Tape 32 - Inflation
Loading the media player...
Transcript
Transcripts may contain inaccuracies.
- | Hello again and welcome as Instruction Old Dynamics | 0:02 |
brings you up to date on the latest developments | 0:04 | |
in the economic field. | 0:07 | |
With Dr. Paul Samuelson, Professor of economics at MIT. | 0:08 | |
This biweekly series is designed to broaden your knowledge | 0:12 | |
and all phases of the economic world. | 0:16 | |
Professor Samuelson, this is the week of July 21st. | 0:18 | |
Let's begin today by looking at inflation. | 0:22 | |
- | One certainly you needs patience in watching | 0:25 |
the passing business scene in a time of transition | 0:28 | |
like the present one. | 0:32 | |
The same old guessing game goes on. | 0:35 | |
Are we making a dent in the inflation? | 0:38 | |
And I must say that the latest bit of news | 0:44 | |
are certainly contradictory | 0:50 | |
and pointing many different directions. | 0:54 | |
(coughing) | 0:57 | |
Let me review some of these latest announcements. | 0:58 | |
Production was very strong in June. | 1:07 | |
It went up at an annual rate of more than 8%. | 1:11 | |
That is certainly a surprise. | 1:17 | |
Inventory accumulation was extremely strong. | 1:22 | |
It was over 10 billion, perhaps $11 billion | 1:28 | |
at an annual rate following a 12 billion | 1:31 | |
annual rate in April. | 1:35 | |
This is much more than most of the macro models | 1:38 | |
that I have seen, had been forecasting. | 1:42 | |
The inventory composition is interesting | 1:47 | |
because goods are not piling up in the retail stores. | 1:53 | |
As far as the May figures are concerned, | 1:57 | |
retail inventories were actually down | 2:00 | |
particularly in a durable goods. | 2:03 | |
So if you had been entertaining | 2:05 | |
the notion that automobiles and big ticket white items | 2:07 | |
were piling up around the nation, | 2:15 | |
that seems not to have been the case, | 2:17 | |
but the increase in inventories | 2:20 | |
was in the manufacturing section. | 2:22 | |
We don't know of course whether there was an involuntary | 2:26 | |
component in this or not, | 2:30 | |
but as yet there is no strong apparent evidence | 2:33 | |
that the good deal of this inventory | 2:37 | |
accumulation was involuntary. | 2:39 | |
What about unemployment? | 2:43 | |
For two months, April and May, unemployment | 2:46 | |
had held up 3.5% of the labor force | 2:51 | |
up from the all time low of 3.3% at the turn of the year. | 2:55 | |
Now that we have the latest figures for June, | 3:03 | |
they show a drop in unemployment | 3:10 | |
back toward the low levels, back to 3.4%. | 3:13 | |
The hours worked per week | 3:22 | |
and the overtime are still quite strong. | 3:25 | |
All of these are elements of strength in a picture. | 3:30 | |
There is very spotty price performance. | 3:36 | |
If you fish for signs of an abatement | 3:39 | |
of the rate of price increase, you can find some such signs, | 3:43 | |
but if you fish for signs of a continuation | 3:47 | |
of the rate of inflation, | 3:49 | |
you also can find evidence on that side. | 3:51 | |
One thing is clear, housing stats are again down. | 3:57 | |
The latest figure for June shows a seasonally adjusted | 4:02 | |
annual rate of 1,400,446. | 4:08 | |
That's the fifth consecutive month of decline. | 4:14 | |
And I've just taken the Chart | 4:20 | |
and I've extrapolated these recent declines, | 4:23 | |
the last three declines and a good case can be made | 4:27 | |
that by the end of the year housing stats, | 4:32 | |
we'll be done to 1,300,000 or even less, | 4:33 | |
particularly if the housing boom has been living | 4:39 | |
on past credit commitments. | 4:44 | |
So it could bite in even harder in the remaining | 4:47 | |
months of the year. | 4:52 | |
Housing them is a definite, favorable case | 4:53 | |
where the tight credit policy seems to be giving | 5:00 | |
some payoff in anti inflationary effect. | 5:06 | |
What does this mean for the Gross National Product? | 5:12 | |
Perhaps by the time you hear my voice, | 5:16 | |
