Tape 128 - Analysis of recent international money market activity
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- | Welcome once again as MIT Professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:05 | |
This series is produced | 0:07 | |
by Instructional Dynamics, Incorporated. | 0:08 | |
This program was recorded May 15. | 0:10 | |
- | The big news today is the rise in the price of gold | 0:13 |
in the free markets of London, Paris, and Zurich. | 0:18 | |
I had a report just this morning | 0:23 | |
that the price of gold had gone well above $100, | 0:25 | |
$125, but I can't vouch for the accuracy | 0:29 | |
of that particular report. | 0:33 | |
Of course, this makes news, and of course, | 0:35 | |
there is no shortage of explanations | 0:38 | |
for the increase in price. | 0:41 | |
The usual explanation given is that people | 0:43 | |
abroad and perhaps in the United States | 0:48 | |
are upset by the Watergate affair. | 0:50 | |
There's a credibility gap | 0:52 | |
concerning the American government. | 0:54 | |
Presumably, if we try to connect this up | 0:56 | |
with economic events, it means | 0:59 | |
that there's some doubt as to whether the president | 1:00 | |
and his administration can govern, | 1:03 | |
but to add to the fun, to add to the speculative run | 1:07 | |
against the dollar in favor of gold, | 1:15 | |
there has been a recurring rumor | 1:19 | |
that the German Mark was going to be up valued once again. | 1:21 | |
As far as I know, no substance has appeared | 1:26 | |
to confirm that particular rumor, | 1:31 | |
but the speculators who are buying gold | 1:33 | |
as if there were no tomorrow obviously have the hope | 1:36 | |
that this will become a self-fulfilling prophecy, | 1:38 | |
and so we have to ask ourself, what does this mean | 1:42 | |
for the American economy? | 1:46 | |
What does it mean for the American rate of unemployment, | 1:48 | |
level of production, price level, | 1:51 | |
and what does it mean for the possibility | 1:54 | |
of another dollar depreciation? | 1:59 | |
After all, we've already had two dollar depreciations | 2:02 | |
just this year, in February and in March, | 2:05 | |
and this follows, more or less, hard on the heels | 2:08 | |
of the Smithsonian agreement of December 1971. | 2:11 | |
This morning, the Department of Commerce | 2:19 | |
released the bad news in connection | 2:22 | |
with the first quarter's balance of payments deficit. | 2:26 | |
That balance of payments deficit | 2:29 | |
for the first quarter went to over $10 billion, | 2:31 | |
much worse than in the fourth quarter of last year. | 2:35 | |
Of course, my telephone rang, and the NBC radio | 2:39 | |
wanted me to comment on that. | 2:43 | |
I had to say that the first quarter | 2:45 | |
was the quarter of the two dollar depreciations, | 2:50 | |
and you have in that first quarter | 2:52 | |
all of the panic conditions that took place | 2:54 | |
in February and March. | 2:59 | |
If one looks at the hard economic news | 3:01 | |
divorced from the speculative markets, | 3:05 | |
there actually was a cheerful improvement | 3:08 | |
in the balance of payments on merchandise accounts | 3:13 | |
in March, the third month of the quarter. | 3:18 | |
That's the last month for which we have actual reports. | 3:21 | |
Instead of being deeply in the negative, | 3:26 | |
deeply in deficits, our merchandise balance, | 3:30 | |
that is, our total of exports of goods | 3:34 | |
and then subtracted from that, the total of our imports | 3:39 | |
of goods by value, that came almost into balance. | 3:42 | |
Very small, negative number. | 3:46 | |
We mustn't attach too much importance to one month's news | 3:50 | |
and to the ups and downs that take place in one month, | 3:55 | |
but it at least is a movement in the right direction, | 3:58 | |
but nevertheless, the, it will take a good deal of time | 4:03 | |
to know whether the medicine of further dollar depreciation, | 4:08 | |
which took place early in 1973, | 4:13 | |
is working, and whether it is working in the correct dosage. | 4:17 | |
The background against which this problem | 4:22 | |
has to be noted is that we've had an upswing | 4:25 | |
in the imports of goods into the United States, | 4:29 | |
which has had an annual percentage rate of growth | 4:32 | |
well above the annual percentage rate of growth | 4:36 | |
of exports of the United States. | 4:40 | |
