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SHADOW OPEN MARKET COMMITTEE
Policy Statement and Position Papers
September 12-13, 1982
PPS-S2-2
\
S
Graduate School of Management
University of Rochester
SHADOW OPEN MARKET COMMITTEE
Policy Statement and Position Papers
September 12-13, 1982
PPS-82-2
Shadow Open Market Committee Members - September 1982
SOMC Policy Statement, September 12, 1982
Position Papers prepared for the September 1982 meeting!
The Voices of "Failure" and the Failure of Monetary Policy-Making, Karl Brunner,
University of Rochester and Universitat Bern
Fiscal Policy Outlook - A Report to the SOMC, Rudolph G. Permer9 American
Enterprise Institute
Forecasting Multipliers in the 80"s: The More Things Change the More They Stay the
Same, 3ames M. Johannes and Robert H. Rasche, Michigan State University
Economic Prospects Through 1983 and Economic Outlooks
Robert X Genetski, Harris Trust and Savings Bank
Alternative Forecasts,
Economic Projections, Burton Zwick, Prudential Insurance Company of America
Money and the Economy, H. Erich Heinemann, Morgan Stanley &. Co., Incorporated
SHADOW OPEN MARKET COMMITTEE
The Committee met from 2tO0 p.m. to &0O p.m. on Sunday, September 12, 1982.
Members!
PROFESSOR KARL BRUNNER, Director of the Center for Research In Government
Policy and Business, Graduate School of Management, University of Rochester
Rochester, New York.
PROFESSOR ALLAN H. MELTZER, Graduate School of industrial Administration,
Carnegie-Mellon University, Pittsburgh, Pennsylvania.
DR. ROBERT J. GENETSKI, Vice President and Chief Economist, Harris Trust and
Savings Bank, Chicago, Illinois.
MR. H. ERICH HBNEMANN, Yice President, Morgan Stanley & Co., incorporated,
New York, New York.
DR. HOMER JONES, Retired Senior Yice President and Director ©f Research, Federal
Reserve Bank ©f St. Louis, St. Louis, Missouri.
DR. 3ERRY L. JORDAN, Anderson Schools ©f Management, University of New Mexico,
Albuquerque, New Mexico.*
DR. RUDOLPH G. PENNER, American Enterprise Institute, Washington, D.C.
PROFESSOR ROBERT H. RASCHE, Department of Economics, Michigan State
University, East Lansing, Michigan.
DR. ANNA 3. SCHWARTZ, National Bureau ©f Economic Research, New York, New
York.
DR. BERYL SPRINKEL, Executive Yice President and Economist, Harris Trust and
Savings Bank, Chicago, Illinois."
DR. BURTON ZWICK, ¥ice President, Economic Research, Prudential Insurance
Company of America, Newark, New Jersey.
*On leave from the SOMC.
••On leave from the SOMCj currently Under Secretary of the Treasury for Monetary
Affairs.
POLICY STATEMENT
Shadow Open Market Committee
September 13, 1982
Economic recovery may be underway. Inflation continues to fail, but the speed
•and durability of the recovery remain in doubt. Some foresee the economy reverting
to stagnation ©r recession in 19S3 after a brief period of expansion. Others foresee
sustained recovery with growth of real output rising as much as 6 percent in If §3 and
beyond.
Three main factors contribute to the high Agree of uncertainty. First is the
failure of the Administration and Congress to reduce federal expenditures and to
implement regulatory reform as promised. Legislation proposed to control interest
rates poses an additional threat. Second, the Federal Reserve's commitment to a
policy of slower money growth has produced a substantial and welcome reduction in
inflation. Its failure to improve monetary control procedures has ynduly increased the
cost of disinflation and heightened uncertainty about its continuing commitment to
this policy. Third, there is a rising probability of defaults by major borrowers.
Defaults, bank failures, and mismanagement by central banks and governments
increase uncertainty about the outlook for the world economy.
REDUCING UNCERTAINTY AND PREVENTING PANIC
Governments and central banks can improve the performance ©f their economies
by reducing uncertainty and increasing the credibility of current policies. If governments make clear that they will take non-inflationary actions to prevent financial
panics in the event of defaults, uncertainty can also be reduced.
The Reagan Administration has made unbeEevable estimates of economic
growth. This mistake has not been corrected. The Administration continues to present
wildly optimistic forecasts. To hide future deficits, forecasts of inflation remain
higher than is consistent with the monetary policies advocated by the Administration.
By making tmbeievable forecasts, the Administration evades the fiscal problem, and
adds to uncertainty.
1
The Federal Reserve deserves major credit for the decline in inflation. It must
also accept responsibility for the excessive uncertainty that clouds the outlook for
1983* We again urge the Federal Reserve to make the major procedural changes
required to Improve control of money and thereby reduce uncertainty*
Fear of defaults and bank failures has grown with the stagnation of the world
economy and the very large changes in some relative prices, most notably the price of
oil. The possibility that defaults and failures can spread from country to country is
widely recognized. No steps have been announced to show that central banks and
governments have determined appropriate policies to deal with the problem in a nonInflationary way.
A clear statement of responsibility should be made by central banks and governments in major countries. The statement should explain the scope or extent of responsibility to financial institutions including domestic branches of foreign institutions,
foreign branches of domestic institutions, and the public. The statement should distinguish dearly between preventing a decline in the money supply and protecting the
interests of bank investors. The former is a pubic responsibility, the latter is not.
UNCERTAINTY SURROUNDING FISCAL POLICY
The Administration's rhetoric about fiscal policy and government growth is
markedly different from its performance. It has not implemented its promised
program to reduce the size of government and growth of government spending.
Government spending continues to grow faster than output, and the government's share
©f GNP appears likely to remain above 24 percent.
No one knows when the fiscal stalemate will end or how it will end. A program
that was supposed to provide greater certainty about future taxes, to facilitate private
planning, has instead done the opposite. No one knows what future tax rates on saving,
investment, and income will be.
We believe the Administration should begin to resolve the problem by reducing
spending $70-billion below its present projected growth path by fiscal year 1985. Cuts
must come from all programs including transfer payments and defense. Spending cuts
of this magnitude will not end the fiscal crisis. The Administration must present a
credible long-range plan to hold the growth of federal spending beyond fiscal 1985
below the growth rate of GNP.
2
UNCERTAINTY SURROUNDING MONETARY POLICY
We applaud the Federal Reserve's commitment and the success of Its policy to
redyce Inflation* Inflations this year, will be the lowest since 1976. If the Federal
Reserve continues to reduce monetary growft, Inflation will continue to fall. By the
middle of the decade, inflation can be ended.
We recommend that the Federal Reserve manage the monetary base so as to
increase the money supply (M-l) by % percent to %.5 percent from the average of the
fourth quarter of I9S2 to the fourth quarter of 1983. for the balance of 1982, the
money supply should remain In a 5 percent to 5*5 percent growA path*
The costs of ending inflation have been higher tfian necessary. Unreliable control
procedures have kept long-term interest rates, after adjusting for inflation, at extraordinary levels. These rates contribute to the current stagnation, recession, and high
unemployment. Recent declines in interest rates can be reinforced dramatically by
staMEzing the growth rate of money*
Recent events have borne out ©ur contention that the Federal Reserve's
procedures are a main cause of high interest rates* Once money growth returned to
the target range, the belief spread that the Federal Reserve was not about to embark
on another round of inflation* Credibility increased. Uncertainty about future
inflation declined, and interest rates fell. Despite the much discussed deficits,
sustained declines in reported money growth reduced interest rates, as on many
previous occasions*
Long-term interest rates on government bonds remain 3 percent higher than the
levels that prevailed before the Federal Reserve changed operating procedures in
October 1979 despite a 2 percent to 3 percent decline in the rate of inflation* Longterm interest rates adjusted for inflation are, therefore, 5 percent to 6 percent higher
than in September 1979*
Recent proposals in Congress call on the Federal Reserve to reduce real interest
rates. Such proposals are misguided, thinly disguised attempts to Increase money
growth* If adopted, they would increase future inflation and, therefore, raise interest
rates*
Congress should insist that the Federal Reserve improve operating procedures
Mid remove the self-imposed restrictions that are the true cause of higher interest
rates* Lasting reductions in real interest rates will only result from a credible policy
of monetary and fiscal restraint*
3
FINANCIAL FRAGILITY
Drysdaie, Perm Square, Lombard-Wall, Mexico, and Poland are not likely to be
the only major shocks to the financial system. The risk of default, and the spread of
failures, are serious threats to the international and domestic banking structure* The
continuing weakness of the thrift industry — a direct result of mistaken regulation,
bureaucratic inertia, Congressional lassitude, and inflation — contributes to the
general problem of financial fragility.
The potential crisis can be averted if governments act correctly. They must
recognize that their responsibility is limited to protection of the integrity of the
money supply. There should be no inflation, no deflation, no socialization of losses,
and no bailouts of unwise, mistaken investment decisions.
The correct procedure for domestic default is to lend to the market, at a penalty
rate, to prevent bank runs and to reduce uncertainty about the survival of otherwise
solvent firms and Institutions. We call on the regulatory agencies to issue a clear
statement of their policies. The Federal Reserve should declare that it intends to
serve as a lender of last resort to the financial system in a non-inflationary manner.
Insolvent banks or financial institutions should be permitted to fail.
Off-shore banks pose a different problem. A run on banks in the Cayman Islands
or in Luxembourg — where there are no central banks — could precipitate a panic
affecting domestic markets directly or through Its effect on banks in third countries.
There is presently no clear policy for dealing with a problem of this kind.
An International agreement or understanding about where responsibility begins
and ends should be reached before failures occur. We propose that each country
accept responsibility as lender of last resort to banks or branches of banks operating
within the home country, regardless of the nationality of the owners. Foreign banks or
branches located in the home country should be permitted to borrow, at a penalty rate,
during a financial crisis even where borrowing of this kind Is not permitted under
ordinary circumstances.
The present financial crisis — serious as it is — is a temporary phenomenon that
should be dealt with by temporary measures. It does not justify a permanent increase
In the lending capacity of the International Monetary Fund.
%
THE fOlCES OF "FAILURE" AND THE FAILURE OF
MONETARY POLICY-MAKING
Karl BRUNNER
University of Rochester
and
Universitat Bern
L
THE VOICES OF FAILURE
Almost three years ago the Federal Reserve Authorities announced a major
change in monetary policy* The events prompting this decision are well known. The
basic inflation rate drifted from the early 6ffs to the late 7ffs in response to an
essentially accommodating policy from a negligible level to around § percent p.a. The
consequences were most dramatically revealed by a series of crises ®n the foreign
exchange market. The Federal Reserve authorities recognized in October 1979 that
monetary policy need be designed more effectively (or willingly) to lower inflation and
support the dollar. A new tactical procedure was Initiated for this purpose. The
operational change was expected to tighten control over monetary growth and prevent
the inflationary drift experienced in previous years.
The passage of time since Octoi>er 1979 offers some perspective about the nature
of the policy introduced, its mode of execution and consequences. Some success should
be dearly recognized. Monetary growth was effectively lowered (in the average) over
the past three years* Inflation responded moreover to the broad change in monetary
affairs. The rate ©f change in the price-level and the momentum of wage settlements
was substantially reduced over the past years.
This progress was accompanied however by economic stagnation and recession.
Real national product fluctuated since 1979 within an interval of about 3-4 percent
around an approximately stationary level. The economy slid moreover into a recession
not recognized by the official forecasts supplied by the Administration in the early
months of 1981. The emerging doubts and questions bearing on the course of policy
deepened and widened with the manifest disarray of financial markets. Since early
1980, interest rates attained a remarkably high level (in the average) and exhibited a
singular variability. The record traced in recent years by the financial markets is
5
unique in the peace time history ©f the USA. The behavior of interest rates threatens
moreover the survival of many financial institutions and has aggravated in recent
months an Increasingly fragile network of international credit relations* The
uncertainty gripping the financial markets seems to envelop both financial institutions
and some governments with a comparatively large exposure to short-term labilities*
Progress in any particular dimension seems hardly worth any notice in the media
or political market. This market thrives on "crises" and "problems". The recession
with the uncertain prospects of recovery, and most particularly the disarray expressed
on financial markets, affected the public debate about the future course of policy.
"Liberal" and "neo-conservative" commentators, including some Federal Reserve
officials, emphatically declared the massive failure ©f the monetary policy pursued by
the Fed. They urged the Federal Reserve Authorities to abandon what was deemed to
be their "monetarist bias". An "alternative policy" could be expected to lower interest
rates permanently, reduce their ¥ariability and assure a sustained recovery.
The "voices ©f failure" offered neither adequate articulation of events nor an
acceptable explanation of the apparent failure. Their basic thrust would push the Fed
once again into a dominantly accommodating stance with the prospect of permanent
and increasing inflation. Their attention thoroughly misses moreover the crucial shortterm and long-term aspects of our monetary policymaking associated with the
observed failure.
11.
THE NATURE OF THE "FAILURE"
1.
The Interest Rate Syndrome
The singular behavior of interest rates emerged shortly after the change in the
Fed's operating procedure. The public announcement of the change suggested that the
Fed would assign "less significance" to interest rates and attend more explicitly to a
control over monetary growth. A prevalent analysis enshrined in many textbooks on
macro-economics informs us that such changes in policy procedures affect the relative
variability of monetary growth and interest rates. This approach yields a trade-off
between the variability of the two magnitudes. The strategy of interest control, or
even the tactical (i.e. instrumental) use of interest rates (more precisely! ©f the
federal funds rate) for monetary control, lowers the short-run variability of interest
rates and raises ©n the other hand the variability of monetary growth. The observed
behavior of interest rates appears thus, according to this story, to be the natural
6
consequence of a shift from a dominant pattern of "interest rate control" in one form
or another t© a more developed stance of monetary control,
A number of studies prepared at the Board of Governors of the Federal Reserve
System Mid at some of the regional Federal Reserve Banks articulate the explanation
in more detail. One version emphasizes that the change in operating procedure
generated misapprehension and confusion around the financial markets. Other studies
demonstrate a statistical connection between the variability of monetary growth and
the variability of short-term interest rates. This connection was attributed to the
change in operating procedures* The financial market expected under a poEcy of
monetary control a dominant pattern of "regressive behavior*" by the Fed.
Unanticipated and substantial deviations of monetary growth from the target path
were expected to induce corresponding adjustments in the Fed's reserve operations.
Positive surprises in monetary growth increase and negative surprises lower under the
circumstances short-term interest rates® The operation of the connection depends
sensitively on the financial markets' confidence that the Fed is really committed to a
policy of monetary control.
Some of the arguments and studies advanced contribute usefully to our
information about the relation between monetary policymaking and financial markets.
None provides however an acceptable explanation of the observed behavior of interest
rates. Three major facts must be recognized in this context. One refers to the level
and variability of interest rates over all maturities* The second involves the
remarkable correlation between interest rates over the whole yield curve. The
singular variability exhibited substantial co-movements between short- and long-term
interest rates. Lastly, the short-run variability ©f monetary growth did not decline
after the change in operating procedure. It actually increased somewhat.
These patterns cannot be explained by the observed connection between shortrun "monetary surprises" and subsequent movements in short-term interest rates.