the official announcements will have been made | 5:19 | |
of the second quarter Gross National Product. | 5:21 | |
I can only guess when I note how strong | 5:24 | |
production was in the quarter | 5:30 | |
and I note how low unemployment was in the quarter, | 5:32 | |
and when I note the strength in inventory, | 5:36 | |
that I've already commented on, | 5:41 | |
that makes me think that the official report when it comes, | 5:44 | |
we'll show quite a considerable dollar growth. | 5:50 | |
Now to be sure the drop in housing stats, | 5:55 | |
would be on the other side of the ledger, | 5:58 | |
but the actual expenditure on housing | 6:01 | |
that is going on today comes from earlier stats, | 6:04 | |
and so I think that number is more significant | 6:08 | |
for what's to come than for making a retroactive | 6:12 | |
guesS as to what the second quarter | 6:16 | |
official statistics will show. | 6:18 | |
The first quarter GMP in money terms was 903 billion. | 6:21 | |
A little bit more than that, | 6:26 | |
I think that something like 920 billion | 6:28 | |
must be a fairly reasonable guess for the second quarter. | 6:33 | |
Now that's an interesting number | 6:41 | |
because I just happened to look at one of the usual | 6:44 | |
macro economic models and I found that rather striking | 6:50 | |
how much that model could be off even in the current quarter | 6:56 | |
in which it is issued. | 7:02 | |
I'm speaking now of the Horton school model. | 7:06 | |
Professor Lawrence Klein who is an authority on econometrics | 7:10 | |
and on macro model building is in charge of that. | 7:15 | |
He's one of the pioneers in this country | 7:19 | |
of such models and this particular model, | 7:23 | |
as I remember receiving in the mail | 7:30 | |
just a few days ago called for unemployment | 7:33 | |
in the second quarter, averaging 3.7%. | 7:37 | |
A more accurate figure we now know is three and 3.4 to 3.5%. | 7:41 | |
That's quite an error for the current quarter. | 7:51 | |
His increase in GMP is more like 13 or 14 billion. | 7:56 | |
Then like the 16 or 17 billion, | 8:00 | |
which seems to me on the basis of fragmented data | 8:03 | |
to be a indicated. | 8:07 | |
Of course, he's in good company, | 8:10 | |
quite a number of forecasters | 8:12 | |
have been looking for a tapering off | 8:14 | |
in the second quarter. | 8:17 | |
I spoke to professor, Alan Melcher some little time ago | 8:20 | |
and he considers himself to be a monetarist, | 8:26 | |
but he's his own brand of monetarist. | 8:30 | |
And he told me that he doesn't go along with these long lags | 8:33 | |
that some monetarists assume between changes in monetary, | 8:38 | |
in money supply stimuli | 8:45 | |
and the final a response affects in the economy. | 8:50 | |
You know, people speak of 16 month lags | 8:54 | |
and some of the macro model builders | 8:59 | |
who build money into their system having money affect | 9:02 | |
the interest rate and that sort of thing, | 9:06 | |
have the effect of money spread over eight quarters. | 9:10 | |
Well, still others and I suppose | 9:15 | |
this would be the more Orthodox and Conventional Monetarist | 9:18 | |
group would say that the money has its effects | 9:21 | |
in about six months time, six months to nine months. | 9:24 | |
If you took the Federal Reserve Board | 9:29 | |
of St Louis Multiple Correlation reduced form, | 9:32 | |
that has a much of its effect | 9:37 | |
by nine months and by 12 months, | 9:40 | |
it has all of its effect by it's nature. | 9:43 | |
Well, Melcher thinks that the lags | 9:49 | |
are even shorter than that, and so anyone who adopted | 9:53 | |
his philosophy would, I think have been in for a gentle | 9:58 | |
surprise in the second quarter. | 10:02 | |
Actually, let's turn to the money supply, | 10:07 | |
which a monetarist would attach a primary importance | 10:12 | |
to what has been happening to that. | 10:17 | |
You'll recall that the Fed was making the money supply | 10:21 | |
narrowly defined as adjusted demand deposits | 10:26 | |
and currency grow at a very slow rate after December. | 10:31 | |
