Tape 119 - Inflations, Monetary Development, Prospects
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Transcript
Transcripts may contain inaccuracies.
Rose Friedman | Hello, this is Rose Friedman | 0:02 |
inviting you on behalf of Instructional Dynamics | 0:04 | |
to another of our biweekly interviews | 0:07 | |
with Milton Friedman, Professor of Economics | 0:09 | |
at the University of Chicago. | 0:11 | |
We have just returned to our second home in Vermont | 0:13 | |
and are taping this interview on April 25, 1973. | 0:16 | |
The most conspicuous element on the economic scene | 0:21 | |
at the moment is the extraordinary rise | 0:24 | |
in the consumer price level. | 0:26 | |
Especially the rise in food prices. | 0:28 | |
Milton Friedman | The price explosion is really | 0:30 |
outstanding and almost unbelievable. | 0:32 | |
For two months running, the Consumer Price Index | 0:35 | |
has risen an annual rate of 10% a year. | 0:40 | |
Those are rates of rise of the Consumer Price Index | 0:43 | |
we associate with South American Banana Republics, | 0:46 | |
not with the United States of America. | 0:50 | |
In addition, wholesale prices as well have been rising | 0:53 | |
at incredibly rapid rates. | 0:58 | |
In examining this recent rise, rapid rise, | 1:01 | |
in the Price Index, what most recognize | 1:06 | |
is part of it is furious. | 1:08 | |
The Price Index was not telling the truth | 1:11 | |
during the period of price control, | 1:15 | |
during the freeze in Phase Two. | 1:18 | |
Actual prices were undoubtedly rising more rapidly | 1:21 | |
than the Price Index because the people subject | 1:24 | |
to the Price Index were finding ways | 1:27 | |
to conceal the real price. | 1:29 | |
The emergence of Phase Three prevented all of this | 1:32 | |
to come out from under cover. | 1:35 | |
And in addition, it gave many businesses an incentive | 1:37 | |
to report even higher prices than they intended to charge. | 1:40 | |
Because there was a wide spread skepticism | 1:44 | |
about how long Phase Three would continue, | 1:46 | |
and whether it might not be replaced | 1:49 | |
by a return to a more rigid price control | 1:53 | |
in which case it was desirable | 1:57 | |
on the part of business people to have a high base price. | 1:59 | |
Exactly that same phenomenon occurred | 2:04 | |
just before August 15, 1971 | 2:06 | |
when the freeze was initially introduced. | 2:09 | |
Because of the large amount of talk in months prior | 2:11 | |
to that date about the possibility of price control | 2:14 | |
many businesses raised their stated list prices | 2:17 | |
in order to have a high base for | 2:20 | |
the price control period. | 2:24 | |
Much more attention has been devoted to the fact | 2:27 | |
that this is primarily a food price rise. | 2:30 | |
And commentator after commentator has noted | 2:32 | |
that in rises in the price of food are | 2:35 | |
in large part caused by features | 2:38 | |
particular to the food industry. | 2:41 | |
Weather, the great rise in World demand for food and so on. | 2:44 | |
All of that is correct. | 2:50 | |
And yet I do not believe that one can dismiss | 2:51 | |
that part of the rise in the Consumer Price Index | 2:54 | |
which can arithmetically be traced to food prices | 2:58 | |
as simply an aberration. | 3:01 | |
After all, if food prices rise | 3:03 | |
by a rapidly large amount, | 3:07 | |
that leaves consumers with less purchasing power | 3:10 | |
to spend on other things. | 3:12 | |
And our ordinary theory would lead us to expect | 3:13 | |
that other prices would rise less rapidly as a result. | 3:15 | |
There is no systematic reason to expect | 3:20 | |
that a rise in food prices, | 3:23 | |
an abnormally high rise in food prices | 3:24 | |
would make the rise in prices in general | 3:28 | |
any larger than it otherwise would be. | 3:30 | |
It would merely mean a redistribution. | 3:31 | |
The rise in prices in general must be a result | 3:33 | |
of the general demand, of the general level of expenditure. | 3:36 | |
And the question of which particular prices rise | 3:40 | |
depends on particular conditions of supply and demand. | 3:42 | |
