Tape 167 - Domestic Economy, Vacuum in Far East, Chile Inflation
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Transcript
Transcripts may contain inaccuracies.
- | Hello, this is William Clark of the Chicago Tribune | 0:02 |
saying welcome once again to a visit | 0:05 | |
with the distinguished economist, Professor Milton Friedman, | 0:07 | |
of the University of Chicago. | 0:10 | |
We're recording this visit very early, | 0:12 | |
just about the turn of the month into May, 1975. | 0:16 | |
And Dr. Friedman has just returned from a long trip | 0:20 | |
that carried into Chile, to Australia, and to Japan, | 0:23 | |
and we want to hear about situation in those countries | 0:27 | |
and how they reacted to developments in Vietnam. | 0:30 | |
But first, Dr. Friedman, I wonder | 0:33 | |
if anything has occurred while you were away | 0:35 | |
to change your thinking about the timing | 0:37 | |
of an economic upturn here at home? | 0:39 | |
- | I have only had time, since I got back, | 0:42 |
to look rather casually at the figures | 0:44 | |
that have been coming out. | 0:47 | |
But they, as well as the ones I saw while I was away, | 0:49 | |
after all, there is a world news service | 0:53 | |
and it's amazing how easy it is to keep up | 0:55 | |
with what's happening in the United States | 0:57 | |
from the most distant points in the world, | 0:59 | |
but the combination leads me to feel | 1:01 | |
that the position I was taking earlier | 1:05 | |
is essentially the same. | 1:08 | |
Before I left, it looked as if the Fed | 1:10 | |
had changed its monetary policy | 1:13 | |
and had started on a monetary explosion in February. | 1:15 | |
The most recent figures which I have seen, | 1:20 | |
which go through the middle of April, confirm that, | 1:23 | |
that whereas the quantity of money narrowly to fund M-1 | 1:30 | |
had grown from July of 1974 to February '75 | 1:36 | |
at the extremely low rate of 1.4%. | 1:45 | |
In the past two months, from February to now, | 1:49 | |
it has grown at the rate of over 12%, | 1:51 | |
which is an extremely rapid rate of growth. | 1:54 | |
The same thing is true for M-2. | 1:57 | |
Money plus time deposits, including time deposits, | 1:59 | |
for the corresponding two dates | 2:04 | |
from July 1974 to February 1975, | 2:07 | |
M-2 grew at the rate of 5.7%, | 2:13 | |
and for the past two months at the rate of 12 1/2%, | 2:16 | |
or more than twice as much. | 2:20 | |
Thus both monetary series combined to suggest | 2:22 | |
that there has been a very rapid expansion | 2:26 | |
in the quantity of money in the past couple of months, | 2:29 | |
and that the turnaround came just about early in February. | 2:31 | |
If one takes into account | 2:37 | |
that there is typically a six to ninth months lag | 2:39 | |
between a change in the rate of growth of the money supply | 2:41 | |
and in the economy, this would lead you | 2:44 | |
to something like August to October | 2:48 | |
as the expected time of the bottoming out of the recession. | 2:50 | |
That's, of course, contingent on a continuation | 2:54 | |
of monetary expansion, not necessarily at this pace, | 2:56 | |
but at a pace larger than that which prevailed | 3:00 | |
at the end of last year. | 3:06 | |
I continue to believe that the real danger | 3:09 | |
is not that money will grow too slowly, | 3:11 | |
but that it will grow too rapidly. | 3:14 | |
Rates of growth such as have occurred | 3:17 | |
in the past two months, if continued, | 3:19 | |
would spell a resumption of inflation | 3:21 | |
in late '76 or early '77 at very high rates. | 3:23 | |
It remains to be seen whether that fear will be realized. | 3:30 | |
The Federal Reserve people and others | 3:33 | |
talk about maintaining moderation in monetary growth. | 3:38 | |
One could justify such rapid rates of growth | 3:41 | |
for a two months period, on the ground that you were | 3:44 | |
offsetting the extremely slow rate of growth earlier, | 3:49 | |
and that what one should really look at | 3:53 | |