Of course, that statistical time series | 4:44 | |
is contaminated by the fact that everything's happening | 4:49 | |
all at once. | 4:52 | |
We have a recession in 1970. | 4:53 | |
We have a very strong upturn in 1972 | 4:58 | |
and continuing into 1973, and Europe went into recession | 5:01 | |
after we did and came out after we did | 5:05 | |
and is now in a strong upturn, | 5:08 | |
but even when you allow for that, | 5:10 | |
there has been until recently an adverse trend | 5:14 | |
in our import position relative to our export position, | 5:18 | |
so the medicine of dollar depreciation | 5:22 | |
has a lot of work to do. | 5:27 | |
There's condition there which needs to be corrected. | 5:28 | |
I don't suppose the economic historian of the future | 5:32 | |
will necessarily say that America at this stage of the game | 5:35 | |
needs a whopping balance of payment surplus | 5:40 | |
on merchandise account because we are building up, | 5:44 | |
gradually, a surplus on invisible account. | 5:47 | |
This is because of our very heavy foreign investments | 5:51 | |
abroad in earlier years, which can be expected | 5:54 | |
to give rise to a stream of return dividends, interest, | 5:58 | |
earnings, plow back on repatriated earnings and royalties. | 6:02 | |
Moreover, that stream of investment, | 6:11 | |
while it's happening, in some degree, adds to our export | 6:13 | |
merchandise credit items. | 6:19 | |
For example, if a Carbon Black company | 6:22 | |
in America begins to invest in Europe, | 6:26 | |
it may be exporting to itself a good deal of machinery | 6:29 | |
and raw materials from its American plants. | 6:34 | |
Nevertheless, as recently as 1964, | 6:39 | |
we did have a fairly sizeable, | 6:42 | |
$5 billion, $6 billion, $4 billion surplus | 6:44 | |
on merchandise account, and it's that | 6:50 | |
which has gone away since 1971, | 6:52 | |
and it's that which in some measure must be corrected, | 6:56 | |
and it's that which has been very slow | 7:00 | |
to show definite signs of being corrected. | 7:04 | |
If you interrogate six economists, | 7:09 | |
six experts in the field of international economics, | 7:12 | |
I think you can get three of them to say | 7:15 | |
that the recent rash of dollar depreciations | 7:17 | |
is, if anything, excessive, and they may be right, | 7:23 | |
but it's too early to see in the data | 7:29 | |
whether or not they are going to be right | 7:33 | |
particularly since, as has been mentioned many times | 7:36 | |
on these tapes, in the short run, | 7:39 | |
the effects of a recent depreciation can well be perverse. | 7:42 | |
Instead of having elasticity optimism in the very short run, | 7:47 | |
we have elasticity pessimism, and that means | 7:50 | |
that the depreciation makes things, | 7:53 | |
in the very short run, look worse. | 7:55 | |
We pay more for goods from abroad, | 7:58 | |
and our physical imports haven't yet changed much, | 8:01 | |
and we realize less from our exports. | 8:06 | |
There's good deal of double counting in such calculations. | 8:14 | |
I guess if I were asked to be one of those six economists | 8:20 | |
and to give my view, I cannot conscientiously say | 8:25 | |
that from the standpoint of the fundamental, | 8:29 | |
basic balance of payments of the United States, | 8:32 | |
that's from the fundamental balance on current account | 8:35 | |
taking into account invisibles | 8:39 | |
and taking into account our government expenditures, | 8:41 | |
which we insist upon making, and taking into account | 8:45 | |
our normal, long term, private foreign investment | 8:48 | |
which our investors want to make, | 8:53 | |
taking all those into consideration, | 8:56 | |
if we had been in equilibrium for the last dozen years, | 8:58 | |
then I don't think I could conscientiously say | 9:02 | |
that the dollar ought to be depreciated further. | 9:05 | |
I think I lean as far in that direction | 9:10 | |
as most modern economists, but still, | 9:13 | |
I try to be judicious in these matters. | 9:17 | |
Nevertheless, it could be that the dollar | 9:21 | |
is still overvalued, and we will learn that. | 9:24 | |
It may be, though, to repeat, that the majority | 9:28 | |
of the international experts are right, | 9:32 | |
and that the dollar is no longer overvalued. | 9:33 | |
Still, we have to ask ourselves this question, | 9:38 | |
