Tape 158 - Mid-year guessing's
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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 July 16th. | 0:10 | |
- | It's been a little time since I've reported | 0:14 |
on the current economic outlook, | 0:17 | |
and just what's been happening. | 0:20 | |
So, let me take advantage of the fact that | 0:22 | |
I've begun to receive a whole new batch of forecasts. | 0:26 | |
These take account of the latest developments | 0:30 | |
up through the middle of the year, | 0:34 | |
but of course they don't yet have the official statistics | 0:37 | |
for the second quarter. | 0:41 | |
The first thing I have to say is that | 0:44 | |
I don't know for sure whether, to put the problem naively, | 0:46 | |
we have had a recession or not. | 0:50 | |
By that I mean I don't know whether, for sure, | 0:54 | |
the second quarter showed a further drop | 0:58 | |
in real growth continuing the very rapid | 1:02 | |
drop in real growth of the first quarter, | 1:08 | |
which you'll recall was about 6.3%, | 1:10 | |
or whether it was flat at zero, | 1:14 | |
or whether it showed a small positive increase. | 1:18 | |
You might ask, what's the importance of that | 1:23 | |
small difference between a little plus and a little minus, | 1:28 | |
and my answer is to agree implicitly | 1:31 | |
with any such questioner. | 1:35 | |
It's not important, but it is important | 1:37 | |
for the semantic question which people | 1:40 | |
tax themselves about, whether or not we have had | 1:45 | |
a conventional recession. | 1:49 | |
The fact that we can argue about whether | 1:52 | |
the second quarter was up or whether it was down | 1:55 | |
suggests to me that | 1:58 | |
it was pretty much a flat quarter, | 2:01 | |
and whatever the first numbers that come out on revision | 2:04 | |
the best guess we can make about that revision now | 2:07 | |
is pretty much flat. | 2:11 | |
It's very important to know that the business cycle | 2:13 | |
didn't continue downward at the first quarter rate. | 2:18 | |
It's very important to know that there wasn't | 2:21 | |
a V bottom at about the end of the first quarter, | 2:24 | |
so that the second quarter showed | 2:27 | |
a sparkling increase like that say | 2:30 | |
in the V bottom recovery of 1958. | 2:36 | |
It's important, in other words, to know the facts, | 2:43 | |
which are that the second quarter continues to be weak, | 2:46 | |
but not as weak as the first quarter. | 2:52 | |
Now, you might say, you might press me, | 2:56 | |
and say if you had to make a small bet, | 3:00 | |
we'll make it small bet, just so that we don't | 3:03 | |
let the man who has the most money | 3:07 | |
and the most risk tolerance | 3:10 | |
dominate the bidding and betting, | 3:15 | |
now suppose though you had to pick a small bet | 3:18 | |
as to whether the real growth was positive or negative. | 3:19 | |
Zero of course is impossible if you carry it | 3:24 | |
to enough decimal places, virtually impossible. | 3:26 | |
I guess I would have to bet that there was | 3:30 | |
a small increase. | 3:34 | |
I would base this on many factors, | 3:36 | |
on the fact that the Federal Reserve Board | 3:39 | |
index of production shows an increase | 3:41 | |
in the months that, of the second quarter, | 3:46 | |
for which we have data. | 3:49 | |
I would base it upon the fact that | 3:52 | |
two of the three of the newer forecasts that I'm looking at | 3:55 | |
carry the second quarter at a positive increase. | 4:01 | |
I'll identify them in a moment, | 4:07 | |
so you can form your own judgment about their validity. | 4:09 | |
However, if two out of three say that it's plus, | 4:13 | |
that means that there must be one which says | 4:16 | |
that it's minus, and I have to take that into account. | 4:18 | |
I also have to take into account that there was | 4:21 | |
a kind of flash announcement from Washington, | 4:23 | |
