Tape 31 - First half of 1969

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-	What's new in the world of economics	0:02
	both home and abroad?	0:03
	Listen now as Instructional Dynamics Incorporated	0:05
	brings you Dr Paul Sameulson,	0:07
	MIT Professor of Economics	0:10
	with his bi-weekly analysis.	0:11
	Professor Sameulson, this is the week of July 7,	0:13
	which means the first half of 1969 is history.	0:16
	How would you analyze the past six months?	0:20
-	The first half of the year, has been strong.	0:23
	I have not yet seen any official estimates	0:28
	of the second quarter GNP, but we did have a release	0:31
	from the Department of Commerce indicating	0:35
	that the figures will show a continued strong growth.	0:38
	I don't know exactly what that means,	0:44
	but piecing together what we do know,	0:47
	the upsurge in the Federal Reserve Board Index of Production	0:50
	in May, I believe it was,	0:55
	the general expectation, I think, must be	0:58
	that the second quarter showed	1:03
	something like a $15,5 billion Dollar increase in GNP.	1:06
	Call it 15, call it 16 billion.	1:11
	That's fully as great as the increase in the first quarter.	1:16
	Indeed,	1:25
	this vague estimate that I'm giving you	1:27
	could be wrong in two ways.	1:31
	It could be a couple of billion above $15 billion	1:33
	or it could be a couple of billion below $15 billion.	1:37
	If I were required to bet my own money	1:41
	on which of those two outcomes might materialize,	1:44
	I'd feel safer betting that we may be in	1:49
	for a shock and a surprise	1:52
	in learning that the numbers	1:55
	were a couple of billion above $15 billion	1:57
	and I would be very much astonished and surprise to learn	2:00
	that the GNP had increase by only a $13 billion Dollars.	2:05
	Now, why do I linger over this problem.	2:09
	I linger over the problem because	2:12
	the most pessimistic event that could happen	2:15
	would be for the second quarter to turn out	2:19
	to have been abnormally strong.	2:24
	Let me reiterate, the problem that we face at this time,	2:28
	I think, is over exuberance, not over kill.	2:32
	And anything which	2:37
	accentuates that over exuberance	2:42
	or confirms that over exuberance,	2:44
	has to be put down as a bad omen for the American economy.	2:47
	Usually in these tapes I try to be judicious,	2:52
	I try to weigh all the factors, pro and con,	2:56
	and give you my best resolution of those factors.	3:01
	The result is sometimes bland,	3:06
	but the result is gauged to minimize	3:08
	the squared error of my predictions.	3:12
	I think that's a good thing to do	3:17
	and if I had to stick to one style,	3:18
	that's the style that I would stick to.	3:21
	But there is room, plenty of room,	3:24
	for change of pace.	3:27
	So I thought that today, I might do a little brain storming.	3:29
	Why don't I, just for a few minutes,	3:33
	try to conjure up some	3:36
	possible pessimistic	3:40
	events and outcomes.	3:44
	It's not that I wanna scare you or scare myself,	3:46
	and it certainly is not that I'm predicting	3:50
	that my best estimate is	3:53
	that these pessimistic events will materialize,	3:54
	but rather, if one is to be creative in this align,	3:57
	one likes to through out hints	4:02
	of things that ought to be watched and that may develop.	4:06
	So that two or three months from now	4:09
	that grade judicious analyst	4:13
	will take this fact, which at the moment	4:16
	is no bigger than a man's hand on the horizon,	4:21
	and regarded as the standard thing	4:24
	which was to have been expected perhaps all along.	4:28
	Well, what would a pessimist	4:31
	conjure up as something that	4:35
	an observer of the American economy might watch out for.	4:39
	One, it seems to me, that what we can not rule out,	4:43
	the possibility of a	4:47
	an acceleration of the creeping inflation	4:52
	which we've been experiencing.	4:55
	I don't mean to be so pessimistic as to say	4:58
	that America, after going through a long period	5:02
	of real recovery in the first part of the 1960's,	5:06
	and after having overdone	5:10
	the rate of spending	5:14
	once full employment or over full employment	5:18
	had been reached,	5:20