Thus I would not regard myself the extraordinarily | 3:45 | |
rapid rise in food prices as an explanation | 3:48 | |
of the extraordinarily rapid rise in consumer prices. | 3:51 | |
More over, the rise in consumer prices | 3:54 | |
has not been restricted to food. | 3:56 | |
Other prices have been rising as well | 3:58 | |
and that is equally true in the wholesale price area. | 3:59 | |
So, while I think it is fair to say | 4:04 | |
that the actual rate of rise in prices | 4:07 | |
has probably been less than the 10% that has been recorded. | 4:09 | |
It has nonetheless been at an extraordinary | 4:14 | |
and astounding level. | 4:17 | |
My subscribers know that I have been saying | 4:19 | |
for many months now that I thought the deceleration | 4:21 | |
of inflation levels produced in reaction | 4:24 | |
to the recession of 1970, | 4:27 | |
had come to an end. | 4:32 | |
That the trough rate of price rise | 4:33 | |
was probably reached in the middle of 1972. | 4:38 | |
It's extraordinarily difficult to make such a judgment | 4:41 | |
because of the effect which the freeze Phase One | 4:43 | |
and Phase Two had in distorting all these figures. | 4:46 | |
But nonetheless, as best you can judge, from the figures, | 4:48 | |
I would say, that sometime between April and August 1972 | 4:52 | |
mark the trough and the rate of price rise | 4:57 | |
for both consumer prices and wholesale prices. | 4:59 | |
In the general price deflator, | 5:03 | |
the price deflator implicit in the National Income Figures | 5:05 | |
the trough is reached in the third quarter of 1972. | 5:11 | |
Again, perfectly consistent with that. | 5:15 | |
A mild rise in the fourth quarter | 5:17 | |
and then the explosion to a 6% rate of rise | 5:19 | |
in the first quarter of '73. | 5:22 | |
So that, I am not surprised at seeing | 5:25 | |
the acceleration of inflation continue. | 5:28 | |
That is what I expected. | 5:31 | |
But the magnitude of the acceleration | 5:33 | |
goes well beyond anything I had expected. | 5:34 | |
And it is a phenomenon | 5:37 | |
that has relatively few precedence in history. | 5:39 | |
Indeed, the only precedence I can think of | 5:42 | |
that matches this period, | 5:45 | |
is what happened in 1950 and '51 | 5:47 | |
immediately on the, or mostly in 1950, | 5:50 | |
immediately on the outbreak of the Korean War | 5:53 | |
when we had a tremendous expansion | 5:57 | |
in the rate of price rise. | 6:00 | |
Rose Friedman | Can you interpret this acceleration | 6:03 |
and inflation as a result of | 6:05 | |
the monetary explosion in late 1972? | 6:07 | |
Milton Friedman | I do not believe so. | 6:10 |
The timing is wrong. | 6:13 | |
As I have commented before, | 6:15 | |
while the rate, on the average, | 6:17 | |
the change in the rate of growth, the money, | 6:20 | |
tends to effect nominal income, that is dollar spending, | 6:24 | |
dollar income, with a lag of about 69 months. | 6:28 | |
That breaks down into two very different parts. | 6:33 | |
One, the effect on real output. | 6:35 | |
And one, the effect on prices. | 6:37 | |
The lag between the rate of monetary change | 6:38 | |
and the rate of change of prices is far longer. | 6:41 | |
On the average, it had been something | 6:44 | |
like 20 to 24, 26 months, about two years. | 6:46 | |
I think one can readily interpret the beginning | 6:50 | |
of an acceleration of inflation in mid '72. | 6:54 | |
As a result of the monetary acceleration | 6:58 | |
that began in February 1970. | 7:00 | |
That leads you to | 7:03 | |
a lag between the monetary change | 7:06 | |
and the acceleration of inflation. | 7:09 | |
Of something over two years, something like, | 7:11 | |
26-28 months which is a little bit long | 7:15 | |
but well within the rage of previous experience. | 7:19 | |
And similarly, | 7:23 | |
there is a reasonable correspondence between | 7:26 | |
the mildness of the acceleration of inflation | 7:29 | |
after mid '72 and the mildness | 7:32 | |
of the acceleration of monetary growth in 1970. | 7:35 | |
However, in order to interpret the recent price explosion, | 7:39 | |