rather earlier I think than most flash announcements | 4:28 | |
about the second quarter, and I think probably | 4:31 | |
a indiscrete and unauthorized one, | 4:33 | |
but it was by Mr. Rush, the president's chief | 4:35 | |
economic advisor, and my recollection is that | 4:39 | |
he said that the provisional guesses were that | 4:44 | |
you had a positive second quarter. | 4:49 | |
Well, let's turn to higher authority | 4:52 | |
to the computer print outs which I have before me. | 4:57 | |
I have the, a new Wharton model. | 5:03 | |
This is the July 3, 1974 control forecast. | 5:08 | |
This is in no particular alphabetical order. | 5:15 | |
Well, let me do it in reverse alphabetical order. | 5:17 | |
A W for Wharton came first. | 5:20 | |
Second comes D for Data Resources. | 5:23 | |
This is Dr. Otto Eckstein | 5:27 | |
of Harvard's organization's forecast. | 5:29 | |
This is of June 25th, a week before the Wharton model, | 5:32 | |
and then finally I have the, | 5:38 | |
a most recent forecast from Chase Econometrics | 5:43 | |
of Dr. Michael Evans which was done on June 24th. | 5:48 | |
If you must forecast, forecast frequently. | 5:54 | |
That's the precept. | 5:57 | |
It certainly is a precept which is followed, | 5:58 | |
because I believe that I have two different forecasts | 6:00 | |
for the month of June from Chase Econometrics | 6:03 | |
and that's rather typical, also from Wharton, | 6:06 | |
in many months. | 6:11 | |
Now, what do they show? | 6:15 | |
Starting with the minority of view, | 6:18 | |
which also comes first alphabetically, | 6:21 | |
Dr. Michael Evans stands by his guns that | 6:25 | |
the recession is a bit more pervasive | 6:29 | |
than the other forecasters with a good track record think, | 6:31 | |
and although he doesn't have a 6 1/3% | 6:36 | |
annual rate decline as in the fourth quarter | 6:42 | |
he does have a minus .8 annual rate of growth. | 6:44 | |
That means a minus 1% rate of growth. | 6:48 | |
More than that, he now has extended his negative growth, | 6:51 | |
bare negative growth, into the third quarter. | 6:57 | |
So, he speaks of about minus 2/10 of a percent. | 7:00 | |
That's about as near to flat as you could get, | 7:05 | |
but still resolving the doubt of the last decimal place | 7:07 | |
he comes out on the negative side, | 7:12 | |
and naturally since his trough comes so late | 7:14 | |
in this year in comparison with most other forecasters | 7:18 | |
that means that for the fourth quarter he has | 7:21 | |
only a 1 1/2% annual rate of growth. | 7:24 | |
Indeed, and this is the most significant thing, | 7:29 | |
not whether we were in a recession, | 7:32 | |
but looking to see what the climate for 1975 looks like. | 7:34 | |
We have to say that there's been a definite deterioration | 7:40 | |
of the outlook on the part of most of the forecasters, | 7:44 | |
both with respect to real growth | 7:48 | |
and with respect to the rate | 7:50 | |
of overall inflation, so that for the year of 1974 | 7:54 | |
as a whole there's almost a minus 1% decline | 8:01 | |
in comparison with calendar '73 as a whole, | 8:06 | |
and for 1975 Dr. Michael Evans now has only | 8:09 | |
a 2.4% increase. | 8:13 | |
He furthermore, you will recall, was | 8:17 | |
for a brief moment at least one of the most optimistic | 8:19 | |
with respect to reductions in the cost of living | 8:23 | |
and what that would do to the interest rate structure. | 8:26 | |
I won't say that Chase Bank was even for an instant | 8:30 | |
quite as optimistic about the drop in rates | 8:34 | |
which the Citibank was on two occasions. | 8:37 | |
Well, perhaps it's a tie. | 8:41 | |
But I can't report on the Citibank because I don't have | 8:44 | |
a detailed forecast by that organization, | 8:49 | |
but I can report that the Chase is now | 8:53 | |
fairly pessimistic about the long run price deflater. | 8:56 | |