Then in April, there was a rather mysterious | 10:36 | |
aberration upward attributed by some to the accident | 10:40 | |
of Easter and what the effects | 10:46 | |
of that were on the euro dollar market. | 10:49 | |
And, especially related to some tax payment dates, | 10:52 | |
I thought that at least I could discern no change | 11:00 | |
in federal reserve intentions. | 11:03 | |
The Federal Reserve doesn't always achieve its intentions, | 11:05 | |
but on that basis, I thought that the April figures | 11:07 | |
would be an aberration and would be followed | 11:11 | |
by a rundown in May. | 11:14 | |
And, so it seems to have been, we have gone | 11:17 | |
throughout this year more or less at a rate of increase | 11:23 | |
of the money supply on an annual basis | 11:28 | |
of less than 3%, 2.5% | 11:31 | |
then I haven't seen the very latest figures. | 11:35 | |
But, I think that can't be very far from the story, | 11:38 | |
both over the last three months | 11:42 | |
and over the last six months. | 11:44 | |
This is quite a change from the earlier period. | 11:46 | |
And those who have been advocating gradualism | 11:50 | |
of course have been very concerned | 11:54 | |
that a so type position should be maintained | 11:56 | |
for so long a period of time. | 12:02 | |
As I have indicated, I am not, I do not share | 12:06 | |
that concern fully. | 12:11 | |
I realize that there are dangers that the lag effects | 12:13 | |
of this may come in later and start | 12:16 | |
too in Avalanche downward. | 12:18 | |
But, I think that you can reverse your policy later. | 12:21 | |
And, I think that if you take seriously the business | 12:27 | |
of cutting down on inflation and inflationary expectations, | 12:32 | |
good policy from an optimal control of viewpoint, | 12:36 | |
and I'm using here the technical jargon | 12:41 | |
of the electrical engineer, or the system builder | 12:43 | |
who has an optical control system for the astronauts | 12:48 | |
to get to the moon, well optimal control theory says, | 12:54 | |
I think that you should overshoot | 13:00 | |
and then you should come back. | 13:02 | |
Many people are joining my ranks. | 13:07 | |
There is a widespread belief that the administration | 13:10 | |
has now abandoned its previous course of gradualism | 13:14 | |
and is now in favor of activism. | 13:21 | |
Of course, the administration speaks with many tongues. | 13:25 | |
I won't say that the there forked tongues, | 13:29 | |
but there is no one mind that seems to be guiding them. | 13:32 | |
And so if you still believe in gradualism, | 13:38 | |
I dare say you can find in the utterances | 13:41 | |
that come out of Washington, something on your side. | 13:44 | |
And if you think that a gradualism is being abandoned, | 13:48 | |
then you can find something on that side. | 13:51 | |
I don't think there's any question | 13:57 | |
that the people who two months ago believed in gradualism | 13:59 | |
and we're in a position to express opinions | 14:04 | |
inside the administration have changed their mind. | 14:07 | |
I think they realize now perhaps wrongly, | 14:11 | |
perhaps they've just run out of patience | 14:15 | |
just when they should have had it | 14:18 | |
and that they should have just held to that position | 14:19 | |
because of the delayed favorable effects | 14:22 | |
that are about to come. | 14:24 | |
But rightly or wrongly, I think that they've been scared | 14:25 | |
by the business news that's been coming in. | 14:29 | |
They've been scared by the continuation of price pressures. | 14:31 | |
They've been scared by the wage settlements, | 14:34 | |
which are beginning to take place. | 14:37 | |
And I don't think they're frowning at the Federal Reserve | 14:40 | |
for being staunch in holding down on the money supply | 14:43 | |
then they themselves would earlier have recommended. | 14:48 | |
Now, I don't say that there aren't some holdouts | 14:51 | |
in the administration but that's always true of a large, | 14:53 | |
group of people. | 14:57 | |