	then inevitably was plunged into	5:22
	the kind of pattern which we see in Brazil,	5:26
	and which we see in Chili and other countries.	5:29
	I don't think that that is in the cards,	5:33
	but there is a lot of room between	5:36
	the 5% inflation which we were experiencing till recently,	5:39
	and the 20, 30 and 40% rates of inflation	5:46
	that are typical, chronic and endemic	5:51
	in Brazil and in Chili.	5:55
	Why couldn't the American economy	5:59
	edge upward from 5% to a	6:01
	rather normal 7% or 9% rate of price inflation.	6:05
	The is ample president for this.	6:12
	I think that in many of the countries of western Europe,	6:15
	and I'm now thinking of successful countries	6:19
	of western Europe,	6:22
	you have had rates of price inflation	6:24
	that have gone on for a decade or more	6:28
	internally that have exceeded those comfortable	6:32
	2% and 3% rates of inflation which	6:37
	we have learned to live with in the next economy	6:41
	and about which we even tend	6:44
	to become somewhat jaded and even complacent.	6:47
	I'm thinking of the fact that Sweden	6:52
	has had wage increases of the 10% per annum	6:56
	for quite a while,	7:00
	the Netherland for a long time in the middle 1960's	7:02
	had wage settlements that exceeded 12%,	7:07
	and hence there is no immunity	7:11
	that I know of within the next economy	7:16
	which assures us that we will return	7:18
	to the comfortable price index behavior	7:23
	of the early and middle 1960's.	7:28
	Now I know it will be argued that this is impossible	7:34
	if the macro economic authorities do their job properly.	7:38
	If the proper fiscal policies are followed	7:45
	this will be impossible, it is argued.	7:49
	If the proper monetary policies are followed,	7:51
	this will be impossible, it is argued.	7:55
	There are some differences of opinion	7:58
	among economists as to exactly	8:00
	what is the appropriate mix between	8:03
	fiscal policy as such and monetary policy as such.	8:07
	There are some economists	8:12
	who say that the important thing is monetary policy,	8:15
	and more specifically, that the important thing is	8:19
	the rate of growth of the money supply itself.	8:22
	And so, as these economists would put it,	8:28
	it is quite impossible to envisage	8:31
	a 7% inflation per annum	8:35
	if the Federal Reserve Authorities	8:40
	do their simple business properly.	8:44
	I say simple business, because according	8:47
	to this monetarist view the process of what aught to be done	8:49
	is quite simple.	8:54
	The Federal Reserve should pick a round number,	8:57
	let us say 5% per annum	9:02
	or 4% per annum for the money supply growth	9:06
	and should do everything	9:12
	under heaven and earth	9:16
	to see to that numbers achieved.	9:18
	Turn it's attention away from the vicissitudes	9:22
	of interest rates and whether Euro Dollar market	9:24
	has gone from 12% temporarily to 14%	9:27
	or down to 9%, just let the Federal Reserve	9:30
	create high powered reserve money	9:34
	for the banking system at the appropriate rate	9:38
	and they can achieve 4%, 5%, let's call it 4,5%	9:42
	rate of growth of one or another of the monetary magnitudes.	9:48
	If they do this, it can be argued	9:54
	it is hard to see	9:58
	how the rate of price inflation	10:00
	can be, let's say 7% for the next four years	10:05
	in every one of those years or averaging out	10:11
	to that amount in those four years.	10:14
	Now, I think I largely agree with that.	10:17
	There are just a few caveats that have to be made	10:22
	I believe I saw in the Federal Reserve Bank of St Louis's	10:26
	monthly letter the statement that	10:31
	the velocity of circulation of money has gone up	10:34
	in 19 out of the last 20 years,	10:37
	and so it is not inconceivable	10:41
	that the rate of price increase could be in excess	10:44
	of the rate of money increase	10:50
	for a considerable period of time.	10:53
	The difference being due to the systematic shift	10:55
	in the velocity of circulation.	10:59
	And as a matter of fact we have some experience	11:02
	over a considerable number of recent years	11:07
	that suggest that this may even be the common pattern.	11:11
	I knew some monetarists who just a couple of years ago	11:16