And actually, for '75 over '74 | 9:01 | |
you have very little abatement. | 9:06 | |
It is one digit. | 9:08 | |
It's 8.9%, but that's just about 9%, | 9:09 | |
which is getting very close to the 10% | 9:14 | |
at which two digits begin. | 9:16 | |
I think I reported last time on the long run forecast | 9:19 | |
in through 1982 and 1983 made by the Chase organization | 9:24 | |
and the same changed | 9:29 | |
outlook with respect to the average rate of inflation | 9:34 | |
that we can look forward to ahead, | 9:38 | |
not look forward to with any eagerness, | 9:40 | |
but perhaps with some resignation. | 9:42 | |
That you'll recall was something like a 5 1/2% | 9:46 | |
for the average year later in the decade, | 9:53 | |
not the old stable prices, | 9:59 | |
which nobody, of course, has been thinking about | 10:04 | |
for a long time. | 10:05 | |
But alas, not the two or 3% that some | 10:06 | |
optimists had been hoping for in the long run. | 10:10 | |
With that of course comes Treasury Bill rates. | 10:16 | |
I might as well give them to you, | 10:20 | |
because there is a school of thought, you know, | 10:23 | |
which believes that the stock market will react | 10:26 | |
to the proximate cause of the behavior | 10:33 | |
of the interest rate. | 10:36 | |
And so, the Treasury 91 day bill rate was 7.60 | 10:38 | |
in the first quarter of the year. | 10:44 | |
It's believed here to have been around 8.31, | 10:47 | |
call it 8 1/3. | 10:51 | |
For the third quarter it won't be down much, | 10:52 | |
7.99, which I have to call 8%, | 10:55 | |
and 7.60 in the fourth quarter of the year. | 10:58 | |
Indeed, the lowest it ever gets is | 11:04 | |
in the first quarter of the next year, which is 6.94, | 11:08 | |
and how much the stock market can make of a boom | 11:14 | |
by a drop in the Treasury Bill rate | 11:20 | |
of only about 140 points at the best, | 11:25 | |
and at the worst you're right back | 11:32 | |
by the end of this period, which is the, | 11:34 | |
if you can believe it, the third quarter of 1976, | 11:37 | |
we're back at the 8 1/3% | 11:40 | |
of the second quarter. | 11:43 | |
So, the stock market will have to make its way apparently | 11:46 | |
by its forecast of earnings growth, | 11:51 | |
and perhaps the belief that the stock market | 11:55 | |
is already underrated. | 11:59 | |
So now, let's turn to the Wharton School model, | 12:03 | |
because it is | 12:08 | |
the next most pessimistic | 12:13 | |
I think of the three models that I have before me. | 12:17 | |
You cannot put on a scale | 12:22 | |
of most pessimistic and least pessimistic | 12:26 | |
forecasts of this sort because they don't all | 12:30 | |
go in one direction. | 12:33 | |
The Wharton School model, let me just give you | 12:36 | |
the expectation, it calls for positive growth, | 12:38 | |
unlike the Chase model, in the second quarter. | 12:42 | |
It says that there was about a 1.42% | 12:45 | |
annual rate of increase. | 12:47 | |
But surprisingly, the current quarter, | 12:49 | |
the third quarter we're now in, | 12:52 | |
shows an even lower positive rate of growth | 12:54 | |
than the second quarter, only 1 1/4%, 1.25, | 12:56 | |
1.90 in the fourth quarter of the year. | 13:01 | |
So, for the year as a whole it's not quite as bad | 13:05 | |
as the Chase. | 13:09 | |
It isn't a minus .8, but it is minus .22 | 13:10 | |
for the year as a whole. | 13:13 | |
But what is really discouraging is that | 13:15 | |
right up through the first quarter of 1976, | 13:18 | |
about the time we're gonna be celebrating | 13:21 | |
the Bicentennial of the United States, | 13:23 | |
there is no good progress in sight | 13:27 | |
of returning to a par rate of growth. | 13:30 | |
2.08 in the first quarter of the year, percent, | 13:33 | |
1.69, that's a drop you'll see in the second quarter, | 13:37 | |
1.64 in the third quarter, 2.47 in the fourth quarter, | 13:41 | |