Rational market expectations operating under a system of monetary control are not
sufficient to produce the particular connection. The tactical procedure used in the
context of lagged reserve accounting contributed probably to the joint increase in the
(short-run) variability of short-term interest rates and of monetary growth.
Whatever the role of "institutional policy'1 may be, the occurrence of monetary
surprises under a system of monetary control cannot explain the failure lamented in
the media. The effect of monetary surprises depends critically on the market's
expectation that such surprises will be systematically corrected. Surprises are thus,
according to this account, essentially interpreted as transitory events and will not
7
affect the behavior of intermediate and long-term Interest rates. This account thus
implies that the change in operating procedure raises the shortest-run variability of
short-term interest rates with negligible effect ©n the variability of longer term
'interest rates. A confident expectation of anti-inflationary monetary control would
moreover lower the inflation premium and decrease long term rates. These
implications are not reconcilable with the three major facts mentioned above.
The trade-off hypothesis based on standard textbook analysis encounters the
same difficulties. It systematically neglects all aspects-of the term structure of
interest rates,, This neglect omits an essential mechanism yielding crucial information
about the market's assessment of montetary policymaking* A prevalent conviction
that the Fed will maintain an effective anti-inflationary monetary control does not
raise the variability of all interest rates and would not produce the co-movements
observed. We may also note in passing that this strand of analysis neglects with the
term structure also the interaction between an array of asset markets. Interpretations
based on this analysis, typicaly represented by frequent statements made by Federal
Reserve officials, systematically equate all the stochastic shocks operating around the
complex of financial markets to the disturbances or shifts in money demand. The
diverse shocks are however not equivalent with respect to their economic effects
under alternative strategies (i.e. monetary or interest controls). Arguments based on
the trade-off analysis usually postulate moreover that money demand is perturbed by
purely transitory shocks. Once again, this postulate yields implications very different
from the pattern observed.
We conclude that the "failure" manifested by the behavior of interest rates
cannot be attributed to a change in monetary regime per se. In particular, it cannot be
explained in terms of a shift from an "essentially flexible" interest strategy to a
system of effective monetary control. It is not the confusion and misapprehension
produced just by a change in strategy or tactics which produced the "failure
syndrome". This syndrome was dominated by the behavior of our monetary autb©ritiesf
most particularly by an uncertain sense of commitment to an anti-inflationary policy
with a corresponding strategy of monetary control conveyed to a broad public. A long
tradition of misleading statements, a sequence of broken promises to pursue antiinflationary policies, the many contradictions observed between statements made by
Fed officials since October 6, 1979, a more or less veiled opposition of important Fed
officials to a policy of effective monetary control, and lastly, the variability ©f
monetary growth after the promise offered in October 1979 to tighten control and
improve performance, all contributed to a diffuse and pervasive uncertainty about the
ft
trend in monetary policymaking. The array of experiences imposed on financial
markets lowered the credibility of Ae Fed's monetary strategy. The resulting
uncertainty Imposed a substantial risk premium of several percentage points on the
gross real rate of interest It was also expressed by cross currents of reassessments
and re-reassessments ©f accruing information about future policies and thus produced
the remarkable volatility. This uncertainty was not confined to the immediate future
but involved perceptions over an extended horizon* The position papers for the
meetings of September 1981 and March 1982 explained in greater detail the effect of a
pervasive uncertainty fostered by our policymaking ©n the behavior of financial
markets. The argument shows in particular how such policymaking should be expected
to produce the patterns summarized by the three major facts.
The analysis presented in previous position papers Implies a persistent antiinflationary policy (in the average) gradually lowers the markets uncertainty* As time
passes and the markets learn about such persistence throughout the noise of
misinterpreted verbal and statistical events both the level and variance of interest
rates decline. This actually happened over the past two years. The level moved along
a declining trade for more than one year and the variance (on all maturities) declined
by a large margin since 1980.
The "failure" expressed by the high level and variance of interest rates was thus
not produced by the shift to a strategy of monetary control. It was conditioned by the
basically uncertain commitment and the inadequate tactical delivery. The behavior of
interest rates offered us consequently an index ©f the Fed's credibility level
determined by the market. There was thus indeed a failure revealed by the
observations noted above. We suffered the consequences of a fundamental failure In
our policymaking Institutions.
2.
An "Unforeseen" and "Avoidable" Recession
The second dimension ©f the alleged failure involves the recession emerging In
late summer or fall of 1981. Two strands need be distinguished in this context. One
strand of arguments confronts the Administration with the surprising appearance of
the recession unforeseen by the poEcymakers. The second strand accuses the policymakers of generating a recession in order to curb inflation.
The first strand does Indeed reveal a specific failure of the Administration. The
official forecasts published in the early months of the new Administration could hardly
be substantiated In terms of available analysis and evidence. The forecast of output
and inflation was difficult to reconcile with the Administration's proposed course of
9
financial policies. The "•Shadow" noted in March 1981 that the execution of an antiinflationary monetary policy would induce a recession under the conditions inherited at
the time. The Administration's forecast emerged as a compromise ©f confEcting
assessments advanced by various branches of the government. The preparations were
probably also influenced to some extent by the daydreams of "supply siders"., The
simple political motivation to produce "numbers which look good" contributed to the
outcome. This process could hardly produce any forecast relevantly addressed to
economic reality. An essentially political procedure yielded a forecast, representing
the Administration's official position, thoroughly disqualified within less than three
quarters. The consequences of this numerological exercise lowered the credibility of
the Administration's whole program*
We observe unfortunately that the
Administration proceeded for its most recent forecasting exercises in the same
manner. We should recognize at this stage a failure in policy-making, a failure
fostering subsequent repercussions ©n the political market which tend to obstruct the
Administration's basic goals supported by the "Shadow" in its statement of March 1981.
The first component of the "recession failure" does not concern the fact of a
recession but the failure to acknowledge publicly the probable consequences of an antiinflationary policy. The second component addresses the fact of the recession. The
ideas advanced in this context do not constitute a single coherent block. Some "supply
siders" argued that inflation could be curbed by inducing an explosive and sustained
growth due to reductions in tax rates. Others objected that an anti-inflationary
monetary policy only achieves its purpose by producing a recession. A recession of
sufficient length and depth forms thus, so we hear, the deliberate target of an antiinflationary policy of monetary control.
The "supply siders" objection is easily shown to be unfounded Important supply
side effects due to existing expenditure programs and regulatory programs are
neglected. There is no analytic or empirical basis to expect sustained rates of real
growth of up to 8 percent p.a. necessary to remove inflation without lowering
monetary growth below levels experienced in 1979/SO.
The argument emphasizing the we ©f recessions as a means to curb inflation
appears more frequently and dominates the media, it requires thus more serious
attention. The issue has been discussed on several occasions at the meetings of the
"Shadow" and was considered in previous position papers prepared over the past eight
years. First and foremost, we need to emphasize that a necessary and sufficient
condition for lower inflation is a correspondingly lower rate of monetary growth. We
deny on the other hand that a recession with sufficient length and depth is a necessary
10
condition of an anti-inflationary program. Whether or not the monetary retardation
required for our purposes translates into a recession depends crucially en the
credibility of the policies pursued. A high credibility induces strong incentives t© reexamine price-wage setting patterns established under the expectation ©I permanent
inflation policies*
A lower credibility obstructs such Incentives*
Monetary
retardations produce consequently under the a l t e r n a t e states radically different
output and price-level responses* The reader may find an excellent summary ©f the
issue in an article by Marvin Goodfriend in the Economic Review, published by the
Federal Reserve Bank ©I Richmond! "There is an important lesson in the successful
restoration of price stabiHty following the German byperinfiation which is relevant for
our own time.
A reduction in money growth can bring the inflation rate down
significantly in a short period of time with relatively minor temporary reductions in
real economic activity* But it must also be emphasized that for such a policy to work
well, i«e. to affect inflation and not real economic activity, It is essential that the
monetary authority announce and carry out real meaningful reform of its money
growth policy.
Suppose the monetary authority is truly committed to eventually
bringing down money growth, but i t moves in fits and starts or disguises its intentions,
for example, to forestall criticism from groups hostile to its policies. Reductions in
money growth, when they do come, wiH impact less on prices and more ®n real
economic activity because there may be some doubt as to whether the money growth
reductions will be sustained* The policy will work well only if- the monetary authority
establishes a commitment to bring money growth down that is credible to the financial
markets and the pubic in general"®
The emergence of a substantial recession in toe course of an anti-inflationary
policy reveals indeed a "failure in policy-making".
The length and depth of the
recession reflects the low credibility ©f current policies as a result of #»e past
experiences*
The same observations which conditioned the diffuse uncertainty
expressed by financial markets also shape the magnitude and length of the recession.
The failure attaches thus not to the decision (or fact) of a monetary retardation
necessary to lower inflation. It attaches to our past record of policy-malcing and the
strategic conception and tactical aspects still dominating our monetary policymaking.
m.
THE "FAILURE" OF MONETAEY CONTROL
The actual failures in policymaking described in tee previous paragraphs should
not obscure an important accomplishment. Monetary growth has been lowered in the
11
average over the past years. The course was moreover maintained during Ae
recession* The rate of inflation substantially declined beyond the expectations
expressed by last year's consensus forecast* Some progress appeared thus throughout
diffuse uncertainty suffered by the financial markets* But the "voices of failure" still
question this accomplishment* Their doubts are essentially concentrated on the
technical feasibility (or desirability) of monetary control. Financial innovations create
allegedly new and unpredictable patterns destroying the basis of monetary control.
Measurement problems are so severe "that nobody knows what the money stock isM*
Nobody seems to know which of the various monetary aggregates to control* Lastly, it
would appear more sensible to control directly the growth rate of nominal gross
national product. The following sections examine these reservations addressed to a
policy of monetary control.
1*
Financial Innovations
The fact of financial innovation can hardly be contested. We observed a remarkable array of new developments in the financial industry. Innovations occurred
however also during the 1950's with the explosion of the thrift institutions. We also
heard voices at the time that this process undermines the effectiveness of monetary
policy.
Almost ail arguments Inking financial innovations with an erosion of monetary
policy are essentially speculative and impressionistically suggestive* The conclusions
are wplausibie" impressions not supported by analysis or evidence. This issue has been
addressed in previous position papers* The present section offers some important
aspects of the problem.
The issues posed by financial innovation for ©ur purposes can be usefully
organized in terms of two relations! the relation between the money stock and
nominal gross national product and the relation between the monetary base and the
money stock. The first relation is expressed by monetary velocity and the second by
the monetary multiplier. Changes in the economic structure induced by financial
innovations will be revealed by the time series pattern governing monetary velocity
and the multiplier. If the assertions about the consequences of financial innovations
typically advanced are correct, then we should observe significant shifts in the
patterns characterizing either multiplier or velocity* The patterns prevailing until a
few years ago could not explain under the circumstances the multiplier's behavior ©ver
the past few years* Similarly, a larger trend element and a significantly larger
variance of the stochastic innovation term would describe the more recent time series
M> @s>
process of velocity. A statistical examination of fte data yields no support for these
implications of the thesis bearing on the consequences of financial innovations® The
trend in M-l Yeioeity shows for the 1970*5 a somewhat larger estimate than for the
1950's. Their respective 95 percent confidence InterYais overlap however to a large
extent The variance of the stochastic innovation is actually substantially smaller for
the 1970*5 than for the 1950's.
There is thus roost definitely no evidence of a
significant increase in the variance.
The data do however yield evidence of a
significant change in the form of the stochastic process. A first order moving average
(for the first difference of log V.) ruling during the 1950*8 was modified into a random
walk for log V..
The position papers regularly prepared by Robert Rasche for the meetings of the
"Shadow" provide the necessary information bearing on the multiplier.
This works,
amplified and buttressed by scholarly papers in professional Journals, yields until the
early months of 1982 (the last report made) no change in the structure of the process
generating the movement of the multiplier.
The statistical evidence yields so far no case at all for the dramatic policy
consequences attributed to financial Innovations.
The controllability of monetary
growth has not been affected,. Tihe experience of the Swiss National Bank indicates
moreover that even In the context of a substantially larger unpredictable short-run
behavior of the multiplier tf»e Central Bank can still execute an effective antiinflationary policy. Secondly, there is no evidence that the link between money stock
and gross national product has significantly worsened. But, lastly, there is evidence of
more or less gradual shifts occurring over time in the form ©f the process governing
velocity.
The last two points bear on a standard argument advanced by Fed officials in
support of a •'flexible approach" t© policymaking. Flexibility seems to be particularly
required whenever we experience changes or a lessened reliability in the link between
money and gross national product. But either one of the two evolutions converts the
claim for a "flexible policies11 into an empty gesture. A lessened reliability offers no
assurance that "flexible adjustments" improve the policy record Systematic responses
to larger noise levels in the data raise the likelihood of destabilizing actions.
A
meaningful flexibility requires more and not less reliable information.
One last issue need be briefly emphasized in this context.
Federal Reserve
officials typically interpret the stochastic properties of velocity as representations of
the random shocks operating on money demand. TMs interpretation Justifies Aeir case
for an accommodative stance expressed specifically by an interest targeting policy.
13
But the equivalence between ¥elocity and money demand shocks does not hold The
stochastic properties of velocity reflect all the shock patterns operating on the
economy including shocks in the financial sector beyond money demand and most
particularly also all real shocks. A more or less significant increase in the variance of
"velocity innovations" offers thus no basis for a policy assigning greater weight to
interest control
2.
The Measurement Problem and the Choice Among Aggregates
The statistical results summarized above for our assessment of the role of
financial innovations also offer information about the measurement problem. This
problem was dramatically articulated by Frank Morris, President of the Federal
Reserve Bank of Boston (Wall Street Journal, June 22, 1982). The previous section
considered the possible effect of financial innovations, in the absence of any
measurement problem, on the behavior of monetary aggregates. Morris emphasizes in
addition that financial innovation creates essentially intractable measurement
problems. The concept of a money stock would be meaningless and a monetary policy
addressed to the control over monetary growth impossible to execute. Financial
innovations blur apparently two distinctions! the differentiation between money and
liquid assets and the differentiation between money and debt.
The innovative arrangements developed by the financial industry are indeed
ingenious. But a description of these innovations and their immediate effect ©n portfolio managers offers little information beyond plausible speculation. We still
understand the meaning of "money", Le. any object generally (with high frequency and
regularity) used as a means of payment. We observe a small group of assets held by
participants in the social game which behave in this respect very differently than most
other assets. The borderline between the two groups of assets and the specific forms
of assets constituting money changes over time. The location of the borderline will
hardly ever occur with any definite precision. We always need to cope with some
measurement problem. The obligation of a Central Bank for an anti-inflationary
monetary control necessarily includes a duty to maintain an adequate data base and reexamine with some regularity its measurement procedures. A Central Bank can always
assure a persistent measurement problem by creating incentives for accelerated
innovation (regulation and inflation) with a suitable inattention to the data
requirement.
Little reason has been advanced thus far to convince us that the measurement
problem is intractable and the error so large that any M- measure is Mmeaninglessw.