Let's turn briefly to the stock market | 15:01 | |
and to the money market. | 15:03 | |
These have been a very blue days | 15:05 | |
for the bowls in Wall Street. | 15:08 | |
The market has sagged day after day after day. | 15:11 | |
There was even a day just the other day | 15:16 | |
when not a single stock reached its high for the year | 15:19 | |
on the New York Stock Exchange, | 15:23 | |
which is a fairly rare event | 15:25 | |
because even when hundreds of stocks | 15:27 | |
are reaching on any one day, | 15:30 | |
they're low for the year, | 15:32 | |
there usually are some stalwarts who have moved | 15:34 | |
against the trend, a dozen or more who do reach | 15:36 | |
their high for the year. | 15:41 | |
And there are exceptionally few of those. | 15:43 | |
The long awaited summer rally has not yet occurred. | 15:48 | |
The talk about summer rallies | 15:54 | |
and about seasonal patterns is mostly nonsense. | 15:57 | |
It's mostly something that writers have market letters | 16:03 | |
do when they have nothing else to do, they're marking time. | 16:06 | |
So they're just chewing the fat and writing filler. | 16:10 | |
There are a few statistically significant monthly trends, | 16:20 | |
but it's quite doubtful that anybody could trade | 16:24 | |
on them and recover his commissions. | 16:28 | |
And nevertheless, hope springs eternal, | 16:31 | |
and I was just reading the latest issue of Forbes | 16:36 | |
that has just come out. | 16:39 | |
And one of my amusements is to read | 16:43 | |
the various financial columnists of a magazine like that. | 16:45 | |
I may say that these financial columnists | 16:49 | |
are as good as any and probably better | 16:51 | |
than a most, but these poor chaps have to write | 16:53 | |
considerably in advance of the time | 16:58 | |
that the magazine comes out. | 17:01 | |
Now, I can sympathize with anyone in this business | 17:03 | |
who's in that position. | 17:07 | |
It does, however, make them often look silly | 17:09 | |
because quite a number of those commentators, | 17:13 | |
when the Dow Jones industrial averages | 17:15 | |
were around 870, well, and they were writing for publication | 17:17 | |
just to come out about now, we're giving all sorts | 17:22 | |
of weighty reasons why the market | 17:28 | |
might hold at that level and turn around. | 17:31 | |
As I say, it makes for a certain amount of Shodan froideur | 17:37 | |
to read the magazine newly out when the Dow Jones averages | 17:42 | |
are having trouble in a holding in the eight forties, | 17:50 | |
to read these previous prognostications. | 17:54 | |
It tells you what that kind of prognostication is worth. | 17:57 | |
It doesn't mean that you could ostrich | 18:02 | |
like, put your head in the sand | 18:05 | |
and not read that kind of thing | 18:07 | |
because at least these fellows don't stay permanently wrong | 18:08 | |
and with the lag by reading them, you do keep in touch | 18:13 | |
with the actual trends. | 18:17 | |
It's the same old business apparently. | 18:20 | |
The competition from the bond market | 18:23 | |
from high interest rates is extremely hard on stocks. | 18:26 | |
In addition, the profit outlook | 18:31 | |
is nothing to write home about. | 18:35 | |
The threatened erosion of profits probably is going on. | 18:38 | |
In real terms, it certainly is going on | 18:46 | |
and it probably will continue for some time into the future. | 18:49 | |
So that leaves you only with the peace news | 18:54 | |
to titillate the market | 19:01 | |
and perhaps just the prospect of inflation itself. | 19:03 | |
As far as peace news is concerned, | 19:08 | |
there hasn't been any particularly | 19:10 | |
and Wall Street was able to go up eight points | 19:14 | |
in the euphoria of the successful launching | 19:18 | |
of the astronauts. | 19:21 | |
And who knows after man has successfully walked on the moon, | 19:23 | |
that might be a worth a point | 19:29 | |
or so on the Dow Jones average, | 19:31 | |
but it's not of such stuff | 19:34 | |
that lasting summer rallies are made. | 19:35 | |