2.86, and my recollection is that | 13:45 | |
this is a definite come down from just two months earlier, | 13:49 | |
the May forecast by the Wharton School model. | 13:53 | |
On the rate of inflation, the Wharton School model | 13:57 | |
is fairly pessimistic, but of course it has been | 14:01 | |
fairly pessimistic all along. | 14:05 | |
By pessimism none of these people say | 14:07 | |
that in the fourth quarter we're gonna have | 14:10 | |
two digit price inflation. | 14:12 | |
They're optimistic with respect to non-economists, | 14:15 | |
who have not yet uncrossed their fingers that | 14:18 | |
we will continue to be maybe until the end of time, | 14:22 | |
until kingdom come, in at least two digit inflation. | 14:25 | |
That's what the plain person obviously definitely fears. | 14:29 | |
Well, 9.68% in the second quarter. | 14:35 | |
That's a drop from 11 1/2% in the implicit deflater, | 14:39 | |
and down finally to the last quarter | 14:43 | |
you're still at about nine and, | 14:46 | |
oh, call it 9 1/8% annual rate of increase, | 14:50 | |
just barely below the two digit number, | 14:53 | |
and never even through the first part of 1976 getting | 14:56 | |
below 6.9% rate of price increase. | 15:00 | |
Let me finally turn to Data Resources' forecast. | 15:06 | |
These were all made at the same time. | 15:11 | |
I remind you that none of them had | 15:12 | |
the second quarter actual data as a springboard to make, | 15:14 | |
and you still find that Dr. Eckstein is among | 15:19 | |
the most optimistic of the forecasters, | 15:23 | |
but even he has a tempered fairly severely | 15:27 | |
his rate of optimism. | 15:31 | |
He shows a plus 1.6% in the second quarter. | 15:33 | |
That's lower than he had earlier. | 15:37 | |
That jumps to 3.5% if the word jump is the right word, | 15:40 | |
then by the fourth quarter we're at 4.1%. | 15:45 | |
As a matter of fact, that doesn't look like such bad | 15:49 | |
performance, because you're back to par | 15:52 | |
by the fourth quarter of the year, | 15:54 | |
and the rate of price inflation according to the implicit | 15:56 | |
price deflater is 7.6%. | 15:59 | |
We probably ought to translate this | 16:04 | |
into the Consumers Price Index, | 16:06 | |
because that's what the politicians | 16:07 | |
and the editorial writers and the plain person thinks about. | 16:10 | |
That's 8.1%. | 16:15 | |
You see how times have changed when a commentator | 16:18 | |
can speak of an 8.1% rate of increase | 16:22 | |
in the cost of living as if it were good news | 16:26 | |
and grasp at the straws of that sort. | 16:30 | |
Well, to try to make the news a little bit better, | 16:33 | |
but not a lot better, by the fourth quarter of 1975, | 16:36 | |
that's the end of 1975, the Consumers Price Index | 16:40 | |
increase in the cost of living is down to 6.4%, | 16:45 | |
just below 6 1/2%. | 16:51 | |
It's no wonder that you're beginning to get | 16:54 | |
the escalator clauses in labor contracts | 16:57 | |
and it's no wonder that this moment, as I spoke, | 17:01 | |
I just heard the announcement | 17:05 | |
on the radio last night there are more strikes | 17:07 | |
going on at this moment than at any time | 17:11 | |
since the 1940s. | 17:15 | |
I presume that means that there are more man days | 17:16 | |
being lost by strikes at, in this week | 17:19 | |
than the statistics have reported | 17:24 | |
since the last part of the 1940s, | 17:27 | |
and the head of the AFL, | 17:30 | |
from whom we haven't heard recently, | 17:35 | |
Mr. George Meany, came on TV | 17:38 | |
on network broadcast with, so to speak, | 17:42 | |
blood in his eye, and said that | 17:46 | |
labor is tired of being pushed around, | 17:49 | |
and was going to go out and get it. | 17:52 | |
Well, I don't think any of us can be surprised by that fact, | 17:57 | |