1%
We note on the other hand an extensive we of many other important economic
magnitudes, e*g«, the inflation rate, the change in the gross national product and of Its
components, the real rate of Interest, the unemployment rate, budget data e t c with
little qualification about their respective measurement error* Most particularly, no
evidence has ever been presented suggesting that the measurement error ©f fte
nation's money stock vastly exceeds the error of the CP1 as a measure of inflation. 1
suggest that the opposite holds true with a wide margin*
The statistical examination of the patterns traced by velocity and multiplier
explored in past position papers and partly surveyed above yields important
information bearing on our subject. A substantial measurement error seems to have
emerged by the end of the 1970's. The revision of the measurement procedures
consistent with the definition of money lowered however the measurement error to an
acceptable range* There is still room for improvement which the Fed should explore*
An intractable measurement problem with increasing error would necessarily be
reflected by significantly shifting patterns of both velocity and multiplier. The results
reported above and summarized in more detail in the position paper prepared for
March 1982 offer no support for the claim that our data are seriously affected by large
and increasing measurement errors. One of the results obtained is especially
Informative in this context. The velocity of the monetary base, denoted with V , is
the product of the multiplier (for M-I) and V,, or in logarithmic expression
log Y0 = log mt + log Yj
Let mf and Vf designate the true magnitudes and y and v the respective (multiplicative) measurement errors, so that
log m. = log mf + p
and
log V, = log Vf + v
The effect of measurement errors involving M-l (or similarly M-2) does not affect the
base velocitye It follows in particular that p = -v , Le. the two measurement errors
necessarily offset each other in the definition ©f the base velocity. The base velocity
remains thus unaffected by this specific measurement problem. It could still be
affected however by shifting sybstitution relations induced by financial innovations
occurring In the absence ©f any measurement problem* But the time series comparison
of base velocity for the 1950*s and 1970ss offers little support for such contentions.
The rational response to "fee emergence of a serious and persistent measurement
problem is tfius quite simples monetary policy should replace the instrumental use of
the base for purposes of monetary control with a base control approach.
15
The argument concerning the differentiation between money and debt advanced
by Morris offers a good example for the irrelevant Impressions surrounding the
discussion. Some innovations are sypposed to invert the timing relation between
money Mid debt creation. Under "overdraft accounts credit card systems" payments
are made before debt is created. This innovation hardly affects however the basic
characteristics and determinants of the money sypply process. Morris also asserts that
"automatic credit programs" must raise velocity. The effect of sych programs depends
essentially on lower transaction costs. They contribute over a period to a modest
extent, with other innovations, to produce a positive trend in V, with a lesser effect on
V . But whatever the magnitude of this effect may be, it supports no case against a
feasible execution of monetary control.
The questions considered in this section also apply to the choice among monetary
aggregates. The multiplicity of aggregates seem to pose a serious obstacle for a
monetary control policy. Multiple aggregates offer at least a convenient objection
against a policy of monetary control. Their appearance, may have actually been
influenced by such considerations. But they involve no serious problem for an
effective anti-inflationary policy executed over a longer-term horizon. We note first
that no aggregate beyond M-l or M-2 need be considered as a relevant magnitude of
monetary control. In the absence of unresolved or differential measurement problems
monetary control can always be formulated in either M-l or M-2. The choice will
determine the benchmark of non-inflationary monetary growth to be considered by the
policy maker. In the context of unresolved or unattended measurement problems for
both M-l and M-2 (as in the United Kingdom) monetary policymakers should
provisionally target directly the monetary base.
3.
Controlling Nominal GNP Yersus Controlling Monetary Growth
Monetary control is not exercised for its own sake. It is an instrument used to
influence the behavior of the price level or of the nominal gross national product. A
strategy of monetary control manipulates an intermediate magnitude as a means to
influence the behavior of an ultimate target. It Is claimed on occasion that this
intermediate targeting is inefficient. A "final targeting" is offered as a more efficient
strategy. Monetary policy should directly control the nominal gross national product.
Analytic elaborations of this idea which postulate a direct control of nominal GNP by
the authorities, in the sense of a specific action which can immediately fix this
magnitude, are hardly worth any discussion. A more relevant approach argues that an
economic structure, defined by a model, implies a unique relation between policy
16
Instruments and nominal GNP. Po intermediate target Is needed. On A e contrary, It
can be shown that, given the model, the use ©f intermediate targeting is in general an
inferior procedure. This argument depends however crucially on the assumption of full
and reliable information expressed by the model. This assumption still belongs at this
stage to Never-Never Land
Controlling GNP on the basis of misconceived beliefs
about the details of the economy's response structure involves substantial risks of a
destabilizing activist policy pattern.
The necessary aid sufficient condition for
"controlling nominal GNP' are simply not satisfied.
There exists thus no relevant
empirical basis for the claim that monetary control is an inferior procedure. This
would be the case with ideal knowledge, but not in the reality of seriously incomplete
information about the true structure governing economic processes.
A different interpretation of ""CMP control" should be mentioned.
offered as an alternative to monetary control.
It is not
It functions equivalently to the
ultimate goal of a stable price-level as a long-term guide to the formulation ©f
monetary control. This long-term guide sets the benchmark of .average monetary
growth. This benchmark depends on the trend in weiocity and the economy's normal
real growth. The same information (stable price-level and normal real growth) can be
used to formulate the growth in nominal GNP as a guide for setting the benchmark of
average monetary growth. This meaning of WGNP control" is thus quite consistent with
a strategy of monetary control.
%.
The Retreat to Permanent Inflation
Two aspects characterize the arguments opposing the use of monetary control
policies. The previous sections discussed the first aspect represented by an array of
plausible impressions with little basis in analysis or evidence. The remarkable
disregard of relevant alternative policies forms the second aspect. The President of
the Federal Reserve Bank of Boston, for instance, offers us no clues on what the
alternative to an "impossible" policy of monetary control should be. The array of
objections share however one central implications they represent an implicit retreat
to a policy of permanent inflation executed by one pf several tactical procedures.
Serious opposition to a policy of monetary control wiM not be reconciled, as a matter
of fact, with a persistent and reliable anti-inflationary policy.
The proposal advanced this summer by 31 Democrat Senators specified an
alternative beyond the usual objection to monetary control. The proposal specified an
expicit return to a strategy of interest control, feme others argued that a change in
the "policy mix" was required. The combination of a "loose" fiscal policy with low
17
monetary growth should be replaced by a large monetary expansion offset with a
"tight" fiscal policy (balanced budget through higher tax rates?). Both proposals
involve a retreat from anti-inflationary policies. Acceptance of these proposals would
signal a commitment t© permanent inflation, high and volatile interest rates aid
disarray in international monetary affairs. These consequences produce over time
price and credit controls in shifting forms. They are also likely to raise real tax rates
and lower the (weak) political pressure to control the magnitude of the budget. The
battle over monetary control involves thus issues substantially beyond some tactical
technicalities. Its outcome will influence the socio-political reality of the final years
©f this century.
IV.
THE "INSTITUTIONALIZATION" OF MONETARY POLICY
The "voices of failure" do address a serious problem. They misunderstood however the nature of the issue. Both components (interest rates and recession) of the
relevant failure reflect a long history of strategic conception and tactical procedures.
This history produced the deflation of the Great Depression and the permanent
inflation of our age. The massive failure of monetary policymaking directs our
attention to a basic questions how can we arrange our monetary affairs in a manner
which avoids simultaneously the risk of large and persistent deflation or inflation?
The problem of an optimal monetary arrangement, expressed by the choice of a
monetary standard, may be approached in a different but equivalent mode. Agents
participating in the social co-ordination game are exposed to a wide diversity of risks.
Many risks express the operation of shocks modifying natural conditions, changes in
technology, organizational skills and information, tastes, demographic conditions etc.
But this variety ©f "real shocks" does not exhaust the risks confronting agents. The
behavior ©f monetary authorities extends the range of shocks affecting the economy
and correspondingly shapes the total risks experienced by agents.
The traditional ideology of Central Banking fully recognizes the on-going
operation of shocks and the associated risks experienced in market transactions. The
occurrence of the real shocks justifies apparently an activist mode of a discretionary
policy. The opportunity to create monetary shocks by suitable discretionary
management can be effectively exploited. Such exploitation should adjust the
monetary shocks in response to all other shocks in order to minimize the total risk
encountered by agents. The reliable formulation of a risk-minimizing activist strategy
requires however a full toowledge of the true stochastic processes of all on-going
18
shocks with a corresponding information about the economy's Interacting structure.
This knowledge is a necessary and sufficient condition for reliable risk-minimization.
This condition offers not even the roughest approximation to reality® Attempts at
risk-minimizing strategies involve under the circumstances a substantial HkeEhood of
raising the total risk ©f the social game. The Great Depression and the permanent
inflation exemplify the point. The case for risk-minimizing activist strategies
expresses thus a "cognitive conceit" beyond ©ur relevant political concerns. The
relevant political issue suggested by analysis and experience focusses our attention ®n
a different question. What are the monetary arrangements which effectively prohibit
an increase of the total risk produced by monetary shocks beyond the basic "natural
risk?"
The relevant set of arrangements contains three major optionss some form of a
gold standard, a "free banking" system with private production of money, and a
constant monetary growth standard, All three standards impose more ©r less stringent
constraints on the government's power to manipulate monetary affairs. Each option
requires ultimately MI appropriate constitutional specification in order to anchor
monetary arrangements beyond the incentives of a short-run political process. Even
so, constitutional constraints are not beyond the longer-run operation of a political
process. This long-term exposure of constitutional arrangements seems to affect all
three options to a similar extent. It offers no rational basis for any preference among
the major options. We are thus led to compare the total social risk produced under the
alternative standards. This problem has not been sufficiently explored in the literature
and was certainly never raised by policymaking staffs or officials, feme very
preliminary examination suggest that a constant monetary growth standard credibly
initiated by the US authorities would probably produce a lower total risk than either a
gold itandard or free banking. This issue remains somewhat open and some deeper
exploration need be pursued. What is hardly open to serious dispute at this stage is the
inferior performance, expressed by a correspondingly Mgh risk, produced by a strategy
©f discretionary policy-making. A constant monetary growth standard would exclude
the Mgh risk potential associated with the Central Bank's preferred strategy.
19
FISCAL POLICY OUTLOOK - A REPORT TO THE SOMC
Rudolph G. PENNER
American Enterprise Institute
FISCAL 1982
There is one advantage related to having deficits that are very large relative to
outlays. The percentage error in my deficit forecasts is likely to be smaller® At least
the principle seems t© have worked with regard to my fiscal 1982 forecast.
In March, 1 forecast outlays of $7%5 billion; receipt ©f $625 billion; a unified
deficit of $120 billion; and an off-budget deficit of $20 billion* The actual outcome for
all of these categories is likely to be marginally lower. The current outlook 1st
Fiscal 1982
$733 B. *
620
$113
19
$132 B.
Outlays
Receipts
Unified Deficit
Off-Budget Deficit
Total financing requirement
Although fiscal 1982 is almost ever, there is still room for substantial error in
the above estimates, especially with regard to receipts. September estimated personal
and corporate income tax receipts can be quite erratic, and outlays are more likely to
be lower than to be Mgher than the $733 billion estimate.
FISCAL 1983
In Marchp I forecast that if policies remained unchanged, we were headed for a
unified budget deficit of about $170 billion. In fact, policies were changed quite
substantially and given the pressures associated with election year politics, this must
be considered as something of a triumph for the Congressional budget process.
Receipts were raised by slightly over $20 billion and the First Budget Resolution called
for outlay savings of over $50 billion including the reduction in debt service payments
resulting from Ae deficit reduction and interest rate effects assumed to follow the
translation of the First Budget Resolution into legislation.
<ft» J i
Unfortunately, the fact that inflation and real growth are somewhat lower than
we earlier expected has offset many ©f these actions and a $170 billion deficit still
cannot'be ruled out, although, as will be argued in detail later, something lower is
much more likely than something higher.
While recent legislative actions are unlikely to make a large dent in our earlier
estimates of the fiscal 1983 deficit, they are crycially important because they will
greatly lower the long-run deficit pattern implied by the policies in effect at the time
of our last meeting. This is quite an accomplishment since there were times In the
early spring when it appeared that the Congressional budget process would collapse
without any deficit reductions in place.
1 was asked to estimate deficits for two significantly different sets of economic
assumptions. The first assumes money growth above target. The real growth rate is
virtually identical to that assumed by the Administration in its Midsession Review of
the 1983 Budget issued in July 1982. From the four* quarter of 1981 to the fourth
quarter of 1983, the assumed real growth rate is 3.1 percent compared to 3.0 percent
in the Administration forecast. Nominal GNP growth is assumed to average 8.8
percent, slightly lower than the Administration's 9.3 percent. Inflation and interest
rates are almost 0.5 percentage points lower than in the Administration forecast.
In addition to making adjustments for differences in the economic assumptions
which, by themselves, lower receipts and outlays below the levels assumed by the
Administration, It is necessary to speculate about the extent of policy slippage and the
extent to which technical estimates of outlay savings and the receipts obtained from
the tax bill are too optimistic. 1 shall use CBO revepue estimating procedures which
lower receipts a bit and use their technical estimates for outlay figures which adds
significantly to estimated program costs. 1 shall also add $5 billion to outlays for
policy slippage as the year unfolds. The results for this path are compared to
Administration estimates beiowt
FISCAL 1983
Administration
SOMC Path 1
Outlays
Receipts
$761.5 B.
646.5
$?S8 B.
643
Unified deficit
Off-budget deficit
$115.0 B.
14.9
Total financing requirement
$129.9 B.
$145 B.
15
$160 B.
77
The second set of SOMC assumptions assumes that the Fed sticks with its enunciated targets. It is much less ebullient and therefore involves a significantly higher
deficit forecast. Nominal GNP is assumed to grow at an average annual rate of 7.2
percent between the fourth quarter of 1981 and the fourth quarter of If S3 while real
growth averages 1.8 percent, Making the same policy and technical estimating
adjustments as before, the second economic path implies?
FISCAL 1983 - PATH M
Outlays
$788 B.
Receipts
619
Deficit
$161 Bo
Off-budget deficit
15
Total financing requirement
$18% B.
It is sheer coincidence that the outlay estimate in Path n is identical to that in
Path 1 and an even more colossal coincidence that both are identical to the CBO
estimate. In all these analyses, assumed real growth, inflation, and interest rate
assumptions are different but the differences exactly counteract each other,,
My own guess is that we shall do tetter than Path 1 if the Fed sticks to its
enunciated targets. I think it reasonable to hope for a tetter division between
inflation and real growtfi under these circumstances and that would bring the unified
deficit closer to CBO's $155 billion than to the $169 billion implied by Path i .
The unified deficit estimated along Path 1 is equivalent to §.4 percent of GNP
while that along Path H equals 5.1 percent of GNP* This compares to a ratio of 4.0 in
1976 and an average of about 2 percent during the decade of the 1970's.
LONGER-TERM OUTLOOK
The policy decisions taken so far this year are crucially important They take us
off of an explosive deficit path in which the deficit grew rapidly relative to GNP as far
as the eye could see even if one assumed a fairly healthy long-run recovery.
Absent a significant recession in the 1984-85 period and assuming a continued
slow deceleration of monetary growth, 1 believe that current policy now stabilizes the
unified deficit at slightly below 5 percent of the GNP in 1984-85. This is still far too
high, but deficits verging on $300 billion seemed quite possible only a few months ago,
and although it is still possible that we shall break the $200 billion mark in the mideighties, it is more likely that we shall remain below that level.