as a reaction to the monetary change in late 1972, | 7:46 | |
one would have to | 7:52 | |
assume an extremely short lag. | 7:56 | |
Something like four or five months. | 7:58 | |
Which is very shorter than before and moreover, | 7:59 | |
the magnitudes don't compare. | 8:02 | |
We had to rapid a rate of rise in money. | 8:04 | |
There is no doubt. | 8:06 | |
But it was nothing like sizable enough | 8:07 | |
to produce a 10% rate of growth of consumer prices. | 8:10 | |
I think, what you're going to interpret, | 8:14 | |
is you have to look at more or less like this that, | 8:17 | |
the more rapid expansion of the money supply in 1972 | 8:22 | |
than in 1971, a rate of rise that the narrow money supply | 8:27 | |
of something like 8% a year | 8:31 | |
or the broader money supply of something | 8:32 | |
in the neighborhood of 10-12% a year. | 8:34 | |
That acceleration did with the usual | 8:39 | |
lag of six months or so, produce an acceleration | 8:43 | |
in the rate of total spending. | 8:47 | |
Total GNP, total consumer spending in the life. | 8:48 | |
But the actual acceleration in the rate of total spending | 8:52 | |
was larger than would have been expected | 8:55 | |
from the monetary change alone. | 8:57 | |
And the division of it between prices and output | 9:00 | |
had a larger fraction in prices | 9:03 | |
than one would have expected from past experience. | 9:04 | |
The questions is, how can one account for that? | 9:07 | |
I go back again to the Korean War episode I mentioned | 9:10 | |
which seems to me the closest comparable case | 9:12 | |
in terms of which to measure. | 9:15 | |
To measure this episode. | 9:16 | |
That time again, | 9:18 | |
the rate of rise in total spending | 9:21 | |
and the rate of rise in prices was much larger | 9:24 | |
than could be explained by the prior monetary expansion. | 9:26 | |
There was a prior monetary expansion | 9:29 | |
one could have expected from that source alone | 9:31 | |
an increased rate of rise of price. | 9:34 | |
But the prior monetary expansion was much too small | 9:37 | |
to explain the very rapid jump in consumer prices. | 9:40 | |
Consumer prices rose from one year to the next | 9:44 | |
at an annual rate of something like 15% a year. | 9:46 | |
Even higher than what we are now experiencing. | 9:48 | |
In reexamining that period, I have come to the conclusion | 9:51 | |
that it is one episode that I know in American history | 9:54 | |
or indeed in any other in which you could interpret | 9:57 | |
the expansion, the price experience and price inflation | 10:00 | |
as primarily a result of an autonomous change in velocity. | 10:05 | |
That is to say, as a result | 10:10 | |
of a desire by the public at large, | 10:13 | |
to spend much more rapidly relative to their liquid assets | 10:15 | |
than they had earning. | 10:19 | |
And in that case, the reason for that was easy to find. | 10:20 | |
A war unexpectedly broke out. | 10:24 | |
1950 memories were still very strong | 10:28 | |
of the extraordinary price rise | 10:31 | |
that had taken place during World War II. | 10:33 | |
To almost everybody, a war implied shortages | 10:35 | |
and higher prices and as a result, | 10:40 | |
there was generated a large amount of anticipatory buying. | 10:45 | |
That as people went out and spent at a higher rate | 10:48 | |
relative to their liquid assets than they had before | 10:51 | |
and this in turn resulted in a rise in velocity | 10:53 | |
and in higher prices. | 10:57 | |
I think something, the same thing, must have been happening | 10:59 | |
in these past few months. | 11:02 | |
The occasion for the fear of inflation | 11:06 | |
was not the outbreak of a war, indeed, | 11:08 | |
if you can call it that, the Vietnam War was ending. | 11:11 | |
I don't mean when I said if you can call it that, | 11:16 | |
I meant if you can call it the end. | 11:18 | |
I don't mean if you can call it the Vietnam War. | 11:19 | |
It's hard to know and view it the way that whole thing | 11:21 | |
is coming unstuck right now. | 11:23 | |
Whether it's proper to describe it in those terms. | 11:25 | |
That wasn't the cause this time. | 11:27 | |