	were beginning to predict that the rise	11:19
	in the velocity of the circulation of money	11:23
	was about to be a thing of the past	11:25
	and they would have not been surprised with	11:28
	seeing the velocity of circulation of money start to descend	11:31
	from the peaks of a few years ago.	11:35
	Well that did not happen.	11:40
	I think that it's not surprising that it did not happen	11:42
	since I believe that the velocity of the circulation	11:48
	of money is,	11:50
	presumed to be systematically related	11:53
	to the rate of interest,	11:55
	I'm not surprised that in this regime	11:58
	of very high interest rates,	12:00
	that there should be economy in the holding of cash balances	12:02
	so that a smaller rate of growth of the money supply,	12:08
	however defined, can support a larger	12:11
	rate of growth of the money GNP.	12:15
	There is quite a tad of precedence for this.	12:21
	If I recall the multiple correlation	12:25
	of the Federal Reserve bank of St Louis,	12:29
	in which a monetarist approach is taken	12:33
	and which the rate of change of the GNP	12:36
	is related primarily	12:41
	to the contemporary rate of change in the money supply	12:43
	and the rate of change in the money supply	12:48
	in the preceding three quarters.	12:50
	In that analysis I will remind you	12:54
	of the importance of fiscal variables	12:56
	turned out to be negligible.	13:02
	The tax rate changes is written down in that analysis	13:05
	as result of least square estimation to essentially zero	13:10
	and the effects of Federal expenditure	13:15
	are shown to be positive only in the first two quarters	13:20
	and negative in the next two quarters,	13:24
	so that I think for the purpose of our discussion	13:26
	we can more or less eliminate the fiscal variables	13:28
	in appraising this monetarist model.	13:32
	Now in that model, the change in GNP	13:37
	is positive even if there is no change in the money supply	13:43
	because there is a positive intercept coefficient	13:49
	in the regression estimating equation	13:53
	and we have therefore build into that model	13:58
	a systematic increase over time	14:02
	in the velocity of circulation of money.	14:05
	Now I don't suppose that any of the framers of that	14:11
	equation are prepared to use it without modification	14:15
	to discuss average inflation over a decade period	14:20
	or a half decade period such as I'm now venturing	14:25
	to apply it to.	14:28
	Never the less, let's see what it's implications are.	14:30
	So, if the rate of money supply is kept at 4,5%	14:36
	and if the prices	14:42
	for some reason are postulated	14:46
	to grow at 7%, let's say 7,5%,	14:50
	part of the 3% discrepancy per annum	14:55
	can be made up by a positive speeding up	15:00
	of the velocity of circulation of money.	15:05
	This is reinforced,	15:10
	or at least we end up with	15:13
	a consistent position in this direction	15:15
	if we realize the 7,5% price increase	15:18
	will generate a quite substantial	15:23
	increase in interest rates.	15:26
	If our present 8%, 9% and 10% interest rates	15:29
	are compatible with a price increase	15:35
	of 5% or 6% per annum,	15:40
	then a 7,5% rate of price increase	15:44
	fairly long maintained by our hypothesis	15:49
	so that every fool can see what's going on	15:53
	and so can every wise man	15:56
	and every lender and every borrower,	15:57
	in that case Mr Wright Patman	16:00
	of the Congressional Banking Committee	16:03
	has some more unpleasant news awaiting him	16:07
	because the 8%, 9% and 10% interest rates	16:11
	might under those circumstances be	16:14
	9%, 10% and 11%, 12% interest rates.	16:16
	Now with those interest rates,	16:21
	and particularly as long as the interest rate structure	16:23
	is still rising, it seems to me	16:26
	that some more can be squeezed out	16:29
	of the velocity of circulation of money,	16:32
	however, well I shouldn't say however defined,	16:36
	but at least as narrowly defined.	16:39
	That's point number one, point number two,	16:44
	there's no guarantee in this pessimistic model	16:48
	that I am broaching with you	16:53
	that the rate of real growth in the economy	16:56
	is anything like that of our potential	17:02