23
It is, of course, probable that further actions to lower the deficit will be taken In
1984 actions. If the main deficit reductions are to be taken on the spending side and 1
hope that they will be, it will be essential to examine defense and social security
outlays critically. Administration estimates imply that those two functions along with
the net interest bill will amount to almost 70 percent of outlays in fiscal 1985 along
their assumed policy path. Adding the health function - mainly medicare and
medicaid - brings the total proporation close to SO percent. It will be virtually
impossible to find savings in the other 20 percent of outlays sufficient to make a
significant dent in the deficit. There are, however, technical and other constraints on
the amount by which defense and social security can be lowered. There is a fairly
broad consensus among military experts that it would be dangerous to enact major cuts
in the operations, maintenance, training, and personnel portions of the defense budget.
The procurement of expensive weapons systems such as the B-l, MX missile, and two
nuclear carriers is much more controversial, but cutting such items now saves little
before 1986.
There are similar time constraints on the ability to cut social security. Even
advocates of significant cuts agree that the benefit structure must be changed slowly
to allow those near retirement to adjust their retirement plans.
Consequently, some tax increases will probably be necessary in 1984 and 1985,
but hopefully, they can be kept to a minimum.
24
FORECASTING MULTIPLIERS IN THE 80'Ss
THE MORE THINGS CHANGE THE
MORE THEY STAY THE SAME
James M. JOHANNES
and
Robert H. RASCHE
Michigan State University
Last spring, in our analysis for the Shadow Open Market Committee meeting, we
were caught in the middle of one of the frequent money stock revisions, without any
historical data for any of the revised money series or their components. These
historical data became available in March 1982, so our current analysis is in three
sectionsi 1) a discussion of our updated estimates which include a significant amount
of data from the post October 1979 period for the first time; 2) an analysis of the
forecasting performance ©f our component models in the 1981-82 periodf and 3) a
forecast for the coming twelve month period.
1.
ESTIMATION OF REVISED DATA
The last set of estimates of our ¥arious component models that we reported were
constructed from the June 1981 money stock revisions, and were estimated over
sample periods that ended In December 1979. These appeared in Table 2 of our
September 1981 report. They are reproduced here for easy reference as Table 1.
These estimates for all practical purposes reflect the experience under the old Fed
funds rate operating procedure* With the data revisions that became available in
March 1982, we have extended tide ample period ftrough December 1980, but kept the
form of the models the same. Thus these estimates reported in Table 2 are influenced
by the first fifteen months of the new operating procedures and the credit control
period in early 1980, but are not influenced by the legalization of nationwide NOW
accounts in January If Si.
On the whole, the models continue to remain very stable, in spite of all the
"special" circumstances ©f the post 1970 period. There appears to be some minor
25
deterioration in the k and tf models, notably In the x and s.e.e. statistics from our
previous estimates, but this is not surprising given the large forecast errors in March
and April 1980 that were noted for these components* Our general conclusion is that
there does not appear to be any evidence at this point in time that the structure or the
usefulness of the models has been substantially influenced by the change in monetary
policy regimes. Whether this conclusion will hold up in the future is an empirical
question that can only be answered with the passage of time. In retrospect, it is
almost unbelievable that the structure of these simple models has remained essentially
unchanged over the four years that we have been preparing forecasts for the Shadow
Committee, in spite of all the allegations of financial Innovations and "special
circumstances." A detailed analysis of the evolution and ex ante forecasting
performance of the models is currently In preparation.
1.
AN EX-POST EVALUATION OF 1981-82
We have prepared an ex-post forecasting analysis for each of our component
models, using currently available data, for the period January 1981 through June 1982.
For five of the component models, k, tf, tf, g and z, we have employed the "ramp"
intervention term over the period January 1981 through April 1981 t© allow for
portfolio shifts between time deposits and transaction accounts, as described in our
report to the Shadow In September 1981. This adjustment Is meant to approximate, In
a simple fashion, a portfolio shift of the magnitude and form implied by the "shift
adjustment" developed by the staff of the Board of Governors. The forecasting experiments reported here support our previous conclusion that a portfolio shift of this
magnitude, with resulting implications for the behavior of the various multipliers,
cannot be ruled out. The one~month forecast errors for this eighteen month period
for each of the component models and for various multiplier concepts are presented in
Tables 3 - 8 .
Casual inspection of these tables reveals a number of desirable properties of the
forecasts. First, the mean forecast error of all components, whether considered over
the whole 1981-82 period or just over 1982, is very small, Indicating that the forecasts
are essentially unbiased. The largest forecast errors are concentrated in the first half
of 1981, but even here *»e average errors tend to be quite small. The size of tfiese
errors Is not a matter of concern, since we have made no attempt to capture the
month-to-month magnitude ©f the portfolio shift associated with nationwide NOW
26
accounts, but merely attempted to approximate the shift en average with a simple
linear function. The approximation seems to have worked tetter than we had any
reason t© expect.
A formal test of tfie forecasting properties of the models is provided by the
information in the right hand column ©f the Yarious tables. This column is the
"standardized* forecast error computed by dividing the forecast error by the estimated
standard error of forecast, a *t ratio."1 Given the number of degrees ©f freedom in the
estimation, this variable can be considered as normally distributed under the
hypothesis that ©ur models are true. The sum of the squares of these standardized
errors are then distributed as x 2 under ©ur maintained hypotheses. The computed
values of the x2 statistic for the entire eighteen months (seventeen degrees of
freedom) and the last six months (five degrees of freedom) are tabulated for the
hypothesis that the variance of the "t ratio" is equal to 1.0. The critical value of the
X 2 statistic at the five percent level is 27.59 for seventeen degrees ©f .freedom and
11.07 for five degrees of freedom. For the whole forecast period, the hypothesis that
the variance of the "t ratio" is unity is rejected in five ©f six cases. This is not
surprising given our simple approximation to early 1981. For the first six months of
1982, the hypothesis that the variance of the mt ratio" is unity is not rejected in four of
the six cases, including the three components, k, tfs and r + 4 that account for most
©f the variance in the multiplier forecasts. In one of the remaining two cases, the
hypothesis is only marginally rejected for the g ratio. Our overall conclusion is that
there is little if any evidence that our component models have teen invalidated by the
experience of the past two years. The one model that may warrant some further
investigation is that for z, the foreign deposit ratio, since it is possible that there has
been some change in the underlying behavior associated with this component during the
past two years, given the strong stowing of the dollar on foreign exchange markets
during this period, and the absence of regular intervention by the Federal Reserve in
those markets.
Undoubtedly the most encouraging result Indicated in ttese tables is that,
contrary to most popular speculation, nothing unusual or unpredictable seems to be
occurring with the currenct ratio, at least since the middle of 1981. The mean error of
the mt ratio" of the k component forecasts over the last twelve months is only -.07,
2
with a computed standard error of 1.19. The computed value of the x statistic over
this period is 15®€3 compared with a critical value of 19.67.
27
The forecasts of the various components have been assembled to produce forecasts for the monetary base and net monetary base (St. Louis Federal Reserve Bank
concepts). In both cases, the mean forecast error is effectively zero for both the
eighteen month period and for the first six months of 1982. The root-mean-squared
error in each case is comparable to those of our earlier forecasting experiments.2)
The first order autocorrelations over the period July 1981 through June 1982 are .02
and -.12 for the monetary base and net monetary base multipliers, respectively. Thus,
while the behavior of the base and M. appears to have diverged considerably in recent
months, the difference in the growth rates of the two series appears t© be completely
consistent with the past behavior of the component series.
11.
FORECAST FOR AUGUST 1982 - JULY 1983
Given that the tests discussed above overwhelmingly support the proposition that
the models that are presented in Table 2 continue to be a valid description of the
money supply process, we bravely plunge into another twelve month forecast. This
forecast, for both the monetary base and net monetary base multipliers, is presented in
Table 11. In brief, we forecast a continuation of the downward drift that we have seen
in these multipliers in recent years. Over the course of the next year these multipliers
should decrease at an annual rate of roughly two percent, which should give
considerable leeway for differential growth of M. and the monetary base over the next
year*
28
FOOTNOTES
1.
For additional discussion of this portfolio shift see, James M. Johannes, "Testing
the Shift Adjustment in the Federal Reserve's New Shift Adjusted M 1B ,"
Economics Letters, 8, 1981, pp. 367-72. For another view, that the currency
ratio was unaffected by the extension of nationwide NOW accounts see, John A.
Tatom, "Recent financial Innovations! Have They Distorted the Meaning of
U.?\ Federal Reserve Bank of St. Louis Review, April 1982, pp. 23-32. Our
models do not support this latter conclusion.
2.
See James M. Johannes and Robert H. Rasche, wCan the Reserves Approach to
Monetary Control Really Work?*, Journal of Money, Credit, and Banking, August
1981, Table %, p. 307.
29
TABLE i Component Models
June, 1981 Revisions
k
Ci-B)(i-B3)(1~B12)
2
X - 36.21
g
(1-B)(1-B
2
2
df • 27
df « 28
(1-B)(1-B3)(1-B12) l o t *
2
X • 33.82
t
3
s . e . e . - .200
SAMPLE: 5 9 . 1 - 79.12
( 1 - .3584B)(1-B)(1-B ~) lnz - (1 - .6912B 1 2 ) a
£
(.0627)
(.0497)
X - 34.53
t,*
1
df - 28
B ?196B
) lng - (1 - ,4134B)(l - . 1 3 2 2 B 2 ) ( i - .6311B 1 2 ) a
c
(.0655)
(.0742)
(.0544)
2
X -34.28
»
)(I - .6239B 1 2 ) a
(.0460)
(.0598)
'
9
s . e . e . - .566 x 10
SAMPLE? 5 9 . 1 - 79.12
ink - ( i -
(1-B
12
df - 28
)[(1-B) l n t *
1
s . e . e . • .269 x 10
SAMPLE? 5 9 . 1 - 79.12
- (1 - .i»7ftlB 3 )(l - .5738B 1 2 ) a
C
(.0494)
(.0603)
s . c . e . - .S51 x 10
-9
SAMPLE: 5 9 . 1 - 79.12
+ .00232D + .0474D - .0828D-]
(.0159) l
(.0130)2
(.0164)J
- (1 - .5369B)"" 1 (1 - .6597B 1 2 ) &
t
2
X - 30.i5
t+l
s . e . c . • .292 x 10
df - 27
SA»LEs 6 1 . 1 - 79.12
s . e . e . - .952 x i 0 ~ 2
12
(1-1)(1-B
1
tc
df - 28
( 1 - B ) ( 1 - B 1 2 ) l n ( r + £ ) - (1 - .6748B + .2449B 2 - .3713B 1 2 ) a
t
(.082.1) (.0834)
(.0702)
X - 35.13
r+i-v
-1
2
SAMPLE: 68.10 - 79.12
19
) l n ( r t t - v ) - (1 - .3114B - .5220B
(.0734)
(.0745)
- 27.93
df • 28
) a
»5>
s . e . e . - .712 x 10
E
SAMPLE: 68.10 - 79.12
( 1 - 1 ) ( 1 - i 1 2 ) l n t c - (1 - .S432E - . 1 7 3 0 1 3 + . 1 7 7 0 1 9 - . § 0 3 8 i 1 2 ) a
c
(.0540)
(.0490)
(.0405)
(.0507)
2
X
• 39.27
M - 21
*.o.«». » .330 x 10
30
-1
SMfftE: § 9 . 1 - 19.12
TABLE 2 Component Models
March, If §2 Revisions
( l » W ( l - S 3 K l - l l 2 i n k « (I - .7B62B 3 )(-r- .§S13B 12 )a
£
X - 39.91
df - 28
i . i . t . "^629x10"^
12
SAWLEi
2
59.1-80.12
17
)lng - (1 - .4203BKI - . 1 5 3 3 8 ( 1 - .6198BA )a
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(.0640)
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SA»LE:
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( i - .35131) (1-B) % (l-B 12 )lnz - (1 - .?093B l 2 )a
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df » 28
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gMffLBs
( l - B ) ( l - l 3 ) ( i - B 1 2 > l n t * - (1 - . ? 3 5 2 i 3 ) ( l - .6363B l 2 )a
(.0452)
2
X " 43.10
df • 28
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89.1-S0.12
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SAtffLE:
59.1-80.12
(1-B 12 ) [ ( l - B ) l n t ? + .00920 + .04650, - .0848DJ
* (.01?8) J (.0123)" (.01?0) J
• (1 - .4?37B)"' 1 (i - .6594B 12 )a
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df - 28
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(.0452)
(.0103)
X 2 - 31.85
SJWLEi
s . e . e . - 305x10
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(.0797)
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r-f-£~v
i f • 28
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TABLE 3
Ex-Post Forecast for k
Period Forecast
Actual (Aug., 1982)
Forecast
January 1981
February 1981
March 1981
April 1981
May 1981
June 1981
July 1981
August 1981
September 1981
October 1981
November 1981
Becember 1981
.38228
.39828
.39426
.37723
.39733
.39453
.39615
.39849
.39439
.39223
.39303
.38980
.38577
.39140
.39725
.38360
.39458
.39018
.39273
.40053
.39311
.39271
.39681
.39172
January 1982
February 1982
March 1982
April 1982
May 1982
June 1982
.37811
.39690
.39680
.38606
.40548
.40422
.38442
.39512
.39750
.38430
.40466
.40009
January 198| -June 1982
mean Error
Standard deviation of forecast
error
standard diviatloa of M t "
-1.40
tm & & d?
•""A s X /
-2.58
1.08
1.73
1.35
-.79
.51
-.19
-1.48
-.76
.70
— 27
.71
.31
1.60
January 1982-June 1982
.00025
.00358
1.4S
31.24
1.42
10.08
1?
"e-Ratio"
-2.54
.00248
.00255
.00156
.00248
.00261
.00758
.00028
.00366
^(Actual-Forecast)/(Standard Error of forecast)
Standard Error
of Forecast
.00249
.00252
.00256
.00247
.00254
.00252
.00253
.00258
.00253
.00253
.00256
.00253
TABLE *
Ex-Post Forecasts for t j
period Forecast
Actual (Aug., 1982 )
forecast
Standard Error
of forecast
January 1981
February 1981
torch 1981
April 1981
May 1981
Juae 1981
July 1981
August 1981
Septeatser 1981
October 1981
Noveuber 1981
December 1981
4.13393
4.34492
4.32466
4.12341
4.33533
4.32235
4.32365
4.38995
4.3S81S
4.39€76
4.37992
4.28411
4.15356
4.2386?
4.32979
4.19420
4.3038?
4.26326
4.29623
4.37191
4.36188
4.3690?
4.40159
4.3347§
.0265
.0271
.0277
.0268
• .0275
.0272
.0274
e©277
.0279
.0279
.0281
.0277
January 1982
February 1982
tfarch 1982
April 1982
May 1982
June 1982
4.28028
4.§3630
4.§5737
4.39926
4.60249
4.58633
4.37200
4.52533
4.56407
4.40157
4.§1549
4.55749
.0279
.0289
.0292
.0281
.0295
.0291
January 1981-June 1982
mean error
standard deviations of forecast
error
standard deviation of M t "
v
2
-.74
3.92
-.19
-2.64
1.14
2.17
1.00
.43
34
.99
-.17
-1.83
-3.29
.38
£ ^gV d*
-.08
=»s 44
.99
January 1982-June 1982
.00269
.0460
.0417
1.68
47.98
1.48
10.95
*(Actual-Forecast)/(Standard Errer of Forecast)
33
"t-Raito1
TABLE 5
Ex-Post Forecasts for t|
Period forecast
Actual (Aug., 1982)
Forecast
Standard Error
of Forecast
January 1981
February 1981
March 1981
April 1981
May 1981
June 1981
July 1981
August 1981
September 1981
October 1981
iovenber 1981
December 1981
.93166
.§2163
.9331?