was a longer term rate of growth, | 3:54 | |
the rate of growth over a year, | 3:57 | |
rather than the rate of growth over these brief periods. | 3:58 | |
Over the past year, the rate of growth of M-1 | 4:01 | |
has been at only 4%, and of M-2 has been only 7%. | 4:04 | |
Those are rates of growth which would be good | 4:09 | |
for the long run. | 4:11 | |
But, as is already clear from what I've said, | 4:12 | |
those averages are made up of two very different periods, | 4:16 | |
extremely slow growth for the period | 4:21 | |
from mid '74 to early '75, | 4:23 | |
and extremely rapid growth for the past two months. | 4:26 | |
We shall have to wait and see how that develops. | 4:29 | |
My own guess is that while the rate of growth | 4:31 | |
may not be maintained at this high level, | 4:35 | |
it will be maintained at a higher level than is desirable | 4:37 | |
under the pressures which will come | 4:40 | |
from the need to finance very large deficits | 4:42 | |
and from the continuing concern about high unemployment. | 4:45 | |
I continue to believe that this tendency will be reinforced | 4:49 | |
by the sigh of relief, which everybody is now expressing | 4:53 | |
at the sharp decline in the rate of inflation. | 4:58 | |
But that sharp decline in the rate of inflation | 5:03 | |
will prove temporary, unless monetary growth is pulled back | 5:05 | |
to lower levels. | 5:10 | |
- | Thank you. | 5:11 |
Now there are two sets of observations | 5:13 | |
that you might make about your travels, Dr. Friedman. | 5:15 | |
One would be essentially political, | 5:19 | |
including the reactions you saw | 5:21 | |
to the developments in Vietnam, | 5:23 | |
and the other would be economic. | 5:25 | |
I hope that we'll have time for you to do a little of both, | 5:27 | |
but I wonder if we might start first with the political. | 5:30 | |
- | Now, ordinarily, I am hesitant to comment | 5:34 |
on the political situation-- | 5:36 | |
- | Yes, I know. | |
- | As an economist, but this was rather | 5:38 |
an exceptional circumstance. | 5:40 | |
I was in Australia at the time that Cambodia fell | 5:42 | |
and while the final stages of the Vietnam tragedy | 5:47 | |
were unfolding. | 5:50 | |
I was in Japan just a few days ago, | 5:52 | |
when Saigon was on the verge of being entered | 5:57 | |
by the Vietcong and the North Vietnamese. | 6:01 | |
Both countries are critical countries in the Far East. | 6:07 | |
Both are highly affluent countries. | 6:12 | |
They both are extremely tempting targets | 6:15 | |
for anybody who would want to expand | 6:18 | |
or want to get further economic power. | 6:20 | |
Australia is, in some way, an even more tempting target | 6:22 | |
than Japan, 13 1/2 million people on a continent | 6:25 | |
with a land area roughly the same | 6:32 | |
as that of the United States, | 6:34 | |
with tremendous mineral wealth of coal, of iron ore. | 6:36 | |
You name it, Australia has it. | 6:41 | |
Australia has depended, and Japan have both depended | 6:45 | |
for many years upon the umbrella of the United States. | 6:48 | |
Both have been maintaining military forces | 6:55 | |
that are very small compared to their potential. | 6:59 | |
That is, if you take the expenditures on armed forces, | 7:02 | |
the percentage of national income spent | 7:06 | |
is very much lower in both Australia and in Japan | 7:08 | |
than it is in the United States. | 7:11 | |
By very much lower, I mean 1/2 or 1/3 as much. | 7:13 | |
I don't remember the exact numbers. | 7:17 | |
Both were obviously unsettled by the collapse in Vietnam, | 7:21 | |
but the main impression I carried away | 7:27 | |
was that neither had reacted to it in a realistic sense. | 7:30 | |
Both were continuing to have a artificial appreciation | 7:34 | |
of the role that the United States could or would play | 7:40 | |
in the Far East. | 7:43 | |
Let me illustrate that by a little anecdote. | 7:45 | |
I talked with the head of one of the oil companies, | 7:47 | |
large oil companies in Australia. | 7:51 | |