with the dollar having been toppled two | 9:42 | |
or three times by frenzied speculative movements. | 9:44 | |
These speculative movements weren't the origin | 9:48 | |
of the problem, but they intensified the problem. | 9:51 | |
Is it possible that even though the dollar | 9:56 | |
shouldn't be further devalued from the standpoint | 9:58 | |
of the basic balance, that it in fact | 10:01 | |
will be further depreciated, and I guess I have to say | 10:03 | |
yes, there is a perfectly good chance of that. | 10:07 | |
In fact, you'd be rash, in the middle of a monetary crisis, | 10:10 | |
to predict that the crisis is going to go away | 10:13 | |
and that we're gonna return to business | 10:16 | |
as usual at the status quo ante crisis | 10:18 | |
as far as the parity is concerned. | 10:24 | |
We know that with $80 billion already swelling | 10:28 | |
the gorged stomachs of the central banks abroad, | 10:32 | |
I am referring to Germany, for example, I am referring | 10:36 | |
to Japan, that they may not be so blithely willing | 10:40 | |
to meet any new crisis, even if they think | 10:45 | |
that this new crisis is unjustified, | 10:50 | |
by continuing to support the dollar. | 10:52 | |
I must say, I wouldn't advise them to do so. | 10:55 | |
The result then would be that if they don't support | 10:59 | |
the dollar, and they don't put in exchange control, | 11:01 | |
and if they don't put in split exchange rates, | 11:03 | |
that the dollar, during the crisis period | 11:06 | |
will depreciate further, the Mark will rise, | 11:09 | |
and if we had freely floating exchange rates, | 11:13 | |
that would presumably be the way to meet the crisis. | 11:16 | |
Let the dollar depreciate. | 11:19 | |
Separate the men from the boys among the speculators | 11:21 | |
because once the dollar has depreciated, | 11:24 | |
then you've got just as bad a chance of being whipsawed | 11:26 | |
by a movement against you if you take a position | 11:32 | |
in Marks and away from the dollars | 11:35 | |
as you have of getting a movement in your favor. | 11:37 | |
Whereas, while there's support operations, | 11:41 | |
then you, as a speculator, have pretty much a one way ride. | 11:44 | |
Heads, you win, and tails, you don't lose. | 11:50 | |
Nevertheless, there doesn't seem to be any very good signs | 11:56 | |
that the religion of floating exchange rates | 12:00 | |
has been converting the officials of the rest of the world, | 12:04 | |
so it's premature to speculate | 12:11 | |
as to what will happen from this particular crisis. | 12:14 | |
I guess it's fair to say there's a 40% it'll go away, | 12:16 | |
a 40% chance that there'll be some kind of controls | 12:20 | |
in the form of interest rate penalties in Germany, | 12:29 | |
and that leaves you with at least a 20% chance | 12:36 | |
that the Germans will give up and will let | 12:39 | |
the Mark float in the short run. | 12:41 | |
Once again, one might point out, | 12:44 | |
that is, an economist might point out, | 12:46 | |
that if the Germans do let that Mark float upward, | 12:48 | |
it's not quite as tragic for their export industries | 12:52 | |
as you might think because if this is only | 12:55 | |
an unjustified crisis brought about by a war of nerves, | 12:58 | |
by a set of jitters, by a Watergate political incident, | 13:03 | |
by the hope that it can be converted | 13:08 | |
into a self-fulfilling prophecy, | 13:10 | |
but if no more than that is at the bottom, | 13:12 | |
then the Mark, which floats upward, | 13:16 | |
can, at a later date, float downward. | 13:18 | |
This is the sort of topic, of course, | 13:25 | |
which we have encountered again and again, | 13:27 | |
and I dare say that in the months ahead, | 13:30 | |
we'll find ourselves discussing, | 13:35 | |
once again, these very same factors. | 13:37 | |
To return to a matter of recurring interest to people, | 13:41 | |
what about the role of gold in our private system? | 13:46 | |
Should American citizens have restored | 13:54 | |
to them the right to hold gold? | 13:58 | |
This topic does not die away. | 14:00 | |
I have expressed my opinion on it. | 14:03 | |
I have no reason to change that opinion. | 14:05 | |
To repeat, I think that we should work | 14:10 | |
towards getting gold out of the monetary system. | 14:14 | |
We should work toward having a system | 14:17 | |
of SDRs, a system of international reserves | 14:21 | |