	and so the 7,5% increase in prices	17:08
	might in a boogeyman pessimist model	17:14
	be associated with	17:19
	a negligible growth in real income.	17:22
	Indeed as long we're being pessimistic	17:27
	and scaring ourselves, why can't we have	17:29
	as a number of clever Latin American countries	17:32
	have managed to contrive for themselves	17:35
	secular recurring creeping price inflation,	17:38
	along with actually stagnating and regressing real income.	17:43
	I don't mean this for any extended period of time	17:50
	and now I want to shorten my view of the future	17:52
	that I'm talking about, but let's talk about	17:57
	just the next couple of years.	18:00
	In the attempt to hold down this	18:03
	runaway creeping price inflation of 7,5%,	18:08
	we'll assume that the Federal Reserve authorities	18:12
	stay very strong and do hold the money supply down	18:16
	to the hypothetical monetarist number of say 4,5%.	18:21
	They might in so doing	18:27
	generate a reduction of real output	18:31
	at an annual rate of 1% of 2%.	18:37
	Now, I can assure you that's a very uncomfortable prospect	18:40
	maintained for any duration	18:44
	that's measured in years	18:48
	because it means eroding profits,	18:50
	it means increasing unemployment,	18:53
	it means trouble in the cities,	18:55
	it means soaring unemployment among	18:58
	the unskilled and the handicapped and the black,	19:02
	but never the less,	19:05
	let's assume that we're facing a quayside Brazilian,	19:08
	quayside Chilian situation,	19:12
	and that the Fed stays stern under those circumstances.	19:15
	We'll the arithmetic more or less does add up	19:21
	4,5% in terms of money and growth	19:26
	and let's say 1,5% per annum for a couple of years	19:31
	in the form of velocity of circulation growth.	19:35
	That leaves us with	19:41
	room am I right for a -1% growth in real output	19:44
	and all of that is compatible with 7,5% increases in prices.	19:51
	Now, there is an inconsistency,	19:56
	it's rather unlikely according to most models	20:01
	and according to most patterns of experience	20:06
	that you should have for any sustained period of time	20:09
	a -1% increase in growth of real output,	20:15
	and an expansion in the	20:19
	amount of unemployment	20:23
	and still have the 7,5% increase in prices	20:25
	that I've been speaking about.	20:29
	But I don't think that's impossible	20:31
	particularly when you take into account	20:33
	the leads and lags which our present	20:36
	in any behavioral equation relationship between	20:41
	wage cost pressures and price pressures	20:46
	and the state of slack in the economy.	20:50
	It's become fashionable these days, an I think properly so,	20:54
	to emphasize the lags between causes and effects.	20:57
	The money supply changes today and that has an effect	21:02
	six months from now, that has an effect according	21:06
	to some models 12 months from now,	21:09
	15 months from now and even longer.	21:11
	When there are tax changes today, that has a delayed effect	21:15
	according some models three months, six months and so forth.	21:22
	The saying mush surely be true	21:27
	about the forces which make for	21:30
	an increase in administered prices, changes in wage costs,	21:33
	and I venture to think	21:39
	when we deal with commodity so imperfectly	21:42
	defined and so imperfectly competitive as labor generally	21:47
	in the Phillip's Curve phenomena of the labor market.	21:54
	And so, although I don't think this model	21:57
	that I'm speaking about is likely,	22:00
	I would like to cover myself,	22:02
	so that if two years from now	22:05
	something like this has happened	22:06
	I'd like to be able to look back and say,	22:08
	that in a brain storming session,	22:11
	when I was trying to consider	22:14
	all of the little unpleasant surprises	22:17
	that might be possible	22:19
	and when I say possible, I mean possible with some	22:22
	modicum of probability.	22:27
	After all everything is possible anytime	22:30
	and it'll be the death of all science	22:34
	to admit anything that's possible	22:36
	has been interesting to talk about.	22:39
	But this particular pattern	22:41
	I think in some other countries,	22:43