particularly if you remember some of the reports | 18:02 | |
that I've been giving from Dr. Arnold Weber, | 18:06 | |
the provost of Carnegie Mellon and who served | 18:11 | |
on the wage board, who was part of the Nixon team. | 18:14 | |
He's been warning that the settlements | 18:19 | |
will be 10% and more, and so, | 18:21 | |
the new settlements have tended to be. | 18:26 | |
I'm giving you the best forecasts of the experts, | 18:33 | |
but the most of them have some alternative forecasts, | 18:38 | |
and maybe we ought to take a look at some of those. | 18:43 | |
Well, first let's take the biggest optimist | 18:50 | |
for the second quarter, Data Resources. | 18:55 | |
They have an alternative forecast, | 18:59 | |
just in case there's something in the data that | 19:00 | |
their seismograph isn't picking up I guess. | 19:03 | |
It's made on 6/27, the next day after the 6/26 forecast, | 19:05 | |
and it shows a minus 1% rate of change, | 19:12 | |
and I think that that doesn't mean that they think | 19:16 | |
that that's likely, but it's a polar case | 19:18 | |
which they regard as of interest. | 19:21 | |
The important thing is that they show even weaker | 19:23 | |
growth throughout 1975. | 19:30 | |
In fact, in the first quarter of the year | 19:34 | |
they're down to only a 1.8% rate of growth, | 19:36 | |
and of course that means their unemployment | 19:39 | |
number is higher. | 19:41 | |
If the experts can't agree on the rate of real growth, | 19:44 | |
and if they can't agree completely on the rate of increase | 19:49 | |
in prices, then you can be sure | 19:53 | |
that they don't agree completely on the rate | 19:56 | |
of unemployment, and you get some interesting differences | 19:59 | |
there, which I ought to report on. | 20:03 | |
Although for the short run, the Chase forecast | 20:06 | |
is the most pessimistic, the Chase forecasting equations | 20:10 | |
for the labor supply are such that | 20:16 | |
they do not come out with a God awful unemployment rate. | 20:20 | |
In fact, Chase shows the unemployment rate | 20:24 | |
never getting above 5.7%, | 20:28 | |
which it builds up to, | 20:31 | |
only in about the second quarter of 1975. | 20:33 | |
When you turn to Eckstein, who is more optimistic | 20:40 | |
on real growth, he never shows unemployment | 20:44 | |
more than 5.8%, but that's what it is, | 20:47 | |
and that's where it holds for a full four quarters in 1975 | 20:50 | |
according to the Eckstein model. | 20:55 | |
Lots of laws have been being repealed in economics | 20:58 | |
as elsewhere, and one of the casualties, | 21:02 | |
at least for the moment, is Okun's law. | 21:05 | |
Those of you who have followed economic discussions at all | 21:09 | |
closely this last decade will know what I'm referring to. | 21:13 | |
I'm referring to the rule of thumb | 21:17 | |
of Dr. Arthur Okun. | 21:21 | |
It was generated when he was a staff member | 21:23 | |
of Kennedy's council of economic advisors, | 21:26 | |
and it's been a darn good rule of thumb | 21:29 | |
through thick and thin. | 21:32 | |
It tells you how much unemployment will go up | 21:34 | |
for each percentage change in a real growth of the GNP. | 21:37 | |
All you have to remember is a simple little number | 21:45 | |
like three and then apply the three to one rule. | 21:47 | |
It's a summary of a more complicated state of affairs, | 21:52 | |
namely, how much the labor supply changes, | 21:58 | |
how many women drop out of the labor market, | 22:01 | |
how many supplementary wage earners come | 22:03 | |
into the labor market when the major breadwinner | 22:06 | |
loses his job. | 22:11 | |
It also embodies what happens to short run productivity. | 22:13 | |
But in any case, so much for law in economics | 22:17 | |
as against Newton's laws in physics | 22:23 | |
which will last at least for centuries | 22:26 | |
until an Einstein comes along and slightly improves on them, | 22:28 | |