in which, perforce, the key currencies of the past, | 14:26 | |
the pound before World War One | 14:31 | |
and in a degree still before World War Two | 14:34 | |
and the dollar, which was riding so high as a key currency | 14:37 | |
at the end of World War Two, these will, | 14:41 | |
I believe, whatever we do about it, | 14:43 | |
increasingly have less luster as a medium of exchange | 14:47 | |
in which to hold your liquidity, as a medium of exchange | 14:52 | |
in which to make international interventions in connection | 14:56 | |
with floating or semi-floating exchange rates, | 15:00 | |
or stabilized exchanged rates, | 15:04 | |
and I think in terms of making contracts, | 15:06 | |
that we will find that an awful lot of contracts | 15:11 | |
will still be made in terms of dollars | 15:14 | |
because the American GNP is still more | 15:16 | |
than one quarter of the world GNP, and more | 15:22 | |
than any other single currency units GNP. | 15:24 | |
The American society, despite the shenanigans | 15:31 | |
at Watergate, is still one of the more stable societies | 15:35 | |
from the standpoint of expropriation of assets, | 15:39 | |
and therefore, the dollar will not go out of fashion | 15:44 | |
as an international holding overnight. | 15:48 | |
Nevertheless, it will, I think, | 15:52 | |
never again be what it could be at the end | 15:54 | |
of World War Two, when the dollar was undervalued, | 15:57 | |
which meant it was a very good thing to hold, | 16:01 | |
when America had, probably, more than 50% | 16:03 | |
of world GNP, and I think we have to accept that | 16:07 | |
as a fact of life. | 16:15 | |
Agreed then, that the hope is to move gold | 16:20 | |
out of the monetary system gradually, | 16:25 | |
but we must equally be agreed that that date | 16:30 | |
at which it has been removed is still very far off. | 16:32 | |
There still is a great deal of the gold virus | 16:36 | |
in the cells of the central bankers of the world, | 16:39 | |
in the cells of governments abroad. | 16:45 | |
Indeed, the very fuss about the right to hold gold | 16:49 | |
in the United States shows that the gold virus | 16:53 | |
is not out of the cells of the United States' citizenry, | 16:55 | |
and I may add, it's not completely out of the cells | 17:00 | |
of the United States' government officials | 17:03 | |
and central bank officials. | 17:06 | |
Therefore, anything which increases | 17:10 | |
the demand for gold now, in the free market, | 17:14 | |
it seems to me, adds to the fetish of gold | 17:18 | |
and is not to be encouraged. | 17:23 | |
Consequently, I think it would both be dangerous | 17:27 | |
to pass the legislation which was proposed | 17:31 | |
in the House and Senate, that individual citizens | 17:35 | |
are again to have the right to hold gold, | 17:38 | |
to pass it in its original form. | 17:41 | |
I think it would be less dangerous | 17:44 | |
if it's passed in the most likely form | 17:45 | |
in which it's gonna be passed, which is that, | 17:48 | |
at the discretion of the president, | 17:52 | |
when he says that the time is safe | 17:54 | |
for American citizens to hold gold, | 17:56 | |
then they shall given the right. | 17:58 | |
That would be very dangerous if the president | 18:02 | |
was very likely to use that power, | 18:04 | |
to give citizens the right to hold gold soon, | 18:06 | |
but I think realism would keep any president, | 18:09 | |
until the fundamentals have changed, | 18:14 | |
from agreeing to that, but still, | 18:17 | |
don't underestimate the political pressures. | 18:20 | |
What about the other side of the supply and demand equation? | 18:26 | |
What about permitting us to sell off | 18:29 | |
from our $10 billion odd gold stock held in Fort Knox | 18:31 | |
or elsewhere some of that gold at these high world prices? | 18:36 | |
A case could be made for that. | 18:44 | |
The trouble is that that's the only $10 billion | 18:47 | |
worth of gold stock which we have, | 18:50 | |
and when we get rid of it, it is gone, | 18:52 | |
and who is to say what the future of gold price will be? | 18:54 | |
Now, I don't want to say the United States | 19:01 | |
should hold off selling at $120 dollars an ounce | 19:03 | |
because I have a confident view | 19:07 | |
that if we just wait a while, it'll be 140. | 19:10 | |
That I'm not thinking about, but what I'm thinking | 19:14 | |
