
because you're right up against the ceiling. | 20:37 | |
And so, the second quarter generally shows a whopping | 20:40 | |
increase for purely seasonal reasons. | 20:43 | |
And generally, we sensibly correct for that, | 20:46 | |
and take out the seasonal influence. | 20:49 | |
But if, at the end of the first quarter, | 20:52 | |
we already were up against the ceiling, | 20:54 | |
how can that normal seasonal factor show itself? | 20:57 | |
And so, it's argued by these experts, it couldn't. | 21:02 | |
If you use unseasonably corrected data, | 21:07 | |
we had one of the biggest output increases | 21:11 | |
in the second quarter on record. | 21:13 | |
And it's only this artificial tinkering with the data, | 21:15 | |
normally appropriate but not appropriate | 21:19 | |
in this 1973 phase of the business cycle | 21:22 | |
that made this look like slow growth, | 21:27 | |
so goes the argument. | 21:30 | |
Now if that's the case, | 21:33 | |
we should see in the third quarter the opposite happening. | 21:34 | |
Because what's the normal pattern in the third quarter? | 21:38 | |
Normal pattern in the third quarter is you're in summer, | 21:41 | |
people are taking vacations, | 21:44 | |
there's an easing up, there isn't any occasion | 21:46 | |
for overtime. | 21:49 | |
But according to this hypothesis, | 21:51 | |
the economy is still very strong, is still running | 21:53 | |
flat out, it's still bumping right up there against | 21:55 | |
the ceiling. | 22:00 | |
Then, according to this hypothesis, | 22:01 | |
we should not see that normal relaxation, | 22:04 | |
and therefore, they're saying, don't be surprised | 22:06 | |
if real output bounces back from allegedly only being | 22:10 | |
two point six percent rate of real growth | 22:14 | |
in the second quarter to something like say | 22:17 | |
five and a half or six percent in the third quarter. | 22:21 | |
In any case, without my trying to adjudicate the matter, | 22:27 | |
I would say that it's best to not go by any one quarter, | 22:33 | |
smooth out your data by using two or three quarters, | 22:37 | |
an then see where we stand. | 22:40 | |
And from that viewpoint, I must say, | 22:47 | |
the situation is still a bit clouded. | 22:49 | |
For example, it looks as if retail sales were very good | 22:52 | |
in the first part of July. | 22:56 | |
Extremely strong. | 22:59 | |
Any beginning weakness or letup earlier. | 23:00 | |
Now, this may be due to the fact, one of those factors | 23:04 | |
which an ecclecticist would take into account | 23:09 | |
in making his forecast and interpreting the passing scene. | 23:11 | |
It may be due to the fact that the freeze of | 23:14 | |
of phase three and a half presented itself | 23:17 | |
to consumers as a very good time to buy | 23:21 | |
because they could figure that after the freeze | 23:24 | |
was suspended, after we moved into phase four, | 23:27 | |
you wouldn't be able to buy at such favorable prices, | 23:30 | |
and that could explain some of the strength in demand, | 23:32 | |
and it may be borrowing against the future. | 23:35 | |
On the other hand, we have to take the straws as they are, | 23:37 | |
and the straws were that in July, automobile sales | 23:40 | |
were very good and retail sales generally seemed | 23:44 | |
to have been quite strong, | 23:49 | |
so it maybe be that we have not yet really turned | 23:50 | |
the corner towards that growth recession, | 23:53 | |
which all the camps, generally speaking, | 23:56 | |
tend to agree is waiting for us around the end of the year. | 24:01 | |
The main differences of opinion have to do | 24:06 | |
with whether that growth recession | 24:09 | |
is going to move into a genuine recession, | 24:10 | |
measured let's say by the Krudos national bureau | 24:13 | |
criterion of two fold quarters of negative growth | 24:18 | |
in the real GNP. | 24:23 | |
I don't want to spend more time in detailed analysis | 24:27 | |
of the second quarter data and what they may be telling us, | 24:32 | |
but I should point out to you what the towns in Greenspan | 24:39 | |
has pointed out, | 24:42 | |
namely that there was a whopping price increase | 24:44 | |
as measured by the GNP deflator, | 24:47 | |
that tends to reduce the real component, | 24:50 | |
and the question is whether all of that is genuine. | 24:53 | |
Now, part of it is undoubtedly due to a weight shift | 24:57 | |
towards goods which there isn't a lot in prices. | 25:02 | |
I'm not sure that is asperious effect, | 25:07 | |
but in case you think it is asperious effect | 25:09 | |
and want to rule it out, | 25:11 | |
you can make a computation using a chain index | 25:14 | |
with the same weights of the GNP prices. | 25:19 | |
And if you do that, that will raise the two point six | 25:23 | |
percent to eight percent. | 25:27 | |
Now, I've heard even stronger reasons for withholding | 25:30 | |
judgment that the first quarter data may | 25:35 | |
a year from this July, | 25:38 | |
well a year from, July in '74, be revised downward, | 25:40 | |
and the second quarter revised upward. | 25:45 | |
I guess then all that we really can conclude | 25:50 | |
is that there does seem to be a beginning of a weakening | 25:56 | |
of real growth, but it's premature to know | 26:02 | |
whether it is primarily due to supply reasons | 26:07 | |
or demand reasons, | 26:10 | |