.98622
.99059
.97788
.03533
.99100
.96790
.97972
.96520
36782
34969
.92584
.92581
.98626
.99330
.95231
1.04647
1.01510
.98526
.99334
.97369
.96064
.0282
,0275
.0275
.0293
.0295
.0283
.0310
.0301
.0292
.0295
.0289
.0285
January 1982
February 1982
March 1982
April 1982
May 1982
June 1982
,99234
,§3010
,06713
,13211
,10507
.03189
,97890
.99338
1.06152
1.14011
1.14135
1.05754
.0290
,0295
.0315
.0338
.0339
.0314
January 1981-June 1982
nean error
standard deviation of forecast
error
standard deviation ©f "t"
v2
-.0041
.0183
-.0024
.0267
„6>04
6.21
.854
4.61
* (Actual-Forecast)/(Standard Error of Forecast)
January 1982-June
3%
TABLE 6
Ex-Post Forecasts for g
Period Forecast
Forecsit
Actual (Aug,, 1982)
Standard Error
of Forecast
,
t-latio,
January 1981
February 1981
March 1981
April 1981
May 1981
June 1981
July 1981
August 1981
September 1981
October 1981
Bovember 1981
December 19§I
.©26455
.©28571
.035135
.038903
.04166?
.©41529
.©35271
.024957
.©36892
,©44013
.031340
.©34815
.038660
.028456
.©2424S
.029011
.©34651
.045486
.038097
.032762
.040665
.§33551
.027929
.039292
.00806
.00593
.00505
.00605
.00722
.00948
.00794
.00683
.©0847
.00699
.§0582
.©0819
-1 ,40
,02
,16
1 ,64
,97
,42
,36
-1 ,14
,45
,50
,59
,55
January 1982
February 1982
larch 1982
April 1982
May 1982
Jung 1982
.044465
.064860
.©50000
.042383
.049091
.©34026
.037383
.042170
.049888
.©49054
.049501
.056481
.00779
.00879
.01040
.01022
.01031
.01177
,91
,58
,01
,65
,04
January 1981-June 1982
•ean error
standard deviation of forecast
error
standard delation of M t "
v2
January 1982-June 1982
.©0040
.01019
.00006
.01493
1.23
25.85
1.51
11.42
*(Actual-Forecast)/(Standard Error of Forecast)
">1i ? 4
35
TABLE 7
Ex-Post Forecasts for z
Period Forecast
Actual (Aug., 1982)
'oreeast
Standard Error
of Forecast
January 1981
February 1981
March 1981
April 1981
May 1981
June 1981
July 1981
August 1981
September 1981
October 1981
loveaber 1981
December 1981
.08994?
.095353
.§88514
.084184
.086333
.087343
.082299
.082457
.084558
.07831?
.§76751
.§76469
.092766
.089534
.095673
.08330?
.088395
.083829
.087677
.079707
.081906
.085446
.077478
.077469
.00265
.00255
.00273
.00239
.00254
.00239
.00250
.00228
.00234
.00244
.00221
.00221
January 1982
February 1982
torch 1982
April 1982
May 1982
June 1982
s©?083?
.0722S1
,071154
.§65418
.070131
.069313
.074306
.071867
.077244
.068853
.067264
.069997
.§0211
.00205
.00201
.00197
.00192
.00200
January 1981-June 1982
mean error
standard deviation of forecast
error
standard deviation of M t "
v2
&> o (£6
£aa & %J* (ka
.37
<s
*' o © X
1.47
^ o X^
^J» Q ^ a c ^
X © A-S
-2.92
-.33
-.45
=1.64
Q ^A'^
" J
e tU^ «?
-1.74
1.49
-.34
Janaury 1982-June 1982
.00173
.00322
1.63
45.24
1.61
13.00
36
t-!atio
-1.06
.0011?
.00385
*(Actual-Forecast)/(Standard Error of Forecast)
M
TABLE S
Ex-Post Forecasts f©r r + £
Period Forecast
Actual (Aug*, 1982)
"orecsst
Standard Error
of Forecast
"t-Ratio"
*^i a wS>
January 1981
February 1981
larch 1981
April 1981
May 1981
June 1981
July 1981
August 1981
September 1981
October 1981
iovauber 1981
December 1981
.025352
.023928
.023582
.923719
.023553
.023567
.023600
.023442
.023150
.022853
.022999
.023162
.©25621
.024313
.§24075
.023977
.023542
.023399
.023663
.023430
.©2346S
.023321
.©23470
.022975
.000265
.000251
,000249
.000248
.000243
.000242
.000245
.000243
.000243
.000241
.000244
.000238
January 1982
February 1982
March 1982
April 1982
lay 1982
June 1Q82
.023571
.022158
.022471
.022544
.022372
.022726
,§231S8
.©22138
.022240
.022672
.022532
.022410
.000239
.000229
.000230
.000234
.000233
.000232
January 1981-Jume 1982
»eao error
standard deviation of forecast
grror
standard deviation of M t "
•=** «£>
.05
.74
o
^ » %&
.05
A © sPcL
-1.94
JL
© iy ist
.79
1.69
£>%&&,
1.00
^© S 3
-.69
1.36
January 1982-June 1982
-.00021
.00031
1.37
31.91
1.32
8.71
37
s
-1.98
-1.04
-.00005
.©0032
*(Actual-Forecast)/(Standard Error of Forecast)
S>
TABLE 9
Ml Monetary Base Multiplier, NSA
Predicted
January 1981
February 1981
March 1981
April 1981
May 1981
June 1981
July 1981
August 1981
September 1981
October 1981
November 1981
December 1981
January 1982
February 1982
March 1982
April 1982
May 1982
June 1982
2.56413
2.58151
2.56164
2.&1272
2.88009
2.60779
2.57992
2.5615?
2.58374
2.58740
2.56935
2.60577
2.61633
2.59863
2.57556
2.60956
2.53442
2.56580
~.02491
.01969
-.02262
-.03455
.01155
.02796
.00886
^.00646
-.00484
-.01297
-.02766
-.00515
-.01415
.03224
.00388
-.00174
-.00798
.01805
2.58904
2.56181
2.58427
2.64727
2.56853
2.57983
2.57105
2.56803
2.58858
2.60038
2.59700
2.61092
2.63048
2.56640
2.57168
2.61130
2.54240
2.54774
January 1981-June 1982
•eats error
IMSE
Avg.
multiplier
Error
Actual
-.0023
.0188
2.5854
January 1982-•June 1982
.0051
.0166
2.5783
Jl©
TABLE 10
Ml Net Monetary Base Multiplier, NSA
Predicted
January 1981
February 1981
March 1981
April 1981
May 1981
June 1981
July 1981
August 1981
September 1981
October 1981
Novenber 1981
December 1981
January 1982
February 1982
March 1982
April 1982
May 1982
June 1982
2*58961
2,60375
2.58170
2.6288?
2.6011?
2.§4209
2.61186
2.5883?
2.60549
2.61008
2.5865?
2.61629
2.S2618
2.621%
2.60168
2. §344?
2.55757
2.58206
2*61120
2.58190
2.§001?
2,66910
2.60223
2.61156
239802
2.58948
2.61124
2.§1812
2.60751
2.62051
2.65319
2.51214
2.§9595
2.63537
2.55851
2.56508
January 1981-June 1982
mem e r r o r
EMSE
Avg.
multiplier
Error
Actual
-.0018
,0191
2.6068
January 1982-June 1982
,0038
.0182
2.§001
39
-.02159
.02185
-.01847
-.04023
-.00105
.03053
.01384
-.00111
-.00575
-.00804
-.02094
-.00422
-.02765
.02982
.00573
^.00090
-.00094
.01698
TABLE 11
Predicted Ml Multipliers 3
Monetary Base
J u l y 1982 p
August 1982
September 19S2
2.5416
2.5132
2.5290
October 1982
November 1982
December 1982
2 5201
January 1983
February 1983
March 1983
5356
4825
t& *4885
A p r i l 1983
toy 1983
June 1983
7
Net Monetary Base
2.5505
2.527?
2.5500
2.5298
2.5365
2.5388
2.5022
2.5455
2.4923
2.4984
&r 0 esS JLd& JL
2.48?4
2.5464
2.4691
2.4162
2.4972
5268
m
5363
4594
4664
2.5374
2.5290
5402
q
#S O 3 &* £t O
2.5388
^Actual based on preliminary estimates from St. Louis Federal Reserve and
August 13, 1982 H.6.
July 1982 origin.
Three wmth a v e r a g e .
40
t£
August 13, 1S82
ECONOMIC PROSPECTS THROUGH 1983
postpone
A renewed slowdown in money growth between January and July will
i
ipid recoveryt__until 1983. However, the recent increased stability in month-to-month
a ra{
cements in
in the
the money
money supply
movements
supply should reinforce a trend toward a lowe:
lower prime
rate in the near-term. While a cyclical recovery in 1983 remains a likely development,
long-'-term prospects have deteriorated considerably as a result of the Administration's
push
If the tax increase is approved* significant economic
r — . for higher taxelT
problems will continue through 1S84 aid the Administration may lose control of
economic policy.
The Latest Money Squeeze
As the chart below Indicates,, the latest six month squeeze on money (Ml)
was not accompanied by a similar dramatic squeeze on the monetary base.
Hence, although the Federal Reserve was supplying reserves to the system, a
larger proportion of these reserves was held by the public in the form of currency
and used to support time deposits. This preference for holding currency is
similar to the pattern which developed in the early 1930s. During that period,
the economy responded not to the rapid creation of reserves, but to the sharp
drop in money..
Personal income a n d Adjusted Monetary Bas«
15
18
# »
teSWW®
18
„
12
S
^^f^t
&
%$&>&
&
iWl,^.
i
SA
A
f^v%^d prp^j
\
Kaaotcry Oseo
W'
6£T
12
°'°\
ViN
" / ' I" j
If
V \ %/
w
V
= #
Ws-^v-v-:,
j
---;, l?T—:-r--"k.:x,,.:-^ J
P©re©raol tae©swG amd Ctesaoy HOT
M date we H B O I ^ ai|*te«J an saon^ ewnpswrf ®w»^ nass e)
Source B n r d of Gownwr* eJ te F e t e d Rssarv* System.
feder at Re»*ve BBi>> oS SI Usub. K 3 1 * to*
$1
tfotgD
Q
§
With the economy already in the throes of & severe recession, the latest
tout of tight money will prevent any significant signs ©f recovery during the
balance of the year. Although the forecast calls for a 6% annual rate of monetary
growth and a 3%% rate of real economic growth during the last half of 1982,
increases in money during recent weeks have been below the forecast assumption.,
Consequently, the odds of ewen weaker economic performance than indicated in
the attached forecast have been increasing.
Tighter money means a weaker economy in the short run yet signals further
progress on inflation. While our forecast calls for a 5% increase in consumer
prices for 19838 the odds are rising that inflation could be below the 5% vicinity.
A further encouraging sign can be found in recent productivity performance.
During the past two quarters private nonfarm productivity has increased at an
average annual rate of 2V2% in spite of a downward trend in real output. This
is the first indication that U.S. productivity, which has been in a state of secular
deterioration since the late 1960s, may be improving.
The Administration Abandons Supply-Side Economics
For the moment, supply-side economics has been put aside by the Reagan
Administration. As details of the recommended three-year, $100 billion tax
increase become available, our analysis shows that it completely eliminates the
cuts in effective corporate tax rates enacted last year. As a result, the only
element of supply-side economics that remains is an extremely modest cut in
individual tax rates. Standing alone, these small cuts are not expected to boost
productivity sufficiently to assure an explosive period of growth over the next
few years. Without rapid growth, a growing disillusionment with economic policy
will continue.
Given the ongoing uncertainties surrounding the nature and shape of the
proposed tax bill, the present forecast was developed under the assumption that
only a part of the tax increase would be approved. Should the tax bill be
implemented in full, it would have the effect of reducing the prospects for
productivity increases and hence, real growth in 1983. ironically, the success of
the Reagan Administration's economic policy now rests on its losing the current
battle to increase taxes.
An interesting and disturbing factor in the move to boost tax burdens is
that it parallels a similar move 50 years ago when the economy was also in a
serious recession. In 1932 the federal deficit was $2.7 billion and there was
widespread concern that this huge deficit would crowd out private investors. (It
should be noted that relative to the size of the economy, a deficit of $2.7
billion in 1932 is equivalent to well over $100 billion in today's economy.) This
concern led President Hoover to shift his economic policy from cutting taxes to
increasing taxes. The end result was the largest peacetime tax increase up to
that point in U.S. history, followed by a decade of economic misery.
Interest Rates to Continue Erratic Downtrend
While only a month ago our prime rate forecast of 14% by year-end was
viewed as too low, now it appears that it may be too high. Whether or not our
forecast overstates the level of interest rates at the end-of the year depends on
42
fed policy. We have assumed a return to the large erratic month-to-month
swings in money which have caused concern in financial markets over the past
two years. This assumption Implies the continuation of relatively high real
interest rates, which in turn serves to dampen the expected recovery in housing
and autos. It is important to note that more recently the Fed has done a
better job of stabilizing month-to-month swings. If this relative stability continues,
year-end interest rates would be lower than our present forecast, and consumer
durables and housing would experience a more rapid recovery in 1983.
S§©tt«if WoiatSiitt? §nd Real Short Term Rate
I^JLSouJay C&S3II
f378=3
Q566G7@S@8TO787273?«75J«77?§79@08ta2
i c s n gsc? @f i
0 Tfe^d Qucre* est
Summary
While a few favorable factors such as decreased month-to-month monetary
volatility, lower interest rates, and improved productivity provide some encouragement,
the key economic developments of recent months have been negative. Six months
ef restrictive monetary growth In an already fragile eoonomio environment combined
with efforts to boost tax burdens has cast a pall on the outlook for the immediate
future as well as prospects' for a vigorous and sostained recovery!
Kobert J. Genetski
Vice President and Economist
*3
•DJVSfED ANNUAL BOTES)
(BTLLTONS OF
FORECAST
ACTUAL
01
IV
12
I
9S
11
3W3.2
3,0
2995.5
-1.0
DEQi iBP
fCH
1490.1
-5.3
MICE RFUTOR
ICJi
1?
Ill
1?
17
83
I
83
11
301?.%
7.1
3122.8
10.3
3199.5
10,2
3269.9
11.8
3318.6
12.6
1470.7
-5,1
1476.0
1.7
1489.2
3.»