about is that if we and some other central banks | 19:16 | |
sell off gold, that could mean that most | 19:20 | |
of the supply could only be sold at rates | 19:24 | |
much lower than this, much lower are prevailing | 19:27 | |
this morning and the hysterical market, | 19:30 | |
and it could be that the longer term rate | 19:32 | |
of gold as a metal, gold as something to be used | 19:36 | |
in wedding rings and in dental inlays | 19:39 | |
and in electric relays, that might have a higher price. | 19:42 | |
I don't think that people have thought through | 19:49 | |
the many proposals that I read about in the newspapers, | 19:53 | |
and when I read Congressional testimony, | 19:58 | |
which is that the two tier system should be dropped. | 20:01 | |
There's nothing sacred about the two tier system | 20:06 | |
in which all the central banks | 20:07 | |
never again do any trading with the free market, | 20:09 | |
but what isn't realized is that if you go | 20:13 | |
into a halfway house and certain central banks | 20:15 | |
are permitted, at their discretion, | 20:19 | |
to sell gold, then you will succeed in creating | 20:22 | |
de facto what is already a partial fact, | 20:26 | |
namely, that within the official tier system, | 20:30 | |
although SDRs are supposed to be as good as gold, | 20:33 | |
although various promises and swaps between nations | 20:35 | |
are to be as good as gold, in fact, | 20:39 | |
nobody in his right mind in the official family | 20:42 | |
of 125 nations thinks of gold as being worth $42.22 | 20:45 | |
an ounce, and they would be mad to think that | 20:50 | |
if just around the corner is the possibility | 20:53 | |
that we will be joining the two tiers | 20:57 | |
with conduits between them and that you'll be able | 21:00 | |
to get rid of some of your gold | 21:02 | |
at $80, $90, $100 an ounce. | 21:04 | |
What you've done, in effect, by having the uncertainty | 21:08 | |
on this manner, is to completely immobilize | 21:11 | |
all official gold as any kind of an effective reserve | 21:15 | |
because it's a reserve which nobody | 21:19 | |
will ever pay out in the present state of affairs. | 21:21 | |
Well, let's wait for a future occasion | 21:27 | |
to see how the international situation develops. | 21:29 | |
Let me turn now to a question | 21:33 | |
that I am being increasingly asked. | 21:34 | |
I am being asked, what is the effect | 21:37 | |
of the Watergate scandals upon the American economy? | 21:40 | |
And there seems to be a conviction | 21:47 | |
that since it has such a great political effect, | 21:49 | |
at least for the moment, we don't know how long | 21:52 | |
memories are in these matters, | 21:54 | |
that it must have a great economic effect. | 21:56 | |
It certainly is doing very well | 22:02 | |
as an explanation for everything | 22:04 | |
which observers want to explain. | 22:05 | |
The American stock market has been behaving very poorly. | 22:08 | |
We're now down below the lows of the year. | 22:11 | |
It's a very convenient thing to blame the drop | 22:15 | |
in the stop market, 18 points yesterday, for example, | 22:18 | |
on the gold speculation and on the Watergate uneasiness. | 22:22 | |
Is there anything reasonable in that? | 22:29 | |
Well, where something so mercurial | 22:32 | |
as the animal spirits that guide the stock markets | 22:36 | |
of the world, which determine the price earnings ratios | 22:39 | |
at which equities are valued as against the basic, | 22:43 | |
GNP forces which determine those earnings | 22:47 | |
and the path of growth of those earnings, | 22:49 | |
where such ephemeral, psychological matters are concerned, | 22:53 | |
I see no reason to rule out concern over Watergate | 23:00 | |
as a causal factor. | 23:05 | |
Of course, concern over Watergate translates itself, | 23:09 | |
rationally, into a concern as to how much the president | 23:12 | |
is implicated and how much he's going to be hampered | 23:16 | |
in his ability to govern. | 23:20 | |
For example, will he be able to make his vetos stick? | 23:21 | |
Will we have an impasse between the president and Congress? | 23:25 | |
We've already seen, in connection with the financing | 23:28 | |
of the Cambodian bombing, that now, | 23:31 | |
for the first time, both houses have gone on record | 23:34 | |
as refusing financing for that purpose, | 23:37 | |
and so if you think that the ship of state | 23:43 | |