and until you can resolve that last question, | 26:11 | |
you of course aren't in a position to make | 26:16 | |
policy recommendations. | 26:19 | |
When I am asked, for example, whether it is still | 26:21 | |
time to have a tax increase, | 26:24 | |
you know there's quite an authoritative rumor | 26:28 | |
that the President's advisors | 26:30 | |
both inside the administration and in some of the other | 26:33 | |
non executive agencies, | 26:39 | |
I won't be more specific, | 26:42 | |
did advise him to ask for a tax increase | 26:44 | |
but because of Watergate and other problems | 26:46 | |
which he has, he overruled them, and put in the phase | 26:49 | |
three and a half, and the phase four. | 26:54 | |
Well, I think I have just a few minutes | 26:59 | |
to begin to comment on the question as to whether | 27:02 | |
the United States is a happy hunting ground now | 27:07 | |
for foreign capital. | 27:12 | |
I spoke of the 80 billion dollars that are abroad. | 27:13 | |
Well of course those are in the central banks, | 27:17 | |
but there's a counter part of those in the hands | 27:19 | |
of individuals abroad, | 27:23 | |
and it seems to me that it might well be rational | 27:25 | |
for a typical corporation or a typical investment trust | 27:28 | |
or a typical person of means in Japan, in Germany, | 27:33 | |
in Holland, in western Europe, generally, | 27:39 | |
to want to have a bigger stake in the American economy | 27:42 | |
than he now has. | 27:47 | |
First, the American economy is about 25 percent | 27:50 | |
of the world GNP, a bit more than that still perhaps. | 27:53 | |
And if you believe in risk aversion and diversification, | 27:56 | |
then I don't think that most investors abroad | 28:02 | |
are as fully invested in the American economy | 28:04 | |
as they ought to be. | 28:09 | |
I could have made this remark at any time | 28:10 | |
in recorded history, | 28:13 | |
certainly any time in the last 15 years, | 28:15 | |
and it's always in season. | 28:17 | |
That's point number one. | 28:20 | |
Particularly you see a foreign investor who has all | 28:21 | |
his eggs, let's say, in the French market, | 28:24 | |
should want to get something which will have independent | 28:27 | |
movements, because in independent probability movements | 28:30 | |
you get diversification and a reduction of variants. | 28:35 | |
Well that's a long run factor. | 28:39 | |
Second, our price earning ratios are cheap. | 28:43 | |
And if you believe that there has not been a long term | 28:47 | |
erosion of profitability in American corporations, | 28:53 | |
then they are indeed bargains. | 28:56 | |
If you're a foreign investor and you have equity | 28:58 | |
investment, you can apply even a less stringent task, | 29:01 | |
namely, if there's an erosion of profitability here | 29:05 | |
in America, then there probably is one also abroad | 29:10 | |
because capital competes with capital by international trade | 29:14 | |
across boundaries of nations. | 29:18 | |
And so, it could be that the American earnings, | 29:22 | |
price ratios, are more depressed from a long run viewpoint | 29:27 | |
than foreign markets, | 29:30 | |
particularly those foreign markets which have done better | 29:34 | |
in the last boom, than the American market. | 29:36 | |
Thirdly, you may find yourself with a reversal | 29:42 | |
of the adverse experience which foreigners have been having | 29:46 | |
in recent months. | 29:49 | |
Let's take a typical foreigner who had a good eye | 29:51 | |
for picking American stocks, | 29:54 | |
he's a rare bird by the way. | 29:55 | |
I don't want to go into details on how a foreigner | 29:57 | |
ought to invest, I don't have time in this tape. | 29:59 | |
But suppose he had a good eye and he picked good stocks | 30:03 | |
which held up better than the American market | 30:06 | |
in which in fact held up and are equal now | 30:07 | |
to their early January levels. | 30:11 | |
To this foreigner, given the depreciation of the dollar, | 30:15 | |
if he reckons, as undoubtedly he does, | 30:19 | |
his net worth in terms of his own currency, | 30:21 | |
because that's where he's gonna spend the rest of his life, | 30:24 | |
that's where his expenses come, | 30:26 | |
then he finds himself with the rather considerable loss | 30:29 | |
due just to the depreciation of the dollar. | 30:32 | |
But my time is just about up, | 30:35 | |
but you see, once you form a judgment and you must form | 30:36 | |
that judgment as to whether the dollar has hit rock bottom, | 30:41 | |
then after you've formed the judgment that Wall Street | 30:45 | |
has hit rock bottom, | 30:49 | |
and that rock bottom has not recognized the inflation | 30:51 | |
which has been going on in the American economy | 30:55 | |
for the last few years, | 30:57 | |
and has discounted all the adverse news that could | 30:58 | |
possibly happen, | 31:01 | |
then that would be a great time for foreigners | 31:02 | |
to invest in good American stocks if they know | 31:05 | |
how to pick good American stocks. | 31:09 | |
Narrator | If you have any comments or questions | 31:11 |
for Professor Samuelson, address them to | 31:13 | |
Instructional Dynamics Incorporated | 31:14 | |
166 East Superior Street, Chicago, Illinois, 60611. | 31:16 |
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