1502.0
3.5
1521.*
5.2
2.0155
1.1
2.03iS
4.3
2,0635
5.3
2,Of§9
6,6
8.1301
6.5
1084.5
3.4
1919.4
7.0
1950.0
0.7
1991.3
8.6
229.6
-17.9
237.9
15.3
242.0
1.1
1,1
746.5
749.1
T5S.5
It ft
is K&
•D a Cf
g»8.3
10,3
932.*
11,0
§51,6
1.5
971.4
1.6
ffi.S
10.5
INVESTMENT EIRNDITURE3
ICN
068,9
-13,3
414.6
-38.8
429.1
14.5
23.6
CKWES P78ED EHPEHB
MS
ss»,s
357.0
-3,5
351,0
-3.3
f.T
815,1
-6.8
139.0
22,1
OK33S Wth
8CM
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1989
1981
1982
1983
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11.6
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03.5
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6.4
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RRCENTAOE ClttWOES IT ANNUAL RATES
BCOtlBifC OUTLOOK
8/12/8?
(BILLIONS W DOLLARS—SEASOMLLt AMUSTED ANNUAL RATES)
1CW1L
WJIECiST
12
19
•3
1
13
11
177.9
23.8
188.4
21.2
197.7
21,2
211.5
31.0
162.1
16,1
168.6
17.1
181.9
35,5
198.9
12.9
58.0
-12.3
56.9
19.2
65.0
?6.2
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28.9
115.9
-59.1
118.2
-5,1
121.0
25.9
123.1
1.2
112.1
5.9
101. J
-33.1
102.0
2.1
105.1
15.2
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2.8
2599.5
6.8
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393.8
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82
1
82
11
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216.5
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KN
183.9
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157.1
-96.7
156.0
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11.•
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55.8
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•2
111
TEARS
S3
If
1980
1981
1982
19$3
221, ©
30,3
229.8
6.9
8*2.5
232,1
-1,3
176.6
•£9.0
216.3
22.6
216,7
81.0
225.2
16.5
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9.9
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128.5
17.6
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150.9
118.6
•21,9
139.1
17.3
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-7.7
112.7
80.1
123.8
135.6
63.7
182.0
20.1
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109.5
12.9
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121.5
29.6
2597.9
7.7
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17.8
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817.6
11.8
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311.7
15.0
391. 3
1,2
915.0
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2117.1
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2151.9
6.7
7217.5
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8857.•
7.8
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2376.8
11.7
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1.9
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111.7
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8.9
8.1
9.5
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9.7
9.8
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1.090
3.9
1.096
2.5
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0.999
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0.991
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1.003
2.8
1.008
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1.021
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INDUSTRIAL ROSW? 103
fCH
1.963
1.818
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1,393
1.801
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1.115
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1.982
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FR0FT7S POt $2:2 ME ESTtHiTES. WIS TO T i t ECOHOMIC BECOfEOT TAR ICT OF 19$1, PRETAX PROFITS HAVE BEER itEDUCtt TO iEFLECT
HJGBEI TAX ALLOWANCES FOR CAPITAL CONSUHPTION.
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82
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83
1
83
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15.3
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19.8
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16.2
16.1
16.0
15.8
15.6
15.1
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13.3
16.2
16.3
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16.5
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12.6
11.8
11.6
11,9
11.0
10.9
12.6
15.2
13.0
11.2
3 MONTH T-BILLS
11.i
12.1
12.9
11.1
10,1
10.7
10.8
10.2
10.1
11.9
19.0
11.8
W.I
FRIMART 90 M l CW
11,1
13,9
19.2
13.1
12.2
11.8
11.6
11.2
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199.8
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18.055
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-9.5
18.071
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18.072
0.0
18.117
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18.379
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18.608
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11.146
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17.991
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936.7
5.9
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951.7
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5.9
980.7
5.6
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»CH
Jj.fTf
-6.0
6.957
-1.3
6.978
1.2
6.969
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7.083
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2151.8
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1591.1
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1913.3
9.5
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8.9
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fCH
1.?30
-8,5
1.699
-8.8
1.686
-1.9
1.687
0.1
1.688
0.9
1.703
3.5
1.716
3.3
1.T30
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1.131
0.3
1.T25
0.6
1.759.
2.0
1.619
1.120
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2.819
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2.138
3.2
2.168
9.6
2.919
6.6
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3.079
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13.5
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3.059
5.6
AUTO SALES 1)
7.39
8.27
7.97
7.90
8.69
9.53
9.81
10.15
10.31
8.98
8.59
8.07
9.15
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5.18
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5,If
5.TO
§.31
6.96
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1.11
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6.60
6.27
5.86
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2.38
2.10
2.00
2.20
2.33
2.5?
2.§5
2.79
2.78
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2.33
2.21
2.69
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0.920
0,956
1.090
1.190
1.221
1,335
1.139
1.500
1.298
1.100
1.027
1.379
I
8?
II
TEARS
S3
111
83
If
1980
1981
1982
1983
liTEiESt HTB
IEM 1SSIB I I I M S
NONET AND VEIOCTTT
HONETART MSE-(NB)
ICU
womtm s t i f f s 3)
1) FRIOR TO NOVCNBCR W 7 9 , COHHERCTAL FAFER 9-6 NORTHS
25
3)
VELOCITY is MEiswira as ONP DIVIDED if NONET SERIES UGOED WO
I N NILLIONS OF WWTS-SEASONALLT ftDJUSTED ANNUAL RATES
IKlJWiJS
August 4, IS82
ECONOMIC OUTLOOKi ALTERNATIVE FORECASTS
A moderate economic recovery is expected during the second half of 1982, followed
by more robust growth in 1983. The recovery should be accompanied by consolidation of
recent gains against inflation, moderate declines in interest rates, and a restoration of
corporate profitability* However, Interest rates after adjustment for Inflation are
expected to remain unusually high by historical standards.
The Economy
The recession appears to have ended during the second quarter, as preliminary
statistics indicate that real GNP advanced at a 1.7% annual rate. Real disposable income
Increased 0.8% per annum during the same period, supporting gains in real personal
consumption and boding well for future advances in spending and personal savings as the
recovery progresses. Moreover, real investment rose for the first time since the third
quarter of 1981, although the Increase was attributable mainly to reduced inventory
depletion.
However, the recovery is off to a feeble start, and economic indicators at the end of
the second quarter are less than encouraging. Consumer prices rebounded to a 12.7%
annual rate for May and June, Industrial production and new orders for durable goods
declined throughout the quarter, and total auto sales in June fell to the lowest level in 12
years. In addition, the leading economic indicators were unchanged in June after posting
gains from March through May.
The slow economic recovery is a direct effect of money growth rates that have been
restrictive since January and the persistence of unusually high real interest rates. As a
result, the recovery is expected to advance at an uninspiring rate of 3%-3 1/2% during the
second half of 1982, or about 2% slower than previous Harris Economies forecasts
predicted in April and May. Growth is expected to accelerate to a 5% rate during 1983 in
req»nse to greater monetary stimulus, declining interest rates, and increased utilization
of the huge reservoir of excess productive capacity.
Monetary Policy
During the last fear money growth rates have followed an erratic eourse for periods
of 6 months. These variations were partly in re^onse to shifting patterns in the federal
Reserve's sale and purchase of government securities, which changed the growth rate of
bank reserves. Patterns in the public's use of these reserves also changed as deposit
holding preferences have been altered by the severe recession and high interest rates.
Because pending in the current period is closely related to changes in money during the
preceding 6 to 9 months, an adequate understanding of Mi behavior is essential for
accurate economic f ©recasting.
#7
-2-
Charges In the Ml measure ©f money result primarily from changes in currency and
bank reserves, together called the monetary base. The Federal Reserve has direct control
over the monetary base, and M1 growth rates seldom deviate from base growth rates for
periods lasting as long as 6 months. Consequently, by controlling the monetary base the
Fed should be able to generate the desired level of money growth and total spending in the
economy. However, the last 6 months have witnessed substantial deviations between base
growth and Ml growth. The recent shortfall in Ml growth occurred because time deposits
became more attractive and because precautionary holdings of currency were increased
by the public, which reduced the growth of bank reserves as a proportion of the monetary
base.
Swings in Ml growth can have a significant impact on economic growth patterns,
even though money growth meets the policy targets on an annual average. The q?urt of
money growth between October and January was largely responsible for the improved
second quarter economic performance. And, de^ite Ml growth at a 5.2% annual rate
since the 2.5%-5.5% targets were established in the middle of the fourth quarter, the
growth of only 1% in M1 over the last 6 months presages a subdued second half recovery.
Moreover, the danger exists that continued slow money growth will delay the recovery
until 1983.
Interest Rates and Money Volatility
Interest rates have remained at unprecedented levels relative to inflation since the
end of 1980, and this situation is expected to persist throughout the coming 18 months.
Most explanations for these high rates have centered on the large federal deficit, and
rates have undoubtedly been biased upwards due to greater government credit demands
and fears that the Federal Reserve might finance part of the deficit through inflationary
money creation. However, the impact of the deficit, at least for the case of shorter term
interest rates, appears to be less important than uncertainty premiums that have been
generated by volatile monetary policies.
As the chart on the facing page illustrates, money volatility closely correlates with
changes in real interest rates. Record levels of volatility have been matched by record
real yields. When tills factor is combined in a multivariate statistical analysis with other
factors affecting interest rates, the volatility factor emerges as the dominant cause of
the current interest rate dilemma. Furthermore, the recent decline in money volatility
coincides with substantial declines in short-term rates recorded in July that have not yet
been captured by the ©hart's quarterly data.
Interest rates should decline substantially If monetary policy folows a more stable
course over the coming year, but a more stable policy is not assured, even if the Federal
Reserve money targets are met on average. Consequently, assumptions regarding future
volatility have a major impact on our interest rate forecasts, and each of the attached
forecast scenarios depend on differing money volatility assumptions as indicated.
Robert R. Davis
Vice President and Economist
48
Wtoraey Volatility
^olatilltf Indies
&&
j? L,
M r~
.11
@5 <S6 ®7 (58 69 ?© 71 72 73 74 75 76 77 7S 79 80 81 82
Money rolaliiity W s x represents average deviation over teeiv© months from
iwo year trends in Ml.
®^S HARRIS
Real rale is lour monSh commercial paper minys en© year of average inflation.
Data are quarterly.
Soyrce: Board of Governors of lite Federal Reserve System; Harris Bank Economic Research Office
Most Likely Forecast (65% Probability)
Money growth is expected to resume during the third quarter in rehouse to increased
reserve levels, and is expected to approach the top of the Federal Reserve target range
for the remainder of 1982 and all of 1983* Ml growth of 5-6% since last November will
be sufficient to maintain the recovery process in spite of high interest rates, although
restrictive money growth between January awl July will generate a relatively weak
reeowery in the second half of 1982.
Although money growth stays near the target ranges on average, little progress is
expected in achieving greater short-run stabilityo Consequently,, money volatility is
assumed to be near the past 2 year average at 0.67, and real interest rates show little
improvement. Both short-term and long-term rates decline moderately in nominal terms,
but real commercial paper rates decline only 120 basis points by the end of 1983, and real
AA corporate bond rates increase 80 basis points. The economy's potential for growth,
indicated by record post-war levels of excess capacity, is dampened by interest rates
remaining at historically high levels. However, as interest rates trend down and
productive factors are returned to operation, the economy will experience the highest
sustained growth rates in 5 years.
50
7/29/82
ECOIWIC OUTLOOK
HOST LIKELY SCENARIO C§5» PROBABILITY)
F01ECIST
aewai
SESB
61
If
63
1
is
ii
82
111
12
If
13
1
83
11
§3
112
03
If
1980
1981
1982
1983
3003.B
3.0
2995.5
-1.0
SORT.A
7.1
3122.8
10.3
3199.5
10.2
3289.9
11.8
3388.6
12.6
3890.)
12.6
356B.T
9.3
2633.1
8«9
293T.T
11.6
3091.J
, 5.2
3836.6
11.1
OEHtiSP
Soft
1890.1
-5,1
1670.T
-9.1
1RT6.8
1.7
1889.2
3.6
1502.0
3.5
1521.1
5,8
1586.0
6.6
15T1.3
6.7
158T.O
8.1
1878.0
«©„t
1502,6
1.9
1888.T
*»1.2
1556.8
4.1
pnsee wtATii
2,0155
8.8
2.§1§S
6.3
2.0835
5.3
2.0969
6.6
2.1301
6.5
2.1625
6.2
2.1919
5.6
2.2213
S.5
2.2886
8.0
1.T866
9.3
1,9551
9.8
z. t i n
t.2061
6.0
2.816
T.I
2.116
3.2
2.668
6,6
6.6
2.956
5.9
2.99T
5.T
5.0
3.0TB
5.8
3,112
8.©
a, i f f
13.5
10.3
MHtT S0PPLT-(H1)
Sett
636.T
5.5
868.1
10.8
851 .T
3.3
856.T
A.5
863.8
6.0
IT7„1
6.0
888.1
6.0
6o@
891.*
6.0
801. J
6.3
PRETAX PROFITS 1)
Sett
216.5
-85,1
1T1.6
-§0,3
111.2
-7.6
177, A
83.1
188.8
21.2
21.8
811.5
31.0
226.0
30.1
229.8
6.9
183.9
-17,7
15T.1
-66.7
158.0
112.1
16.A
168.6
17.1
181.9
S5.5
198.9
82.9
216.T
81.0
OIWS RBTL PRODUCT
fell
fob
fch
PBOPITS ADJ ?l
Seh
iWEOBf
6.5
a. i n
(.2
3,058
5.6
829.5
7.0
QSS.i
5.9
5.6
2*2.5
-8.0
832.1
-8.3
TT8.Q
81©. 8
23.6
22§ 0 2
16.5
181.6
-6.8
190.6
' 8.9
161.0
-15.6
S83.T
27.8
mim
an raws lows 3)
19,1
B.I
15.3
15. J
19,2
15.0
18.8
18.3
1J,5
12. J
15.1
15.6
16.6
PRIME BATE
1T.0
18.3
18.5
15.6
18.3
13.6
13.*
13.0
12.T
15,1
18.9
18.1
1S.1
CQMML PAPER 5J
13.0
13.8
13.T
12.6
11.8
11.6
11.8
11.0
10,1
12.6
15.2
13.0
11,8
DPBOFITS FOB 8 2 : 2 ABE ESTIMATES. DUE TO THE ECOHOfilC BECOtEBY t i l ICT OF 1 9 8 1 , PBETAX PBOPITS NAVE GSffl G1KKE8 1 0 IOT.ECT
HIOHEB T i l ALUWABCES FOB CAPITAL COiSWPTIOi.
2)FBOFITS ADJUSTED TO EXCLUDE INVENTORY PROFITS AND ALLOW FOB DEPBECIATIOB IT REPLACEMENT COST.
3)AA INDUSTRIALS ME NEW ISSUE. COMMERCIAL PftPEI 6 MONTHS,6-6 WWHS PRIOR TO NOVEMBER 19T9.
first Alternatives Slow Money Growth (20% Probability)
The first alternative scenario assumes that the subdued money growth of the last 6
months is continued through the third quarter, followed by money growth rates near the
middle of the Fed's target range for the remainder of the forecast period. Such continued
monetary restraint in the third quarter will yield very little growth during the remainder
of 1982, although higher money growth, improved productivity, and falling interest rates
will generate a robust recovery in 1983.
Lower interest rates are realized because of both falling inflation rates and reduced
volatility of money growth. Lower money growth and improved productivity lower
inflation from 6.1% at an annual rate in the third quarter of 1982 to 3.2% at an annual
rate in the fourth quarter of 1983, and a decline in money volatility to 0.5 reflects
declining financial uncertainty. As a result, interest rates decline substantially in nominal
terms and moderately in real terms.