this particular law in economics has not worked very well | 22:33 | |
in predicting unemployment in the first, second | 22:35 | |
quarter of this year. | 22:39 | |
The last numbers that I know of were 5.2% unemployment | 22:41 | |
for the month of June which are on the low side | 22:46 | |
for anyone who used Okun's law | 22:52 | |
and previous patterns of experience. | 22:55 | |
Now, this projection of the failure of Okun's law | 22:58 | |
seems to prevail for the Chase model | 23:01 | |
and I think in a measure for the Eckstein model. | 23:04 | |
It must prevail for less of such a measure | 23:09 | |
for the Wharton model, because I ought to report | 23:13 | |
on all contrary opinion, here the Wharton model | 23:17 | |
is the minority, but it's where the forecasters were | 23:20 | |
about six months ago. | 23:24 | |
It expects that with sluggish real growth | 23:27 | |
unemployment will continue to rise from the 5.28%, | 23:30 | |
which it puts down for the second quarter of the year, | 23:35 | |
seems a little high to me, to 5.47 for the third quarter, | 23:40 | |
to 5.66 for the fourth quarter, to 5.81 going into '75, | 23:46 | |
to 5.98 going into the second quarter, | 23:52 | |
to breaking the 6% barrier by the third quarter of '75, | 23:56 | |
and by the fourth quarter of '75 you're at 6 1/4%, | 24:00 | |
and when the computers stop drooling, | 24:04 | |
the last, the first quarter of 1976 | 24:07 | |
the unemployment was still rising. | 24:10 | |
It was then about 6 1/3%. | 24:12 | |
I think you'll probably get a fairly interesting | 24:15 | |
political situation if that actually comes to pass, | 24:20 | |
although you'll have 7% inflation according | 24:26 | |
to the Wharton model, which is a steady reduction, | 24:29 | |
very slow, but steady reduction | 24:32 | |
from the last recorded numbers. | 24:36 | |
You will have slowly growing unemployment, | 24:40 | |
and that will begin to involve more and more people, | 24:44 | |
and no doubt will be associated with longer duration | 24:48 | |
and more human suffering and presumably with more clout. | 24:54 | |
Well, now where do I come out on these particular numbers? | 25:02 | |
I guess I have to | 25:06 | |
depart from the optimus when it comes | 25:11 | |
to price forecasts. | 25:15 | |
I've been seeing some, a recent monetarist forecast | 25:23 | |
which suggest that by the end of the year | 25:26 | |
prices will be down to about 5 1/2 or 6% annual rate | 25:30 | |
in that general ballpark level. | 25:36 | |
The argument is that the only amount | 25:38 | |
of the price inflation which we've been experiencing | 25:41 | |
that can really be accounted for by the behavior | 25:45 | |
of the monetary aggregates, and that's of course what counts | 25:48 | |
to a monetarist, is about five or 6% | 25:51 | |
and by some magic which I fail to understand | 25:54 | |
the system is gonna get down to that number | 25:59 | |
even though it was earlier able to depart. | 26:01 | |
Well, I think that you have to take into account | 26:04 | |
exactly what you believe to be the supply situation | 26:09 | |
with respect to food and energy and raw materials generally | 26:12 | |
and I have to report what I think I mentioned earlier | 26:18 | |
that there has been some deterioration | 26:21 | |
in the crop outlooks not only in the United States, | 26:24 | |
but around the globe. | 26:27 | |
You had late rain planting, so that the estimated | 26:30 | |
corn crop is down. | 26:35 | |
You had late wheat planting. | 26:38 | |
So, there's a bit of a risk in the Dakotas | 26:41 | |
that an early frost, which can happen | 26:45 | |
with some probability, may catch the crop. | 26:48 | |
You've had a similar relationship in Russia, | 26:51 | |
although the situation is less clear there. | 26:56 | |
As was feared, the monsoon in India seems to be | 26:58 | |