What was the cause was a combination | 11:31 | |
of the | 11:35 | |
widespread belief that price controls were not much longer | 11:38 | |
going to be holding, | 11:42 | |
if they had at all, were not much longer going | 11:44 | |
to be able to hold back in check the inflationary pressures. | 11:46 | |
The rise in a few very visible prices of foods, | 11:53 | |
especially meats. | 11:58 | |
The substitution at the same time of Phase Three | 12:00 | |
for Phase Two and the widespread newspaper | 12:03 | |
and other speculation that an inflation was coming | 12:06 | |
all reinforced by the International Monetary Crisis | 12:09 | |
and the devaluation of the dollar | 12:13 | |
which were widely taken to made and | 12:14 | |
be further importance of future inflation. | 12:17 | |
In this atmosphere, I think expectations | 12:21 | |
must have been very unstable. | 12:23 | |
After all, there had been no significant, | 12:25 | |
substantial tapering off of inflation really | 12:29 | |
to cut out peoples, | 12:31 | |
really to reduce sharply peoples expectations | 12:33 | |
about future rate of price inflation. | 12:36 | |
And under these circumstances with all added on to this | 12:38 | |
all the talk of the energy crisis | 12:44 | |
which again brought up the specter of shortages. | 12:46 | |
The only way I can see that one can interpret | 12:50 | |
this episode is another autonomous jump | 12:52 | |
in consumer spending as a result of a fear | 12:55 | |
of further inflation. | 12:59 | |
Rose Friedman | In retrospect, what is your view | 13:00 |
of this whole experiment in price control? | 13:03 | |
Milton Friedman | Well, I hate to be in | 13:05 |
the position of simply saying I told you so | 13:07 | |
but my opinion of it in retrospect is identical | 13:10 | |
with what my opinion was in prospect. | 13:13 | |
This episode has simply fallen into line | 13:17 | |
with all previous episodes of price control that I know of. | 13:20 | |
For awhile, | 13:25 | |
it always looks as if the price control is working | 13:27 | |
because it suppresses symptoms. | 13:29 | |
In this particular episode, | 13:32 | |
the circumstances for the price control appearing | 13:34 | |
to operate favorably where particularly good | 13:37 | |
because inflation was tapering off in any event | 13:40 | |
and therefor, the price control could take credit | 13:43 | |
for what would have happened. | 13:46 | |
But, as in all such episodes in the past, | 13:49 | |
after a period of a year or so, | 13:52 | |
the difficulties started arising under the price control. | 13:55 | |
Then you have real troubles. | 13:57 | |
The Nixon Administration on this occasion | 13:59 | |
saw that those difficulties were arising, | 14:02 | |
and were coming to a head and so they thought | 14:04 | |
they would avoid the adverse effects of price control | 14:06 | |
by shifting to Phase Three and getting away from | 14:10 | |
the more severe, rigid controls. | 14:12 | |
The result was simply the kind of an explosion | 14:17 | |
that have had after a year or more | 14:20 | |
of price controls in other countries. | 14:23 | |
And particularly after | 14:25 | |
those price controls have been dropped. | 14:26 | |
We have exactly the same thing | 14:28 | |
in a more exaggerated form in 1946 | 14:29 | |
when the World War II price controls were dropped. | 14:32 | |
European countries have had exactly the same thing | 14:35 | |
when they have dropped price controls. | 14:37 | |
In addition, | 14:40 | |
the period of price control, | 14:42 | |
in addition to having no significant effect | 14:46 | |
on the underlying inflationary forces, | 14:49 | |
indeed if anything, producing a step up in those forces | 14:51 | |
by virtue of encouraging the Fed | 14:56 | |
to expand the money supply more rapidly | 14:58 | |
than it otherwise would, | 14:59 | |
and encouraging a larger government deficit | 15:01 | |
than otherwise would have occurred. | 15:03 | |
In addition to that, | 15:06 | |
in addition to causing distortions in such areas as lumber | 15:08 | |
and other sensitive areas, | 15:15 | |
this whole experiment has had one enormously costly effect | 15:19 | |