We came around to talking about the consequences | 7:55 | |
for Australia or for the Middle East, Far East. | 7:57 | |
I mentioned the possibility that Iran, | 8:02 | |
with its new-found munitions, with its rearming, | 8:04 | |
would seek to make itself the master of the Persian Gulf, | 8:09 | |
might move in and try to take over Saudi Arabia, Kuwait, | 8:11 | |
and the other countries. | 8:14 | |
"Oh," said my host, "that won't happen." | 8:15 | |
"Why not?" Said I. | 8:18 | |
"Why, the U.S. wouldn't let it happen." He said. | 8:20 | |
Now that is an attitude that seemed to me inconceivable. | 8:23 | |
He was very much taken aback when I told him | 8:28 | |
that I thought there was not a chance in a million | 8:31 | |
that the U.S. people would stand for American troops | 8:33 | |
being sent to the Mid East in order to prevent Iran | 8:37 | |
from taking over Saudi Arabia. | 8:41 | |
In general, what I'm getting at is a lack of appreciation | 8:44 | |
of the vacuum that has emerged in the world as a whole, | 8:49 | |
not only in the Far East, as a result | 8:54 | |
of the events in Vietnam. | 8:56 | |
The official party in Australia is the Labor Party. | 8:59 | |
It took power about two years ago | 9:02 | |
after a long period out in the wilderness, | 9:04 | |
23 years of a prior government. | 9:06 | |
It was a party that pulled Australia out of Vietnam, | 9:10 | |
and indeed, one of the major forces | 9:14 | |
that enabled the Labor Party to come to power | 9:18 | |
was the great dispute within Australia | 9:21 | |
about whether Australia ought to be involved in Vietnam. | 9:23 | |
And it was exactly the same kind of a dispute | 9:25 | |
that we had in this country and the arguments | 9:28 | |
about the Vietnamese situation. | 9:32 | |
The present Deputy Prime Minister of Australia, | 9:35 | |
a man by the name of Dr. Cairns, | 9:38 | |
was one of the leaders in the so-called Peace Movement. | 9:41 | |
He, in fact, almost exalted in triumph on TV | 9:45 | |
at the Vietcong's capture of South Vietnam. | 9:49 | |
He restrained his exaltation | 9:55 | |
cuz it was obviously politically unwise to do so, | 9:57 | |
but it was very clear that he was extremely happy | 10:00 | |
at the outcome. | 10:02 | |
The official policy of the Labor Party | 10:04 | |
with respect to defense is premised on a report | 10:08 | |
in which the key statement is that Australia faces no threat | 10:11 | |
from the outside for the next 10 years, | 10:15 | |
for at least the next 10 years. | 10:17 | |
That's the atmosphere within which policy is being made, | 10:19 | |
and it's quite clear that there is no disposition | 10:22 | |
at the moment to do anything | 10:24 | |
about increasing their own armed strength. | 10:26 | |
And when you ask them, the more knowledgeable ones | 10:29 | |
are concerned about this. | 10:32 | |
They feel that Australia oughta do more to defend itself. | 10:34 | |
But they are continuing to rely on the United States | 10:37 | |
as the ultimate source of strength. | 10:41 | |
The same thing occurs in Great Britain, I mean, in Japan. | 10:44 | |
When I talked to the editor | 10:49 | |
of one of the major newspapers in Japan, | 10:51 | |
he was, himself, extremely concerned | 10:54 | |
about the Russian and the Chinese threat to Japan. | 10:56 | |
He has always been a strong supporter | 11:03 | |
of a Japanese-American alliance, | 11:05 | |
always one of the people whom I would have regarded | 11:07 | |
as pro American, and he still is. | 11:10 | |
He personally felt that Japan | 11:14 | |
probably oughta be very concerned about its own safety, | 11:18 | |
but his attitude was that the constitution | 11:22 | |
which the U.S. forced on Japan after the war | 11:25 | |
makes it illegal for Japan to rearm, and that beyond that, | 11:28 | |
any government which sought to rearm on any major scale | 11:33 | |
would be out of office almost instantaneously | 11:37 | |
as a result of the reaction of the public at large. | 11:39 | |
So his attitude was, "Well, maybe we can't | 11:42 | |