on the disappointing side and late, | 27:03 | |
and I don't know whether the Indians will come | 27:05 | |
in with the purchasing power, | 27:08 | |
but if the famine is too awful, | 27:10 | |
perhaps the more affluent part of the world, | 27:14 | |
including let us hope the newly affluent | 27:18 | |
Middle East, may chip in some effective purchasing power | 27:21 | |
to get some of the scarce supplies of grain | 27:26 | |
bid away from the world free market | 27:29 | |
to the Third World of the Sahara and of Southeast Asia. | 27:32 | |
Therefore, I think probably that I would bet my chips | 27:40 | |
on less than two digit inflation in the fourth quarter | 27:47 | |
if we use the implicit price deflater. | 27:50 | |
But I would rather bet on eight and 9% | 27:53 | |
than on five or 6%. | 27:59 | |
With respect to real growth, | 28:05 | |
the situation is less clear to me. | 28:09 | |
I see that housing has taken a terrific beating, | 28:13 | |
and I see that a lot is gonna depend upon autos. | 28:17 | |
I guess on the whole I would think that | 28:24 | |
the old model cars | 28:30 | |
will be sold out for a longer period than is usually, | 28:35 | |
that even if the new model cars have a weak demand, | 28:40 | |
which I'm fearful of, that won't take much of a toll | 28:45 | |
from real output and employment in this year, | 28:50 | |
because you have to fill the pipeline. | 28:53 | |
So, I go along with a weak real recovery overall | 28:54 | |
throughout the economy, | 29:01 | |
but with the economy at the end of the year | 29:04 | |
based upon the present pattern of evidence | 29:06 | |
not coming into the new year with as much strength | 29:09 | |
as one could earlier have expected. | 29:13 | |
With respect to interest rates, it seems to me | 29:19 | |
that we have corollaries from the implicit pessimism | 29:23 | |
about improvement in the rate of inflation. | 29:30 | |
If the rate of inflation gave good signs | 29:33 | |
by the fall of being on its way to drop down | 29:37 | |
towards the five or 6% rate, then I think | 29:41 | |
there is every reason to expect that the tremendous | 29:45 | |
differential between the prime rate | 29:49 | |
and the federal funds rate which now prevails | 29:51 | |
and the Treasury Bill rate would diminish. | 29:55 | |
And so, the stock market would get good news | 29:58 | |
in the form of successive reductions | 30:01 | |
of the prime rate. | 30:05 | |
But since my best guess, | 30:08 | |
I don't rule out the possibility of that. | 30:11 | |
I want to give a fair indication of the measure | 30:13 | |
of imprecision in my mind, of my ignorance. | 30:16 | |
That's about as important that I can do | 30:21 | |
for anybody who asks for my advice | 30:26 | |
as to give them my best midpoint estimate. | 30:27 | |
But since I think that is not the most likely behavior | 30:32 | |
for the price level, then I have to think that | 30:36 | |
the Federal Reserve will still have reason for concern, | 30:39 | |
will still have reason to keep | 30:42 | |
a tight rein on the interest rates, | 30:44 | |
and do whatever is necessary with respect | 30:46 | |
to the total monetary aggregate | 30:50 | |
to make such a program effective. | 30:52 | |
And so, I think that I am not one of those | 30:54 | |
who expects a prime rate of seven or eight or 9% even | 30:58 | |
by the, well, 9% is a better possibility, | 31:05 | |
by the end of the year, and therefore any of you | 31:09 | |
who are trying to guess the behavior of Wall Street | 31:12 | |
based upon the comparison with interest rates | 31:15 | |
should, I think, take that into account. | 31:19 | |
- | If you have any comments or questions | 31:24 |
for Professor Samuelson, address them | 31:26 | |
to Instructional Dynamics Incorporated, | 31:28 | |
450 East Ohio Street, Chicago, Illinois, 60611. | 31:31 |
Item Info
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