is going to be without a rudder, | 23:46 | |
I'm not talking now about the more ominous possibilities, | 23:47 | |
such as the impeachment of the president | 23:51 | |
or such as his voluntary resignation | 23:54 | |
or such as the impeachment of the president | 23:56 | |
plus a successful conviction of him | 24:00 | |
by the Senate and removing of him from office. | 24:04 | |
I'm just talking about the fact that his mandate, | 24:07 | |
his majority, has been very much hampered. | 24:10 | |
I must say, as one who didn't fully approve | 24:16 | |
of the way he was using what he conceived to be his mandate, | 24:21 | |
I don't find this a completely bad thing, | 24:24 | |
and I think you could, on a rational basis, | 24:27 | |
make an argument that the president's inability | 24:30 | |
to veto excessive appropriations, | 24:35 | |
instead of in the short run being a bearish factor, | 24:39 | |
say, for the GNP forecaster, | 24:43 | |
could be an expansionary factor. | 24:45 | |
I hate to say bullish factor because if the economy | 24:48 | |
is over strong and you add fuel to the fire, | 24:50 | |
and particularly if that flame spends itself | 24:52 | |
primarily in increasing the rate of price inflation | 24:56 | |
because it can no longer much expand the rate | 25:00 | |
of output expansion, then the word bullish is misused. | 25:03 | |
We're left, then, with the chronic guessing game | 25:13 | |
which was been going on for some time, | 25:19 | |
namely, although the economy is overly strong, | 25:21 | |
our last quarterly figures for which we have data, | 25:25 | |
that is, the first quarter of 1973, | 25:29 | |
showed almost an 8% increase in the real GNP, | 25:32 | |
more than 14% increase in the nominal, or money, GNP. | 25:37 | |
After you add the price inflation rate | 25:41 | |
of 6% to it, that is overly strong. | 25:45 | |
That is adding to the lags and delivery time. | 25:49 | |
That is expanding the amount of overtime | 25:55 | |
in the American economy. | 26:00 | |
That is ominously building a platform | 26:02 | |
for a later slow down, and yet, | 26:10 | |
at the same time that all of that is true, | 26:15 | |
when we look at a dozen, really two dozen, | 26:19 | |
different, new americo forecasts, | 26:23 | |
you find that with rare exceptions, | 26:26 | |
those forecasts, whether they are of a equational, | 26:29 | |
computer type or whether they are of a judgmental type, | 26:33 | |
with rare exceptions, those forecasts agree | 26:37 | |
that by the fourth quarter of the rear, | 26:40 | |
the rate of real growth in the American GNP | 26:43 | |
will be way down from 8%, down by more than half, | 26:47 | |
down in many cases, according to the forecaster, | 26:54 | |
below 4%, and in particular, below the 4 1/3% rate | 26:57 | |
which represents the long term par for the American economy. | 27:03 | |
I might in this connection just read to you | 27:09 | |
the latest Wharton quarterly model computer print out. | 27:13 | |
This is something which was prepared this month, | 27:21 | |
May 2nd, 1973, and the numbers I wanna call | 27:24 | |
your attention to are the real GNP rate of growth. | 27:30 | |
That's 7.9% in the first quarter. | 27:36 | |
That's the first estimate. | 27:39 | |
That is not a forecast. | 27:41 | |
Then, for the second quarter, the quarter | 27:43 | |
which we are now in, the quarter | 27:45 | |
where we're right in the middle of it, | 27:48 | |
the Wharton School Model predicts | 27:50 | |
that that will drop to 6.1%. | 27:52 | |
That is almost a 2% drop. | 27:56 | |
I believe that if it works out that way, | 27:59 | |
we have to regard that as a healthy development | 28:01 | |
because 6% is as much as, I think, | 28:06 | |
the doctor would order for the American economy | 28:12 | |
at this stage of the game. | 28:14 | |
There is almost a 1% in the price deflator | 28:16 | |
for this second quarter. | 28:22 | |
Now, that would be a happy outlook | 28:25 | |
if that same moderation and tapering off continued | 28:31 | |
and if we were then to float into a maintainable level. | 28:37 | |
I wouldn't, for example, think that even 5% | 28:43 | |
would be a bad annual rate of real growth | 28:46 | |
because our productivity has been very strong | 28:49 | |
in the first quarter of the year | 28:53 | |
and in the last quarter of last year, | 28:54 | |
and we might hope at this, I can't say early stage | 28:56 | |