"depend on the United States, | 11:44 | |
"but we have to depend on the United States. | 11:45 | |
"It's the only recourse we have." | 11:47 | |
- | Which concerns Japan more, Russia or China? | 11:51 |
- | I would say at the moment, | 11:54 |
the more immediate fear is that of Russia, | 11:55 | |
because of the Kuril Islands | 11:57 | |
and the fishing rights up in the north | 11:59 | |
and the dispute about that. | 12:00 | |
So, moreover, I think that the Japanese | 12:02 | |
kind of have a feeling that they know better | 12:05 | |
how to get along with the Chinese | 12:07 | |
than they do how to get along with the Russians. | 12:09 | |
Now this is an interesting thing, | 12:12 | |
because the fact is that while Japan has, in a way, | 12:13 | |
severed diplomatic relations with Taiwan | 12:18 | |
to renew them with mainland China, | 12:20 | |
the trade which it is now carrying on with Taiwan | 12:22 | |
is considerably larger than the trade | 12:25 | |
which it is carrying on with mainland China. | 12:27 | |
- | That's interesting. | 12:30 |
- | Of course, I must confess personally, | 12:31 |
with respect to Japan, I have very mixed feelings. | 12:33 | |
I don't know whether I am more worried | 12:35 | |
about the possibility that they will rearm | 12:38 | |
or about the possibility that they won't, | 12:40 | |
because neither one is a very happy thing. | 12:43 | |
The fundamental thing that comes out of all of this, | 12:45 | |
in my mind, is that there is a real vacuum of power, | 12:48 | |
not only in the Far East but in the world. | 12:54 | |
When Great Britain was the defender and guardian | 12:56 | |
of the world's peace and it gave up that task, | 13:01 | |
we were there to take over. | 13:04 | |
Now that we are giving up that task, | 13:07 | |
and I see no other way to describe | 13:08 | |
what's happening in this country | 13:11 | |
than to say that we are giving up this task, | 13:12 | |
that there is a tremendous isolationist movement | 13:14 | |
sweeping the country, that we are going to retreat back, | 13:17 | |
into not even a fortress America, | 13:20 | |
but we have the same attitudes, it seems to me, | 13:22 | |
that our defense needs no strengthening | 13:26 | |
that Japan and Australia has. | 13:29 | |
I don't believe that they have different attitudes, | 13:30 | |
really fundamentally on this, than the American people have. | 13:33 | |
I think we are all living, in a sense, in a fool's paradise, | 13:36 | |
in a sense of supposing that a vacuum can exist | 13:39 | |
for a long time without any harm. | 13:42 | |
Now maybe that's right. | 13:45 | |
I had breakfast in Tokyo with a group of graduates | 13:47 | |
of the University of Chicago, | 13:51 | |
half Japanese and half Americans | 13:52 | |
who were over there for various business ventures, | 13:54 | |
and one of the Americans there maintained very strenuously | 13:57 | |
that the vacuum idea was a meaningless concept | 14:02 | |
because the world was perfectly safe | 14:06 | |
without any single great power there to guard it. | 14:08 | |
I hope he's right but I fear he is not, | 14:11 | |
and I believe, therefore, that the next five or 10 years | 14:15 | |
are going to be very dangerous years, | 14:18 | |
not only in the Far East, but throughout much of the world. | 14:20 | |
- | Those are interesting and certainly provocative comments | 14:24 |
on the political aspect of what you observed, | 14:28 | |
Professor Friedman, I wonder if we might turn now | 14:31 | |
to the economic side. | 14:33 | |
How's the inflation in Chile these days? | 14:35 | |
(laughter) | 14:38 | |
- | Well, Chile is a textbook example | 14:39 |
of what a real honest to God inflation is like. | 14:43 | |
I may say inflation plagues all of the countries I was at, | 14:48 | |
but with rather differences in Chile, | 14:51 | |
which I'll come back to in more detail in a moment. | 14:53 | |
Inflation is currently running at the rate | 14:56 | |
of something like 300 to 400% a year. | 14:58 | |
In Australia, it's currently running at 17% a year, | 15:02 | |