which we envisioned in advance | 15:24 | |
and which unfortunately will haunt us for many years. | 15:28 | |
And that is the miss-education of the public | 15:32 | |
which it has produced. | 15:35 | |
The public has been told, and had learned a lesson | 15:36 | |
that the price of peanuts is determined in the White House, | 15:40 | |
it is not determined in the market place. | 15:43 | |
It has learned that if anything happens | 15:46 | |
to a price they don't like, | 15:47 | |
either because their own wage doesn't go up fast enough | 15:49 | |
or because the price they have to pay goes up too fast, | 15:51 | |
that the thing to do is to yell and shout | 15:54 | |
for price control and wage control. | 15:56 | |
And moreover, the President in the administration | 15:59 | |
had no answer make | 16:01 | |
because they have encouraged that miss-education. | 16:03 | |
I believe from the long run point of view | 16:06 | |
this miss-education of the public at large | 16:08 | |
will turn out to have been the most serious price | 16:11 | |
that we have paid for this episode. | 16:14 | |
Just about three weeks before the freeze | 16:20 | |
on August 15, 1971 was imposed, | 16:25 | |
I wrote a News Week column | 16:28 | |
entitled Steady as You Go | 16:30 | |
in which I praised President Nixon and Secretary Shultz | 16:32 | |
for sticking to the policy of steady monetary policy, | 16:36 | |
steady fiscal policy, and no price and wage controls. | 16:41 | |
I may say that was not one of the more stellar | 16:45 | |
bits of clairvoyance that I have ever engaged in. | 16:48 | |
I couldn't have chosen | 16:51 | |
a worse date to publish that bit of praise | 16:52 | |
because just three weeks later came the August 15th freeze. | 16:55 | |
But it is interesting to go back and speculate now | 17:01 | |
and ask oneself how the economy would be, | 17:03 | |
what state it would be in, | 17:07 | |
if instead of shifting that policy, | 17:08 | |
that policy had been maintained. | 17:11 | |
On economic grounds, | 17:14 | |
there can be hardly any doubt that we would be | 17:16 | |
in fair better shape than we now are. | 17:18 | |
It might be that prices would be rising, | 17:21 | |
but it would have risen over the period | 17:23 | |
on the average as much as they did. | 17:24 | |
But you would not have had the sharp shocks to the economy. | 17:27 | |
A freeze for 90 days, then some expansion of prices, | 17:31 | |
post freeze bulge I should say first. | 17:35 | |
Then some expansion under Phase Two. | 17:38 | |
Then this business of going to Phase Three. | 17:40 | |
Then the rapid explosion of the past two months. | 17:42 | |
You would have had a much calmer and steadier atmosphere. | 17:45 | |
The answer will be, well it was politically essential | 17:48 | |
for Mr. Nixon to do something like this | 17:51 | |
in order to get reelected. | 17:53 | |
Again, retrospects makes clear that that was wrong. | 17:54 | |
In order for that to have been correct, it must be | 17:57 | |
that had a freeze not been imposed, in August 1971, | 18:00 | |
someone other than Senator McGovern | 18:05 | |
would have been nominated. | 18:07 | |
It's hard to see any link between the on and the other. | 18:08 | |
It's hard to see that without a freeze, | 18:11 | |
Senator McGovern would have failed as a nomination. | 18:14 | |
And once he got the nomination, | 18:16 | |
Mr. Nixon's reelection, | 18:18 | |
as it now seems in retrospect, was a cinch. | 18:19 | |
So I have a good deal of nostalgia | 18:23 | |
for what might have been in that respect. | 18:26 | |
Rose Friedman | A subscriber opens up | 18:29 |
the whole question of recent monetary development. | 18:30 | |
Mr. Ray Graham Jr asks, | 18:34 | |
I have noticed the monetary base | 18:36 | |
has been increasing somewhat. | 18:38 | |
Is that significant? | 18:40 | |
And could you please explain? | 18:41 | |
Milton Friedman | His questions is very pertinent | 18:44 |
to recent monetary developments | 18:45 | |
because what you have had in the past two or three months | 18:46 | |
is the sharp difference between | 18:50 | |