of the expansion, but not late stage of the expansion, | 29:01 | |
that we could continue to have some good news | 29:03 | |
on the productivity front, but let me tell you what. | 29:05 | |
Already, by the third quarter, remember, | 29:07 | |
we're talkin' now about just after the Fourth of July, | 29:10 | |
and by Labor Day, the rate of real growth, | 29:14 | |
according to the Wharton Model, is down to 2 1/3%. | 29:18 | |
Now, the inflation is down to about 3 2/3%, | 29:23 | |
but if you add those two together, | 29:27 | |
you get only a 6% increase in the money, GNP. | 29:29 | |
That itself, if it's continued for any length of time, | 29:34 | |
has it be termed a mini-recession, a growth recession. | 29:37 | |
Well, growth recession is perhaps | 29:42 | |
the better word than a mini-recession. | 29:43 | |
How does it go in the fourth quarter? | 29:46 | |
Well, the fourth quarter of the year, | 29:47 | |
the Wharton School Model, is down to 2 1/3, | 29:48 | |
well, still 2 1/3% real growth. | 29:51 | |
First quarter of next year, it pops up to 3 3/4%. | 29:56 | |
Still, though, notice, below par of 4% or 4 1/3%, | 30:00 | |
then it's 4% in the second quarter of 74, | 30:06 | |
then down below 2% in the third quarter, | 30:11 | |
then about 3%, and it isn't until the first part | 30:14 | |
of 1975 that the economy is bouncing back | 30:20 | |
to above its growth rate. | 30:23 | |
For the year 1974 as against the year 1973, | 30:26 | |
the Wharton Model shows only a 3.2% rate of real growth. | 30:30 | |
I'm concentrating on the rate of real growth | 30:35 | |
because it seems to be, that that's where the well-being | 30:37 | |
of the American economy resides. | 30:39 | |
Now, that picture, if it were true, | 30:43 | |
would require me to change the advice | 30:48 | |
which I have been giving, which I have been giving, | 30:51 | |
now, for six or eight months, namely that we should lean | 30:53 | |
against the wind, that we should try to make this expansion | 30:57 | |
be a healthy, lasting one, rather than one | 31:00 | |
which blows its top with just a few 8% quarters | 31:03 | |
and is followed by an inventory turnaround | 31:08 | |
and a mini-recession, and in the forecasts | 31:11 | |
of many people, actually a genuine recession, | 31:15 | |
in which the real GNP drops. | 31:20 | |
If I believe the Wharton School Model, | 31:23 | |
in view of the lags that take place | 31:26 | |
between any policy which is followed now | 31:28 | |
and the time in which that policy takes effect, | 31:30 | |
it is too late for moderation to curb the excess | 31:34 | |
of the boom, but although I have high respect | 31:39 | |
for the Wharton Model, and although I have the humility | 31:44 | |
not to try to go against all the forecasters | 31:49 | |
when they are having a consensus, | 31:51 | |
I still don't have all that much confidence | 31:54 | |
about the ability of forecasters to forecast ahead | 31:57 | |
and in particular, to forecast a change in the wind, | 32:00 | |
and so I'm tempering my advice, | 32:04 | |
but I have not yet gone over to the other side. | 32:06 | |
I would not consider it a defeat | 32:09 | |
or an inconsistency to go over to the other side | 32:11 | |
because I do not believe that the way to minimize | 32:13 | |
the squared deviations from good performance | 32:17 | |
of the American economy is by a process of gradualism. | 32:20 | |
I think that what you have to do | 32:24 | |
is to form the best Bayesian probabilities | 32:25 | |
of the situation about six months ahead | 32:29 | |
and base your policy on that basis | 32:30 | |
and be activistic, knowing that your later activism | 32:33 | |
can negate you present activism | 32:38 | |
if you've held on too long or have been going | 32:42 | |
in the right direction, and if you use | 32:43 | |
optimal control theory and if you have the opinion | 32:46 | |
of kinds of errors which occur in the American economy | 32:49 | |
which I have, you will find that that kind of activism | 32:51 | |
is actually better than the gradualism | 32:54 | |
as far as achieving good performance. | 32:58 | |
- | If you have any questions or comments | 33:02 |
for Professor Samuelson, address them | 33:03 | |
to Instructional Dynamics, Incorporated, | 33:05 | |
166 East Superior Street, Chicago, Illinois, 60611. | 33:08 |
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