and it's been going up in Australia. | 15:07 | |
In Japan, it's currently running at about 15% a year, | 15:11 | |
and it's been coming down from about 30%. | 15:14 | |
So that all three countries, like the United States, | 15:20 | |
have had an inflation problem. | 15:24 | |
The Chilean problem is the easiest one to describe. | 15:27 | |
It is a carryover from a long period | 15:31 | |
of developments in Chile. | 15:35 | |
It's tempting to think of it | 15:37 | |
as simply a momentary phenomenon | 15:39 | |
arising out of the Allende regime, | 15:42 | |
the overthrow of the Allende regime | 15:45 | |
and the establishment of a military junta, | 15:47 | |
but the roots go back much earlier than that. | 15:50 | |
They really go back to something like 1908, | 15:53 | |
when Chile was one of the earliest countries, | 15:56 | |
certainly in the Western Hemisphere, | 16:00 | |
to start on the road toward a welfare state. | 16:02 | |
And fundamentally, the basic problems of Chile today | 16:05 | |
are very much the same as the basic problems | 16:09 | |
of Great Britain today. | 16:12 | |
They stem ultimately from a welfare state, | 16:13 | |
carried to a point at which, on the one hand, | 16:16 | |
it absorbs so large a fraction of the nation's income | 16:20 | |
that it cannot be met with the kind of taxes | 16:24 | |
that people are really willing to bear. | 16:27 | |
And on the other hand, it involves so large an intervention | 16:30 | |
and private activity as to destroy individual incentive | 16:33 | |
and the free market system. | 16:36 | |
I was very much struck by the parallel, in this respect, | 16:38 | |
not only in Chile, but all of us | 16:42 | |
are going down the same path. | 16:44 | |
From this longer range point of view, | 16:45 | |
Chile is a cautionary tale that we should all look at | 16:48 | |
with great care, because it brings out in sharp contrast | 16:51 | |
the possible consequences of the past | 16:59 | |
that Britain has followed, that the U.S. has followed, | 17:01 | |
that Australia is following, that Japan is following. | 17:04 | |
The common feature of all of the countries around the world | 17:08 | |
is that as it goes down onto a welfare state line, | 17:11 | |
the fraction of income which government spends | 17:14 | |
tends to go up. | 17:17 | |
As that fraction tends to go up, | 17:18 | |
it becomes more and more difficult | 17:20 | |
to finance it out of taxes, which the public | 17:22 | |
is voluntarily willing to bear. | 17:24 | |
There is more and more pressure to turn | 17:26 | |
to the inflationary tax. | 17:28 | |
Moreover, it stimulates social unrest, | 17:29 | |
because to begin with in this process, | 17:33 | |
it's possible to provide substantial benefits | 17:36 | |
to small groups at very minor costs to a large group. | 17:38 | |
Taxpayers are a large silent majority. | 17:42 | |
As the process proceeds, | 17:47 | |
this becomes more and more difficult, | 17:49 | |
and finally you're getting to the point | 17:51 | |
where 50% of the people are trying to get funds | 17:53 | |
out of the other 50%. | 17:55 | |
And at that point, you have added to the economic problem, | 17:56 | |
the political problem of a breakdown in political cohesion. | 18:01 | |
I think Britain is very close to the end of that process, | 18:05 | |
as I've said before on these tapes. | 18:08 | |
Now, go back to the Chilean case, | 18:11 | |
it's a relatively poor country. | 18:13 | |
The per capita income in Chile in real terms, | 18:15 | |
if you believe the numbers that come out, | 18:18 | |
is about 1/10th of that in the United States. | 18:20 | |
That's probably an exaggeration | 18:23 | |
because these international comparisons | 18:25 | |
tend to overstate differences in income, | 18:28 | |
but it is a relatively poor country. | 18:30 | |
That country is one which had a very long tradition | 18:33 | |
of a political democracy in a reasonably free society, | 18:36 | |
the longest in South America. | 18:40 | |