What about the bond market? | 19:40 | |
Again and again, we've discussed this important question. | 19:46 | |
At least it's important to people in the money market. | 19:51 | |
It's the number one question which they've been asking | 19:53 | |
whether the turn has actually come | 19:57 | |
and I've been dragging my heels | 20:02 | |
and been a little bit skeptical. | 20:04 | |
I don't want to, to be stubborn, | 20:06 | |
and I don't wanna be dogmatic. | 20:11 | |
So let me weigh the elements. | 20:12 | |
In one of my earlier tapes, | 20:19 | |
I said that I found it quite instructive | 20:20 | |
to watch every Monday the Chart of municipal bonds. | 20:22 | |
Municipal bonds are only one part of the money market, | 20:31 | |
but somehow, they are intermediate in the money market | 20:33 | |
and they feel the effects of very diverse, | 20:37 | |
movements and they capture those effects pretty well. | 20:43 | |
So over the years every Monday, I have clipped out | 20:47 | |
of the Wall Street Journal, | 20:49 | |
the Chart and I carried my wallet for the week. | 20:51 | |
As I look at the last Chart, | 20:55 | |
you will when you hear this, have one more to look at. | 20:59 | |
The interest yields on municipal has been dropping | 21:04 | |
for one, two, three, four weeks. | 21:08 | |
The drop is not all that great, | 21:12 | |
but it's about from a yield of 5.82 let's say to 5.68 | 21:14 | |
and that's a pretty big drop in terms of basis points. | 21:26 | |
If that continues, of course, then I'm wrong | 21:31 | |
in my earlier statement that I would feel more confident | 21:34 | |
that by Labor Day, they tied on my term. | 21:39 | |
Particularly if by Labor Day, we see some signs | 21:43 | |
of diminution of the dollar rate of growth of the GMP. | 21:47 | |
and I've just told you that I don't yet see those signs | 21:51 | |
in the second quarter figures, at least my estimate | 21:54 | |
of the second quarter. | 21:58 | |
This drop in yields means that the people | 22:02 | |
who in the last few weeks have been accumulating | 22:05 | |
in municipals are probably corporates in general, | 22:07 | |
have been feeling pretty happy. | 22:11 | |
They have not found the bonds, | 22:14 | |
they've just bought going down in price | 22:16 | |
as has been the experience for a low | 22:18 | |
these many, many years. | 22:20 | |
They actually, have a little profit on their purchase. | 22:21 | |
And it may be that this trend will continue. | 22:27 | |
Against that possibility of course is the fact that money | 22:31 | |
is still tightening and the calendar will increase | 22:36 | |
and tends to increase every time the market stabilizes. | 22:44 | |
I'd like to mention the possibility | 22:49 | |
in one of the earlier tapes I was brainstorming | 22:52 | |
and the mentioning remote, possibilities. | 22:56 | |
This time I'd like to mention a possibility | 23:00 | |
that that's not all that remote, | 23:02 | |
although it's not necessarily the most signal | 23:04 | |
probable, continuously that might happen. | 23:07 | |
We could have a term when, | 23:11 | |
we would have a bull market in bonds | 23:13 | |
and bear market in stocks. | 23:17 | |
The argument goes as follows: | 23:25 | |
As interest rates drop, | 23:28 | |
you ordinarily expect that to be good for stocks. | 23:29 | |
And I think that's true in the steady state. | 23:32 | |
Low interest rates are good for stocks | 23:36 | |
and high interest rates are bad for stocks. | 23:38 | |
But remember, if interest rates stop rising | 23:40 | |
and we'll just stabilize, and perhaps just sag very slowly, | 23:44 | |
then the bond market is a sitting pigeon | 23:50 | |
and a lot of the action which might go into bullying stocks | 23:53 | |
upward might under those circumstances | 23:56 | |
try to go into the bond market. | 23:59 | |
And so as business continues to weaken | 24:04 | |
in real terms, the stock market | 24:08 | |
frightened by profit prospects is languishing. | 24:12 | |
There are plenty of opportunities in bonds, | 24:19 | |
10% capital gains to be made over a six month period. | 24:22 | |