the rate of growth and the monetary base. | 18:53 | |
That is of what I sometimes call high powered money, | 18:56 | |
currency in the hands of the public | 18:58 | |
plus the reserves held by banks on the one hand | 19:00 | |
and the money supply however measured on the other. | 19:04 | |
If you start with the money supply, | 19:08 | |
M1, the narrow money supply, | 19:10 | |
currency and demand deposits, | 19:12 | |
over the past two months has risen at the rate of 4% | 19:13 | |
or in the past three months | 19:16 | |
at the rate of a little less than 1%. | 19:17 | |
The reason of course for that very sharp slowdown | 19:22 | |
was the attempt by the Fed to offset | 19:24 | |
the extraordinary and unintended rapid bulge | 19:28 | |
in the money supply in November and December of last year. | 19:31 | |
In terms of their earlier objectives, | 19:35 | |
they have succeeded in bringing back | 19:38 | |
the rate of growth measured over a year | 19:41 | |
to the 6% to which more or less | 19:44 | |
they have stuck for a long time. | 19:46 | |
As I have argued repeatedly, that 6% is too high a rate | 19:49 | |
and it would if continued produce | 19:53 | |
an acceleration of inflation. | 19:55 | |
It is also clear that the Fed regards it | 19:57 | |
as too high a rate and is currently aiming at a lower rate. | 19:59 | |
And I would not be surprised if the 4% rate | 20:02 | |
that has been achieved over the past two months | 20:05 | |
is more or less about the rate that they are aiming for. | 20:07 | |
If we look at M2, that too, | 20:12 | |
has over the past two or three months been rather moderate. | 20:15 | |
6% rate of growth. | 20:18 | |
And M2 includes commercial bank time deposits | 20:19 | |
other than large CDs. | 20:23 | |
CDs at 6% over the past two months. | 20:25 | |
5% over the past three months. | 20:27 | |
And again, these rapidly low rates | 20:30 | |
where to offset the undoing rapid rate over the, | 20:32 | |
at the end of last year. | 20:36 | |
Looking at it at a year to year basis, | 20:39 | |
M2 has been growing at the rate of about 9% recently. | 20:41 | |
That again is too high. | 20:46 | |
And again, I believe it is above the rate | 20:48 | |
which the Fed intends. | 20:50 | |
But compare these rates, | 20:51 | |
let me just take the past two months, | 20:55 | |
the 4% in M1 and 6% in M2 with the base | 20:57 | |
which over that period has grown | 21:00 | |
at a rate of over 12% a year. | 21:01 | |
And Mr. Graham's question becomes relevant. | 21:03 | |
What's the explanation of the difference | 21:06 | |
and what does this portend? | 21:07 | |
The arithmetical explanation of | 21:09 | |
the difference is very simple. | 21:10 | |
The base has been rising much more rapidly | 21:12 | |
than the money supply because Treasury Deposits, | 21:14 | |
deposits of the Treasury, have been going up very rapidly. | 21:17 | |
And the Treasury Deposits are not counted | 21:20 | |
as part of the money supply, | 21:22 | |
yet they absorb part of the base. | 21:24 | |
The question is, whether this pattern reflects | 21:26 | |
the fact that the Treasury has been | 21:30 | |
the active central banker, it has been following | 21:33 | |
the monetary policy and slowing down monetary growth. | 21:36 | |
Or whether the Fed, on its part, | 21:38 | |
has been offsetting the Treasury's actions | 21:41 | |
in order to keep the monetary growth past | 21:43 | |
where it wanted it. | 21:45 | |
I am rather inclined to the second of those views. | 21:46 | |
That is a very typical thing for the Fed to do. | 21:48 | |
However, it is true that as the Treasury Deposits come down, | 21:51 | |
this will raise technical problems for the Fed | 21:56 | |
in keeping the monetary growth rate relatively low. | 22:01 | |
However, on the whole, as yet, | 22:05 | |
there is no reason to suppose | 22:09 | |
that the more rapid rise in the base | 22:11 | |
is portent of a more rapid rise | 22:14 | |
in the aggregate money in the future. | 22:17 | |
Rose Friedman | How do you expect this to develop? | 22:22 |
Milton Friedman | Well, on the monetary side itself, | 22:24 |
it seems, I continue to believe that the Fed | 22:28 | |