The Allende regime brought that to an end, | 18:43 | |
but the Allende regime was a logical consequence | 18:45 | |
of what had gone down before. | 18:48 | |
It was not introducing anything very different. | 18:49 | |
It was just carrying out to their logical implication | 18:52 | |
many of the laws that had been passed before. | 18:55 | |
The junta took over from the Allende regime. | 18:58 | |
It is not a free government by any manner or means. | 19:01 | |
It certainly is a dictatorial government, | 19:05 | |
but Chile had only bad choices at that time. | 19:08 | |
To turn to the economic side of it, | 19:14 | |
the basic situation is that government spending in Chile, | 19:17 | |
at all levels, amounts to about 40% of the national income. | 19:21 | |
That's not very different from the percentage | 19:26 | |
in the United States, and it's very much lower | 19:28 | |
than the percentage in Great Britain, | 19:30 | |
where government spending is now approaching 60% | 19:32 | |
of the national income. | 19:34 | |
But, as I mentioned before, Chile is a far poorer country | 19:36 | |
than either Britain or the United States. | 19:39 | |
Of the 40% of the national income being spent by government, | 19:45 | |
roughly 30% is currently being raised by taxes. | 19:50 | |
I might mention that the 40% is lower and the 30% is higher | 19:53 | |
than at the end of the Allende regime, | 19:58 | |
when the Allende regime had driven the spending higher | 20:01 | |
and taxes lower. | 20:05 | |
And several of the first acts of the government that came in | 20:07 | |
were to try to reform the collection | 20:12 | |
of taxes on the one hand | 20:13 | |
and to hold down government spending on the other. | 20:15 | |
But they have not gone anything like, so far, | 20:17 | |
as they would like to go, or as would be desirable to go. | 20:20 | |
At any rate, the bare facts, 40% government spending, | 20:23 | |
30% taxes, leaving 10% that has to be raised | 20:26 | |
in some other way. | 20:30 | |
With inflation at rates which ran as high as 900%, | 20:32 | |
at the very early stages of the takeover by the junta, | 20:37 | |
capital market has been almost completely destroyed, | 20:42 | |
so there is no way the government can finance | 20:44 | |
any of its expenditures by issuing bonds or securities. | 20:46 | |
Although, of course, any that it does issue are indexed. | 20:49 | |
The only other recourse is printing money, | 20:54 | |
and here again, the situation is very simple. | 20:57 | |
The Allende regime took over | 21:00 | |
what had been private commercial banks, | 21:01 | |
they are all in government hands. | 21:03 | |
In order to try to offset its own inflationary actions, | 21:05 | |
it raised reserve requirements on them | 21:09 | |
so that 85% of the assets of the government banks | 21:11 | |
are pure cash. | 21:14 | |
As a result, it's approximately correct to say that 100% | 21:16 | |
of all money issued is pure government money, | 21:21 | |
and that 100% of all new money issued | 21:24 | |
goes to pay for government spending. | 21:26 | |
It's a straight, clear, fiscal deficit, | 21:27 | |
as clear as anything could be. | 21:30 | |
Now, the arithmetic of it works out very simply. | 21:32 | |
The tax base is the amount of cash. | 21:36 | |
Inflation is a tax. | 21:39 | |
And here's a clear case that the tax base | 21:40 | |
is the amount of cash that the public holds. | 21:43 | |
The amount of cash that the public holds, | 21:45 | |
currency and deposits at these government banks, | 21:48 | |
is equal in amount to about 3% of the national income. | 21:51 | |
Now that's worth stopping to contemplate a moment. | 21:54 | |
In the United States, a corresponding number | 21:59 | |
would be something like 30% for M-1, | 22:00 | |
50% or more for M-2. | 22:06 | |
But with inflation rates of 900%, or now 300%, | 22:09 | |
obviously people want to hold their cash balances | 22:14 | |
down to a very minimum. | 22:17 | |
And they have managed to reduce them to about 1/10th | 22:18 | |