52
7/29/8?
ECONOMIC OtJTLQOtt
F U S T ALTERNATIVE C20S PROBABILITY)
iCTtM.
PonecisT
YEARS
82
If
83
1
83
11
S3
111
83
M
1900
1901
19S2
19S3
3101.S
6.3
3153,1
9.9
3221.2
9.1
3312.1
10.0
3398.1
10.1
3182.*
10.3
2633.1
0.9
2937.7
11.6
30T6.3
1.1
3355.2
1876.0
1.7
1808.2
2.0
1*81.0
-0.1
1501.0
8.7
1525.0
6.6
1589.7
6.6
1815.S
6.8
1878.0
-0.8
1502.1
1.9
1870.9
-1.6
1537.9
0.0
2.03*1
8.3
2.0635
5.3
2,OP 11
6.1
2.1251
6.0
2.1501.
8.9
2. I T U
1.0
2,1f2|
3.9
2.2TO2
3.?
1.7068
9.3
1.9551
9.0
2.0 WO
6.8
2.1018
0.9
2.11*
T.I
S. 636
3.2
2.1SI
8.6
S.91Q
2, f i t
8,9
2.977
3.9
2. f t !
2.9
3.023
3.8
3.083
2.7
2.869
13.5
2„T2i
10,3
2.092
ft„2
3.010
0.1
HONEY SUPPLY-CHI)
fob
N3S.7
5.9
QOOoD
10.0
851.7
3.3
953.9
2,0
8.0
862.9
8.0
067.5
8.0
872.1
8.0
876.0
8.0
i§i. 3
§.3
829.5
7.0
853.0
5.5
869.0
3.7
PRETAX PROPITS 1)
foh
216.9
-25.1
171.6
-60.5
IIS. 2
-f.i
1H, 5
15.0
176.6
8.9
101.8
11.8
192.0
25.8
200.7
29.2
216.8
21.1
282.5
—0.0
232.1
—1§@ 3
1T2.T
-25.6
190.6
15.0
113.1
-11.7
157.1
-86.7
156.0
151,2
0.3
15T.1
-5.2
166.9
27.5
101.5
39.9
197.0
81.0
218.2
3t.5
161.6
-6.0
190.6
8.9
157.3
-11.5
190.1
20,1
I I INDUS M I S 31
15. T
15.1
15.3
15.0
18.0
18.1
13.8
12.*
11.3
12.3
15.1
IS. 2
12.1
PRIHE RATE
17,0
IS. 3
16.5
15.1
12.7
12,0
11.8
10.8
10.0
15.3
10.9
15.2
11.0
COHHL PAPER 3)
13.0
13.1
13.7
12.1
10.2
10.0
9.7
S.f
0.5
12.1
15.2
12,5
9.3
SI
It?
82
I
02
3§§3„2
3.0
2995.5
-1.0
3087,8
7.1
• I I I ONP
fed
1090.1
-9.3
1870.7
-5.1
PRICE DEFLATOR
foh
2.0155
S.8
CPt-AU. URBAN
Sch
BHiSS NATL PRODUCT
Sett
PROFITS AM 21
s?
tl!
f.i
INTEREST RATES
DPROFITS f t * l ? § 2 H E ESTIMATES. WE TO fBE ECONOMIC lECOfEll T i l ACT OF 1 9 0 1 , PRETAX PIOFITS HAVE BEEN lEMKED TO IffLECf
HIGHER TAX ALLOWANCES FOR CAPITAL CONSUMPTION.
2JPR0FITS ADJUSTED TO E1CLUK INVENTORY PIOFITS I I P JtLUW FOB DEPRECIATION IT REPLACEMENT COST,
3)AA INDUSTRIALS IRE NEW ISSUE. COMMERCIAL P»PEI 0 MONTHS,8-6 MONTHS PRIOR TO iOWEMBER 1 9 7 9 .
Second Alternative; FastflAoneyGrowth (15% Probability)
The second alternative assumes a return to rapid monetary growth which ^ u r s
economic growth in the short-run, but produces deteriorating business conditions in the
longer term. Money growth exceeds the target range throughout 1983, and the wolatflity
of money growth remains high at 0*8* Consequently, real economic growth slows from a
rapid pace by mid-1983, inflation rates return to near double digit levels, and interest
rates advance in nominal and real terms at all maturity levels
54
7/29/82
ECONOMIC OUTLOOK
SECOND ALTERNATIVE <15S PROBABILITY)
ICTOii
FOIEC1ST
1EHS
11
If
S2
1
12
11
1?
Ill
12
If
§3
1
13
11
83
111
83
If
1980
1911
1912
1983
3§©3.?
3.9
2995.9
-1,0
3©I7„i
1.1
3129.9
11.3
3219.3
11.9
3332.3
14.8
3445.5
14.3
3546.9
12.3
3651.2
12,3
2633.1
S.f
W3T.T
1 11.6
3098.0
5.5
3994.0
12.8
RB8L 8HP
8eh
1490,1
1970.7
-9,1
1476.8
1.7
1492.6
1.3
1511.3
5.1
1533,1
5.9
1551.5
5.7
1567.4
3.1
1810.i
3.4
1474.0
-g.t
1502.6
1.9
1487.9
-1,0
1551.5
4.0
PDICE B2FLfi¥00
2.0155
S.I
2.0368
4.3
2.0635
5.3
2.0969
2.1301
§.5
2. WIS
8.4
2.216*
S.I
2,2S2f
8.7
-2.3100
1.6
1.7864
9,3
1.9951
9.4
2.0111
6.9
T.i
SPE-QLL WBflO
Sets
2.014
7.8
2.836
3.2
2. SSI
4.6
2.917
7.0
2.970
7.5
3.037
9.3
3.103
9.0
3.175
9.6
J.2U8
9.5
2, i f f
13,5
10.3
2.191
6.4
I, Ml
8.4
KS3EI SOPFLTMtllJ
gob
138.?
9.9
Q40.1
10.8
151.1
3.3
•Si. 3
6.0
468.3
9.0
478.5
9.0
488.9
9.0
499.6
9.0
510.5
9.0
0O1.3
6.3
429.9
7.0
^5i,§
§.3
4§404
Go 3
PDEfflK PEWITS 1 |
216.5
171.6
-S©„5
168.2
-7.6
110.1
32.2
196.6
11.0
209.3
21.5
223.9
31.0
231.5
14.3
237.9
10.5
§02 oS
«JJ,0
232.1
-4.3
179.2
-22.1
225.5
29.9
pnwiTs aw §$
113.9
-17.?
15?. 1
156.©
164.3
23.0
175.1
29.0
189.9
38. *
205.0
35.T
21*.2
If. 3
223.1
17.6
181.6
-6.8
190.6
4.9
113.1
-14.4
208.1
2?.5
11 INDUS lOIDS 31
15.1
15.1
19.3
15.*
15.6
16.3
16.8
11.2
17.7
12,3
15.1
15,5
17.0
PRIME RATE
1T.0
16.3
16.9
15.9
14.7
15.1
16.7
16.9
17.3
15.3
18.9
19.9
16.7
COWL PAPER 3)
13.0
13.8
13.T
12.9
12.1
14.0
14.9
14.9
15.3
12.6
15.2
13.3
14.8
6C08S HflTL POOWCT
INTEREST RATES
DPIOflTS FOI 9i%2 ARE ESTIMATES. WJE TO TIE ECOIOMIC RECOVERT TAX ICT OF 1981, PRETAX PlOflTS iifE iEEi JtEWJCEB TO lEFLECt
tifOHEB TAX ALLOWANCES FOR CAPITAL C0ISWPT10I.
2)PR0FITS IDJUSTES TO EXCLUDE INVENTORY PROF ITS AND ILLW FOB DEPRECIATION IT REPLACEMENT COST.
3)AA INDUSTRIALSflffiCJEW ISSUE. C0MMEBCJ1L PAPER 4 MOUTHS,t-6 MONTHS PRIOR TO lOfEHBER 1979.
ECONOMIC PROJECTIONS
Burton ZWiCK*
Prudential Insurance Company of America
Though still quite high by historical standards* interest rates have fallen quite
sharply since the end of June* Rates on 3-month treasury bills ha¥e fallen from almost
13 percent to about 8 percent, and 3&=year government bond rates have declined from
1* percent t© around 12 percent Just as economists were divided in their explanation
of the unusually high rates of the past 2 years, they have been divided in explaining the
recent decline. The factors that divide them are important, because the differing
views Imply quite different scenarios for the economy over the next four to six
quarters.
One view — which emphasizes the "supply and demand" for new flows of credit —
is that high rates reflect large credit demands, Including those resulting from large
federal deficits. High rates may also reflect the level of money supply targets relative
to inflation and nominal GNP. In this view, rates have fallen so sharply only because
the economy is so weak. As soon as recovery leads to higher credit demands, rates will
rise, particularly if the Federal Reserve holds money growth within the target range.
The rise in rates will be sufficient to constrain or even completely choke off a
recovery by the middle of 1983.
The opposing view — which emphasizes desired holdings of the stocks of assets —
is that high rates reflect concern that the recent deceleration in inflation may be
temporary* This view acknowledges that economic slack has contributed to recent
rate declines, particularly in short term rates, but emphasizes the beneficial effects of
declining inflation as weE. As with the supply~and»demand view, deficits contribute to
high rates in the expectations view, but less through an immediate effect on the
balance between supply and demand than by wdermMng confidence that monetary and
fiscal policy can be focussed on controlling inflation over the longer term. In this
•The projections presented here reflect my own personal views and should not be
interpreted as the official view of Prudential. 1 have benefitted from many helpful
discussions with Robert M. Sinche.
57
wiew, a recovery will not lead to a sharp rise in rates despite budget deficits unless
investors believe that inflation will reacceierate. Should inflationary expectations
remain under control as the economy recovers, the trend toward more normal interest
rates can continue and the recovery can extend throughout 1983 and even beyond
Since inability to observe expectations directly precludes any clear cut discrimination between the alternative views of interest rate behavior, choosing between the
pair of economic scenarios requires an analysis of other developments in the economy,.
One unmistakable development is the decline in inflation from the 10-12 percent area
two years ago to the 6-7 percent range today* The degree of economic slack and the
moderation in money growth over the past two years suggest that inflation could slow
to the 5-5 1/2 percent area over the period from 19§2s2 to 1983:4.
Disinflation is never painless, and this most recent decline in inflation rates has
created serious adjustment probjems for many households and firms. Firms have been
unable to increase prices and revenues as rapidly as anticipated, and their profits and
cash flow have been severely squeezed by the extremely high cost of servicing their
debt. However, as recovery begins, the decline in inflation will be extremely
important in enabling the recovery to be sustained* Assuming annual Ml growth of 5
percent and velocity growth of % percent (slightly above the Jong-term trend growth of
3-3 1/2 percent), personal income should begin to rise at a 9 percent annual rate.
Personal tax cuts in 1982 and 19§3 of about $60 billion will further increase disposable
income growth — over the period from 1982:2 to 19§3t* — to about 11 percent per
year. With inflation running at 5 1/2 percent, real disposable income is likely to grow
around 5 1/2 percent per year, compared with annual growth of about 3 1/2 percent
over the 1970-78 period and less than 2 percent during the 1979-81 period.
An annual increase in real disposable income of 5 1/2 percent over the next 6
quarters can support real outlay and consumption growth of about k.5 percent per year
and a 1 1/2 percentage point increase in the savings rate — from 6.6 percent in 1982.2
to 8.1 percent in 1983:*., A 1 1/2 point increase in the savings rate would enable
households to .raise their net financial investment by about $35 billion over the next
year and a half.
Until mid-1983, low capacity utilization and still higher than normal interest
rates will prevent business and inventory investment from performing as well as
consumption. In nominal terms, business fixed investment will rise about $25 billion
over the next 6 quarters, and inventory investment will rise about $25 billion. With
after-tax profits rising by about $30 billion and depreciation (aided by the tax cut
provisions) rising by about $35 billion, corporations — though still a net user of credit
5§
market funds — will be able t© Improve their net financial Investment position by
about $15 billion over tihis period.
This $50 billion Improvement in tte net financial positions of households and
firms should make the increase in federal credit demand — estimated at about $40
billion — more manageable. Even within a supply-and-demand framework, there seems
little reason why recovery cannot proceed amidst a continuing trend toward more
normal interest rate levels.
The greatest risk to this forecast of sustainable recovery (which is presented in
detail in Table 1) is that interest rates will not continue their recent move toward
more normal levels* Higher than projected deficits could lead to higher rates, either
by destroying the balance between the supply and demand for funds or by undermining
confidence that monetary and fiscal policy will be focussed on controlling inflation
over the longer term. Apart from excessive budget deficits, any actions by the
Federal Reserve that investors either rightly or wrongly interpret as abandoning the
fight against inflation will also cause rates to rise* The continued dependence of
recovery ©n lower rates — and the tendency of rates to rise whenever investors
question the commitment to control inflation over the longer term — continue to
justify the long standing policy recommendations of this Committee, namely, to reduce
budget deficits (as much as possible from the spending side) and to carry out monetary
policy operations in a manner that fosters confidence in the Federal Reserve's
intention and capability to control the growth of money and credit'over the longer
term.
59
TABLE 1
Economic Projections
(Percent Changes, S.A.A.R.)
Q482/Q2§2
Real GNP
Final Sales
Q4g3/Q2g3
3.8
3.3
4.0
3.7
4.2
0.0
24.0
0.9
-1.0
4.0
2S.0
4.0
7.0
§.7
10.0
4.0
— 1.5
6.0
25.0
8.5
5.9
4.5
3.8
3.0
5.3
9.3
9.4
Q482
Q283
Q483
7.6
10.0
120.0
7.5
1.1
7.8
9.6
134.0
8.2
8.1
8.8
140.0
9.0
9.5
11.5
&s J
1.5
Non-Durables Consumption (Ind. Services)
Durable Consumption
Business Fixed Investment
Residential Fixed Investment
Federal Government
State & Local Government
Inventory Investment (Bill 72$)
Net Exports (Bill 72$) •
£. © 3
5.1
-4.4
19.8
5.0
-1.0
©.4
31.9
Nominal GNP
Deflator
Monetary Base
Velocity of Monetary Base
Ml
Velocity of Ml
Savings Rate (Percent)
Unemployment Rate (Percent)
Profits After Tax (Bill $)
Auto Sales (Million Units)
Housing Starts (Million Units)
3-Month Bill Rate (Percent)
30-Year Gov't Bond Rate (Percent)
Q283/Q482
M,£a &%0
60
&,%& m <&
y &3
e?@ £L
6.0
3.1
5.0
4.1
6.0
1 ©^.JJ
JeZ
5.0
4.2
W &£
1.35
9.0
10.75
MOMYANB Tim ECONOMY
September 10, 1S82
THE MORE THINGS CHANGE.
By tradition, August should be a quiet time in financial markets.