	has occurred and there is no benevolent providence	22:45
	which ensures that the Unites States	22:53
	could not also experience this behavior.	22:55
	I'm going to conclude this pessimistic	22:59
	brain storming session by asking	23:01
	that you not concentrate upon the 7,5% figure	23:05
	and the 4,5% money supply figure	23:08
	but to consider it as a parable well told	23:12
	if anything like these magnitudes	23:15
	should actually develop in the future.	23:19
	Now I'd like to turn to the current situation early in July.	23:22
	I suppose the question that I am asked	23:30
	more than any other question	23:32
	in these last couple of months is this:	23:34
	has the Bond market had it?	23:37
	Is there, in the period ahead,	23:42
	some chance that interest rates will soften?	23:46
	Is this perhaps the bargain opportunity	23:52
	of the decade,	23:56
	of I will say, our lifetime	23:58
	to go in and buy long term Government Bonds?	24:01
	In the rather confident hope	24:06
	that there will be a sizeable capital gain situation.	24:08
	That's the way the problem looks	24:13
	to the nimble trader and speculator.	24:15
	But the same problem off course	24:17
	is in the mind of every prudent man	24:19
	who is a trustee for pension funds	24:22
	and for investments generally.	24:24
	Should he at long last	24:27
	begin to be in more interested in the Bond market.	24:30
	The Bond market has been in a very long term bear movement.	24:35
	Are we yet at the end of this movement?	24:42
	A month or two ago, there was a substantial	24:49
	group of informed opinion which thought we were	24:54
	at that time at that situation.	24:57
	At the present time I think you will find	25:01
	that there is a fairly substantial body of opinion	25:04
	which says:	25:09
	only hogs and fools think they can catch	25:12
	the very bottom of the Bond market.	25:16
	We are near enough to the bottom	25:20
	so that a program of aggressive	25:21
	buying of long term bonds is now indicated.	25:25
	And then, I am asked;	25:32
	Professor Sameulson, what do you think of this reasoning?	25:34
	We are interested in your opinion on this	25:40
	because of our investments problems	25:42
	but we're also interested in it	25:45
	because we think it has a lot to do	25:46
	with the forces that the stock market is gonna have to fight	25:49
	in trying to have a summer recovery.	25:52
	If the interest rates will indeed soften a bit	25:56
	then the stock market will have removed from it	25:59
	one of the obstacles and hurdles	26:03
	toward that usual summertime recovery.	26:06
	Well, it's a hard question for me to answer	26:11
	and I think that's the most important part of my answer	26:14
	that should be stressed, namely,	26:16
	that I do not consider it to be	26:19
	and open and shut case in either direction.	26:20
	But if forced at the point of a gun	26:25
	to give an answer, my hunch is, that we aren't yet there.	26:28
	I think that the minute interest rates ease off a little bit	26:33
	the calender will grow.	26:37
	There are lots of financial needs which are in the process	26:38
	of being starved by the Federal Reserve	26:42
	tightness to the money supply	26:44
	which is down to about a 2,5% rate of growth	26:46
	of the money supply in the first half of the year.	26:50
	And I think that this need of corporations	26:54
	to continue to finance their funds	26:58
	plus the possibility that I mentioned at the very beginning,	27:00
	that the second quarter may be	27:03
	a bit stronger than we thought	27:05
	al of these may mean that the bulls on bonds	27:07
	are a little bit early and so I'm still gonna stick	27:10
	to my night before Labor Day guess on this matter.	27:14
-	Thank you Professor Sameulson.	27:19
	We welcome your question and comments	27:21
	and hope that this service is of value to you.	27:23
	Our address is:	27:26
	166 East Superior Street, Chicago, 60611.	27:27

Item Info

Title:

Tape 31 - First half of 1969

Date:

1969

Contributor:

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

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Paul Samuelson

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Tape 31 - First half of 1969

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