will seek very hard indeed | 22:32 | |
to hold down the rate of monetary growth. | 22:33 | |
And I expect that they will succeed. | 22:35 | |
On the other hand, from the point of view | 22:38 | |
of the economy as a whole, | 22:40 | |
there is only one way in which it can develop. | 22:41 | |
What has happened is that under the pressures | 22:44 | |
of attempting to create a favorable climate | 22:48 | |
for the election last year, | 22:51 | |
just as Water Gate affair, | 22:53 | |
so in the economics sphere, | 22:55 | |
President Nixon and the Republicans | 22:57 | |
didn't want to take any chances and they over did matters. | 23:01 | |
The extraordinarily expansive fiscal policy, | 23:04 | |
the high rate of monetary growth of last year | 23:07 | |
set off a boom at too rapid a rate. | 23:09 | |
We are now booming at a rate that cannot be continued. | 23:12 | |
At a rate which must stop one way or another. | 23:15 | |
I see only three alternatives. | 23:18 | |
And these are the three that have been present all along | 23:23 | |
when we clearly foresee, saw a year ago, | 23:25 | |
that we would get into this box. | 23:28 | |
One alternative is to let the inflation rip | 23:30 | |
and try to get the public at large | 23:33 | |
adjusted to a very high inflation rate. | 23:34 | |
I cannot believe that as yet, | 23:36 | |
that is a feasible economic or political policy. | 23:38 | |
It may become so after some years. | 23:41 | |
The second, is to step hard on the, | 23:43 | |
is to keep the foot on the monetary and fiscal brakes | 23:46 | |
and produce a recession in late 1973, | 23:51 | |
early 1974, | 23:56 | |
which will take some of the heat off the economy. | 23:58 | |
A third, is to reimpose, | 24:01 | |
or impose, far more rigorous | 24:05 | |
and widespread wage and price control | 24:07 | |
in an attempt to bottle up the steam. | 24:10 | |
My own expectation is that both | 24:13 | |
of the last two courses will be engaged in. | 24:15 | |
And I personally regret the final one of those, | 24:18 | |
I think again, the price and wage controls | 24:22 | |
will do more harm than good and will be self defeated. | 24:24 | |
I wish there were some way of avoiding | 24:28 | |
a recession at this stage but I think that | 24:30 | |
the boom is gone so far that there is no longer | 24:32 | |
any possibility of slowing it off | 24:35 | |
without overshooting the other way into another recession. | 24:37 | |
How severe it will be, how long it will last, | 24:41 | |
my crystal ball is much to clouded | 24:44 | |
at this point to speculate. | 24:46 | |
Even precisely when it will start | 24:49 | |
I think is very difficult. | 24:51 | |
And the reason for the special difficulty here is | 24:53 | |
because of the point I made earlier. | 24:55 | |
What I think is an unusual, | 24:58 | |
independent expansion of velocity | 25:00 | |
that is the general, widespread | 25:03 | |
flight into spending because of the fear of inflation. | 25:06 | |
And the crucial question is | 25:11 | |
how fast a reaction to that will come. | 25:12 | |
Because of that, it is possible on the one hand | 25:16 | |
that the recession will start much sooner | 25:18 | |
than one would ordinarily expect | 25:21 | |
it simply from the slow down of monetary growth. | 25:23 | |
If one were to extrapolate from the slowdown | 25:25 | |
of monetary growth alone, | 25:27 | |
one would not expect any appreciable recession to occur. | 25:29 | |
Even if the slow rate of monetary growth is continued | 25:32 | |
until the forth quarter of this year | 25:35 | |
and maybe early next year. | 25:37 | |
But it could be that a reaction | 25:38 | |
to this extraordinarily high rate of spending | 25:40 | |
could come sooner than that. | 25:42 | |
Rose Friedman | Thank you very much. | 25:44 |
Remember subscribers if you have any questions or comments, | 25:46 | |
please send them to Instructional Dynamics Incorporated | 25:49 | |
166 East Superior Street Chicago, Illinois 60611. | 25:52 | |
We shall be visiting with you again in two weeks. | 25:58 |
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