And you can even leverage that if you like. | 24:27 | |
So that would be quite the formidable competition | 24:30 | |
before for the stock market. | 24:35 | |
Let's turn now to the international situation. | 24:39 | |
There seems to be no hard, interesting | 24:43 | |
and exciting news at the moment. | 24:46 | |
More or less, more of the same. | 24:49 | |
But I do think that I'm getting to see some developments. | 24:51 | |
For one thing, I do believe that behind the scenes | 24:55 | |
there is beginning to be among men of affairs, | 24:59 | |
men in government, men in the big banks, | 25:05 | |
more and more of an acceptance | 25:10 | |
of some kind of exchange rate flexibility. | 25:11 | |
I think that the experts in the big banks | 25:15 | |
when they come together and their technical meetings | 25:19 | |
now take very seriously the sliding peg arrangement. | 25:21 | |
They're compromisers by nature. | 25:27 | |
And, although a lot of those smart fellows | 25:29 | |
could make lot of money on a floating exchange rate basis | 25:32 | |
and when the world is ripe for that and turns to that, | 25:36 | |
they will do very well. | 25:41 | |
They are quite happy about going to the halfway house | 25:43 | |
of the sliding adjustable pig. | 25:48 | |
Now, if I am converted to an adjustable pig, | 25:54 | |
that is of some significance as typical of what happens | 25:57 | |
to an academic and academics influence their students, | 26:01 | |
they influenced their graduate students, | 26:05 | |
that they may even do a little financial journalism | 26:07 | |
and occasionally have an influence upon public officials. | 26:10 | |
But I think it's much more significant | 26:15 | |
when these hard headed men in the money market, | 26:17 | |
begin to be converted toward the sliding pig. | 26:21 | |
For one thing that shows that they think the system | 26:26 | |
is moving in that direction because they won't waste | 26:30 | |
their time on Utopian, on feasible gadgets. | 26:32 | |
For another thing, they are not only the effect | 26:37 | |
of the change of opinion, but they are causes | 26:40 | |
of a further change in opinion. | 26:42 | |
And so, I would, prepare myself and then revising | 26:44 | |
my textbook, which I'm just now engaged in. | 26:49 | |
I am increasing the emphasis upon the flexibility | 26:51 | |
of exchange rates cause I think | 26:56 | |
I can see it in cards. | 26:57 | |
There is talk that there'd be a money crisis | 27:02 | |
in the next two months. | 27:04 | |
I don't know why you couldn't say that | 27:05 | |
in any two month period. | 27:07 | |
The French with the new President | 27:09 | |
have announced a budget cut. | 27:13 | |
There's a certain amount of austerity there. | 27:15 | |
The British seem to find that the medicine of the evaluation | 27:19 | |
is working very, very slowly, | 27:25 | |
but it does seem to be working. | 27:28 | |
I wouldn't say the pound is out of the woods, | 27:31 | |
but there are signs of the British balance | 27:33 | |
moving in the right direction. | 27:37 | |
It leaves us of course, with the mark. | 27:39 | |
The mark is very ripe, in my opinion for a reevaluation. | 27:43 | |
But, you never really can be sure | 27:49 | |
because of the politics of the situation. | 27:52 | |
However, if I had to have a hedge position, | 27:54 | |
I would certainly give considerable probability weight | 27:58 | |
to upward valuation of the mark. | 28:03 | |
Along with it, I suppose the gilder | 28:11 | |
and some related the currencies | 28:12 | |
could be expected to make a move. | 28:15 | |
The Italian lira being a more questionable item. | 28:17 | |
- | Thank you, Professor Paul Samuelson. | 28:23 |
Instructional Dynamics welcomes your questions, | 28:25 | |
comments or suggestions. | 28:28 | |
Write IDI, 166, East Superior Street, Chicago 60611. | 28:30 |
Item Info
The preservation of the Duke University Libraries Digital Collections and the Duke Digital Repository programs are supported in part by the Lowell and Eileen Aptman Digital Preservation Fund