of the level that we hold, say to 3%. | 22:22 | |
Another way of looking at that is | 22:26 | |
that total spending is probably something | 22:28 | |
like two or three times national income | 22:30 | |
because you buy it wholesale | 22:32 | |
from the manufacturers or retail | 22:35 | |
so that gross payments are a much higher number | 22:36 | |
than national income, which is only the final value | 22:39 | |
of goods and services. | 22:42 | |
And I roughly estimated that the money stock | 22:44 | |
is enough to handle about three days payments, | 22:47 | |
so that people have to live from hand to mouth, | 22:49 | |
and a large fraction of the attention | 22:52 | |
of all of the people in Chile | 22:53 | |
goes to how do they make their receipts | 22:54 | |
exactly match their payments, | 22:56 | |
so that they won't have to hold any of this wasting cash. | 22:58 | |
There's no doubt in my mind that Chile cannot really recover | 23:02 | |
until it gets the inflation under control | 23:05 | |
for this kind of a reason. | 23:08 | |
At any rate, the tax base has been reduced | 23:09 | |
to a very low level of 3% of the national income. | 23:13 | |
If on a tax base of 3% of the national income, | 23:17 | |
you're gonna a raise a sum of money | 23:19 | |
equal to 10% of the national income, | 23:21 | |
you need a tax rate of over 300%. | 23:23 | |
And that's exactly what you have, | 23:26 | |
you have a rate of inflation of something over 300%, | 23:27 | |
with a rate of money creation, | 23:31 | |
which increases the quantity of money | 23:32 | |
by something over 20% a month. | 23:34 | |
That's a clear pure case. | 23:37 | |
I mentioned that the inflation had come down | 23:40 | |
from some 900% to about 300% as a result of the measures | 23:44 | |
which the government had already taken | 23:48 | |
in reducing expenditures and raising the explicit taxes. | 23:50 | |
Along with that decline came, as people should expect, | 23:54 | |
but most people might not, an increase in unemployment, | 23:59 | |
so that unemployment in Santiago | 24:02 | |
has doubled over the past year | 24:04 | |
from about four or 5% to close to 10%. | 24:05 | |
And although the government is a military junta, | 24:09 | |
it is very much concerned about the level of unemployment, | 24:11 | |
and the one refrain we heard repeatedly | 24:15 | |
in talking to government people and people in power | 24:18 | |
was that how would such and such a measure | 24:21 | |
affect the level of unemployment. | 24:24 | |
From the longer run point of view, | 24:26 | |
the policy which Chile must follow, if it is to recover | 24:30 | |
and have a respectable economic situation | 24:34 | |
must include a sharp reduction in government spending. | 24:37 | |
There is no other way, in my opinion, | 24:42 | |
on which it can get itself into a position | 24:44 | |
where it can really cut the inflation down sharply. | 24:47 | |
And unless it cuts the inflation down sharply, | 24:51 | |
it is hard to see that it can recover | 24:53 | |
in a very effective way. | 24:57 | |
On the other hand, one of the amazing things | 24:59 | |
is how a country can operate under such conditions. | 25:03 | |
Walking in the streets, going in the stores, | 25:06 | |
you would not have the feeling | 25:08 | |
that there was anything really very abnormal going on. | 25:09 | |
The capacity of the human being to adjust | 25:12 | |
to what seemed like intolerable circumstances is tremendous. | 25:15 | |
- | Thank you very much, Professor Friedman. | 25:20 |
Perhaps we can hear a little more | 25:21 | |
about Australia's and Japan's economy on your next tape. | 25:22 | |
If you subscribers would like to pose questions | 25:26 | |
for Dr. Friedman to answer | 25:28 | |
or suggest subjects for him to discuss, | 25:30 | |
please write them to Instructional Dynamics Incorporated, | 25:32 | |
450, four five oh, East Ohio Street, Chicago, 60611. | 25:36 | |
Dr. Friedman will be with you again in a couple of weeks. | 25:43 |
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