The world is on vacation, the weather is hot and lazy, and things
generally are dull. August 1982, of course, was anything but traditional, in a few dramatic weeks, there has been a sharp revaluation
of financial assets, even as further evidence surfaced ©f spreading
weakness in the credit structure and continued lethargy (or worse) in
the real sectors of the economy, low with the holidays ended and
some of the excitement dying down, portfolio nanagers must grapple
once again with the fundamentals. Most particularly, they have to
answer the nagging questions Does the surge in both stock and tend
prices represent a harbinger of a. sustained cyclical recovery in the
economy? While such has often been true in the past, my best judgment
ment would be that in this case it is not* notwithstanding the likelihood of an ephemeral increase in real economic activity this fall,
it is probable that 1983 will again be a year of little or no economic
growth, weak profits (at best), rising unemployment, and an uncomfortably high level ©f financial risk.
The root of this malaise, plainly, is the ongoing social and political stalemate over Federal budgetary policy and the prospect that
this means that the Treasury1s deficit will press inexorably toward
$20O-billion in the quarters immediately ahead. It seems to me that
so long as this is the predominant pattern, market participants will
doubt the feasibility of long-term monetary stabilization (giving all
due regard to the tenacity and wisdom of the present members ©f the
Federal Reserve Board).
This suggests that the real risk
premium in interest rates will remain at an historically high level,
which is likely to lead next year
to a sharp increase in personal
saving, sluggish consumption, and
declining investment. Unhappily,
the rise in savings (obviously a
product not only of the incentive
of high real returns, but also of
general uncertainty in the economy)
will most likely be fully absorbed
in financing the Federal deficit
and not in financing expansion of
the private capital stock, in
broad outline, this has been the
thesis of my short-term economic
forecast for some time, and nothing
has happened in the last few weeks
CONTENTS
THE 1QOT OF THE OAM.ISE
1
GROWTH IN BIGB-BOmRED MONEY
BAS SMMED BOWW
3
JUTES JW£ DOWN FOR TEE RIGHT &EASOH 4
TSE ILZVSIOM
OF B&Sf MOMBY
5
TEE EXPLOSIVE SURGE IN
FEDERAL BORROWING
§
FIGUMSS OF TEE WEEK
7
STATISTICAL
X
MPPEMDIX
61
THIS MEMO&WDUM IS BASED WON WFOKMTION AVULMLE TO WE PUHlC iW MEMBBIMION B MARE BMT IT B ACCVM7E OH C0MHSTE MOKGAM STANLEY * CO
mrOMWUATED AND OTWEtS ASSOCIATCD SOTS JT MAf HAW POffnONS « . MO HAT EfFBCT I M « C W « «f. SCUMIES Of COIWmS MBtmum
MEMBK AMD mtMSO
OK SSEM TO PgMFOtM i W O W O W m t K B i B /••—*•** •"** • " - —
Digitized forKSFQmt
FRASER
MORGAN STANLEY
-2-
to make me want to change that opinion. To dig beneath this conclusion, let's consider some of the factors that seem to lie behind the
surge in the financial markets over the last few weeks. As is now
well known, at its meeting in early July* the Federal Open Market
Committee —• apparently alarmed by the growing number of business
failures in the economy — decided to pursue a more accommodative
MONETARY DATA
(Weekly Average* of Daily Figures Is MUlioni of DoUara)
%MeatWetk
Change From
Pteviom Week
Rmteo of Change 1Jver——
S Months S bSoathf 1 Year
$457^100
$+
§00
+ 2.9%
+ 3.71
+ 5.71
Expanded Money*(l)
S92 S S00
-
300
+ §.4
+ 8.2
+10.3
Adjuited Monetary Baie*(2)
ISO,400
+1,100
+ 5.8
+ 7.5
+ 6.9
Adjusted Federal Keicwe
Credit*(2)
158,000
+
700
+ 6.3
+ 7.9
+ 7.2
Total Adjusted Reieivet*(l)
49,200
-
800
+ 5.0
•
+ 4.8
Member Bank BoR0wing(2)
§44
+
437
MA
24
+12 = 5
+13.4
+14.2
Money Supply (M-l)*(l)
5.0
MA
HA
iWedroe*d«ty Figurei
Short-Term Business Credit*(l)
381,606
+
Total Commercial Paper
Outitanding*(l)
177,41a
™*JL g 4 x 3
+10.6
+13.4
+15.0
Business Loans:
All large Banks*(l)
214,691
+1,827
+ 9.6
+15.0
+14.8
Mew York City Ranks* ••(!)
5S,867
+
123
+ 9.6
+19.5
+10.3
Chicago Banks*(l)
&$,^/3
-
375
+ 1.0
+10.1
+17.7
•Seasonally Adjusted
••Exclude! bankers* acceptance* a»d cowMercU piper
MA » Not Applicable
Rate* of change I R eonjponnd aaniiaJ rate tsuedl on four-week wovtng avenges. Expanded *©ney
KPs and Eurodollar* and 50% of aoaittrtitiitioBal aoney nwket BUMAS fund shares. Short-tens
oiaS and induttrial loani at large bank* phis loans sold to mfSliatet lea bsn&cri9 acceptance! cud
plus loans at large banb to finssce eompaaiei and Boabaak financial jartStutioM phis aoat
0)
September 1
(2)
of M-l phu o v o a i ^ t
edit iadtidet caaaefpaperfeeMin portfolios'
Septenber 8
62
IHtt MEMORANDUM IS BASED UPON INFORMATION AVAILABLE TO THE PUBUC. NO MEPMESENTATION IS HADE THAT IT IS MCCUKATE OK COMPLETE MOgCA.S STAMEY 4 CV
HUNSACnOltS IN. SECUM/T1ES OF COMPANIES MEKTIOMED HEREIN AMD MA YALSO
iNCORPORATED AND OTHEMS ASSOCIATED WITH IT MAY HAVE POSITIONS IN. AMD MAY EFFECT
fEMFOKM
OK SEEK TO PEMFOMM INVESTMENT BANKING SEKVICES FOX THOSE COMPANIES.
MORGAN STANLEY
Underlying wmmtmy ksss &to ere Seem-vssdk csric3 cssn^s.
Smarm: Ecoaalytt Data Bast;ftJajpasSteals^ lleeKreEs
monetary policy. But while the authorities may have wanted easier
money (a prospect that led to a sharp dissent from three members of
the Committee), the fascinating thing is that in the short run they
have achieved just the opposite.
Figure 1 above shows the pattern clearly. The rate of growth of the
monetary base — which 1 maintain is the best single indicator of what
the central bank is actually doing, as opposed to what its managers
may intend ~ has slowed significantly since mid-June. At the same
time, short-term interest rates (shown here by the three-month Treasury bill rate) have dropped sharply, which eventually triggered the
surge in the values of longer term financial assets. My interpretation of this pattern has been as followsi
•
Aggregate demand for credit has dropped materially, reflecting
the weakness in the overall economy. The rate of increase
in my proxy for total short-term business credit outstanding,
as one example, was only about 3% at an annual rate in August,
down from roughly 20% in June and July.
•
At the same time, the reduced rate of increase in the central
bank's balance sheet (which is aeasured by the change in the
' 63
mts MmomMmm is BASED unm mfommm AVMIMLETOWE nmuc m aenaomann s mme ma f[Oj^aH^tm^njmmMM5rML^
Smpm^>mD amats ASSOCIATED WITH n ma HAVE msmom m. mo mr EFFECT mmmcmm m. BCMHWS or cmtesHiss mmnmm
http://fraser.stlouisfed.org/
eSMfemt OM SEEK TO fBMFQOf BffiSMB/T'BANKING SOtVICBS FOX WOS£ CUtnuKS
Federal Reserve Bank of St. Louis
ACQ
tag/mm MUD UAXALS
MORGAN STANLEY
.4-
ECONOMIC DATA
PU^HI
Lcteit Week
ftew^»» Week
124,651
41,018
291.150
S72
5S0.2
1,267
-11,171
- 7,546
- 5.725
7
" •••'3
of Change<
1 Ye
OUTPUT
Auto* (Uait*)
Track* (Unitt)
Lumber* (Million* of i o w i Feet)
Faper* (fnouiand* of T O M )
taperfjowd* (Thouwnda of Tons)
Saw Steel* (Thonwadi of Short Tow)
Energy fPntdestioa:
Bituninoiu Coal* (Thoutsad* of Sheet T e a )
Crude Oil Mefsiaery Jta®*^
(Daily Average ;Thou««nd» of BBLt)
Electric Output lades* (1967=1©0)
•8-105.91
+ 49.6
* S2.6
— S.6
- 14.5
- 46.7
- 15.9%
#54.3
8.2
4.8
8.7
- 48.2
9/ 4
9/ 4
S/28
6/28
S/28
9/ 4
§26
- SO.5
- 47.0
- 14.8
8/28
128
12
- 17.1
<» 1 . 6
*
-
-
9.3
1.8
9/ 4
9/ 4
§.3
31 o i
15.6
8/28
m
eL& a $
•
48
13,938
11,567
196
4- 6 5 . 8 1
- 22.7
5.4
+ 2.0
0.0
«=• 23.fi
•
*
4.3
1.8
TRANSiORTATlON
ECTesne T©m-Miie», Que I Railroad** (BSUtocs)
14.§
25.3
1USINESS ACTIVITY
Commercial and Indiutrial F d w i *
f Number of Finu)
4-321.5 * 79.6 * S2.2
759
9/ 2
fMCES
Spot Frtee lodes, AB Comtooiiife* (1967*100)
Spot Price Imdes, Foodatuffi (1967*100)
Spot Price linden, Saw Iodu»triaJi (1967*100)
World Cradle Oil Price (Dalian per Band)
Trade-Weighted Value of Ae Dollar
(March 1973*100)
239.7
237. i
240.9
33.11
+
+
0.4
1.0
1.4
—
- 10.5
- 19.4
3.8
1.6
8.1
+ 0.9
- 13.9
4.7
- 11.2
- 2.2
- 16.9
- 3.1
9/
9/
9/
9/
7
7
7
1
US.49
0.08
+ 27.9 * 15.8 + 7.7
9/ 8
S29.0
4,097.6
8.5
58.i
4 6.7 + 37.5 + 40.3
- 4.9 * 32.1 • 42.5
8/28
8/21
EMPLOYMENT
Initial Unenploynieat GSJIBJ*
! Level* (ThotuiMb)
Hates of cfeange are
ratesrasra@R
Astocntet Data I
Stanley
monetary base) helped t o lower i n f l a t i o n a r y e x p e c t a t i o n s , by
demonstrating that t h e noney managers were (quite c o r r e c t l y )
pursuing a course of monetary s t a b i l i z a t i o n .
Thus, for nuch of t h e summer i n t e r e s t r a t e s have been declining for t h e r i g h t reason -— namely, because of a drop i n t h e
m
WIS
MEMORANDUM IS BASED UPON INFORMATION AVAILABLE TO WE PUBLIC NO KEPKESEMTATION IS MADE THAT IT IS ACCUKATE OH COMPLETE MOK(JAN SlANLEr A. CO
TBANSMCTWHS W. SECUMSJIES OF COMPANIES MEMTtOHED HEMEiK AND MAfALSO
AND OTHEMS ASSOCIATED WITH IT MAf HAVE POSITIONS IN. AMD MAY EFFECT
Digitized forINCOilPOHATED
FRASER
PEMFOXM OK SEEM TO PEMFOMM INVESTMENT MAMKINC SEMVICES FOB THOSE COMP/miES
-5.
demand for credit, not because the Federal Reserve has been
pumping up the supply ©f high-powered money*
Bat can this favorable course of events be expected to continue? 1 am
fearful that it cannot. Not only do the authorities intend to follow
an easier (or at least less restrictive) course, but also they seem
to be committed to keeping short-term interest rates down. This is
fine so long as the demand for short-term credit continues to decline.
However, what would happen if the aggregate demand for credit were to
turn up again, for whatever reason? Under such circumstances, it seems,
clear, the Federal leserve would be forced to add rapidly to its holdings of Governaent securities, in what would amount to a futile rearguard action to hold dona rates. la fact, if there should be a sustained reacceleration of the monetary base, interest rates would rise,
and rise rapidly, As 1 argued in Money and the Economy•on July 16,
the "Keynesian Option0 of trying to use easy money to induce lower
interest rates is an illusion. RAttempts of this sort Ito pump up the
•oney supplyl have always backfired in the past and have produced the
opposite result from those intended." Interestingly, lenry C. Wallich
the senior member of the Federal Reserve Board in point of service,
Hade exactly this point in an important address early this summer6
MONTHLY
ptoMWy A V C T ^ * of DtJIy S%ures m M
Q M@m$h$
1 Y^M
t f c s y §»eki
EM°(1)
S
(I)
E3-2 (1)
E3-S° (1)
> 0S»„2
509 = 9
1,946.1
2,355.3
8,752.3
$+ 4.0
* f.S
•22. S
+35.1
*35.S
* 3.3%
* 9.6
•10.7
+14.0
•13.4
• 3.Si
• 7.8
+10.8
+13.1
•12.1
+ 8.8%
+10.2
• 8.8
+10.8
+12.1
Cessa of s f e g s CJB esopKscS e K a d s a o .
£3-1 ^saasls oi eaweeey, fetacsd feyasffi, ffic^dsss dis&&, pbs esfesr f M r f u M . Magnate S3fecalae^d Etuifi
C K M f Gsifcet c r a e d fcsd ehosa. EJ-teeceMsefKS-H pfea eweeei^s U h s a i Eetoiolksa.e^araefcaofcafsetrod ess^y msAet caOad feefe, gz£ eafejp esi ESCS tfeas d^»cSa at ©Ksssssfcd fccAj esS tfcsift
tjsie&tntimxs. U-g raaesa e f SS& pfaj fes&atfesal &a»aay BBS&£1 s a t e d ^ E & , togs tiaec dspsdte, cad fcjf~s-
P)
Bafoofc
|8}
figaril
-fiL
wis MEMotummm is msES ufon mFoaMATim AVMtjmu n THE nmuc no eEf*B£$£Nr&mm a <MOF iw«r #r is ACCUMTE M COMPIME mtxcm srmi£r A CO
tfCMPOKATED Mt> OTHERS ASSOCIATED WTO IT MAI" » V £ HtsmOMS m. «MD MAY EFFECT mtW&tCTIMB Hi. ffiOTWHEJ Of COMtASUES MEtmoHEB MOBH MMD MAfMSO
KMFOmt mSE£M TOPgBFOmtMntESTM&tTMMC1MCS~ '
'
""
MORGAN STANLEY
SSS> ( N i cssa
In fact, 1 have some concern that actual Federal Reserve policy (again,
as opposed to the central bank's expressed intentions) has already
turned in a truly expansionary direction. The monetary base rose
more than $i-billion in the week ended September 8 to a total of $180.4billion. Over the last four weeks, the monetary base has averaged
$179.8-billion, which represents an 8.5% seasonally adjusted compound
annual rate of gain from four weeks earlier. However, this increase
was not part of a sustained patterni the critical three-month growth
rate of the base, which is traced in Figure 1, was about 5.8% in the
most recent week, which was the lowest since last December. Meanwhile,
the money supply (M-l) surged up at an 11.2% annual rate in August, in
part reflecting the lagged impact of the large-scale injection of
reserves into the banking system between November 1981 and mid-June
1982.
In trying to judge the likely trend of credit demand in the months
ahead, keep in mind that since 1978, the volume of credit, extended in
the United States market to all nonfinancial sectors has been little
changed in nominal terms and has declined very substantially in real
terms. To put the matter simply, a very large drop in real credit
extended to the household sector has more than offset the increased
credit needs of the corporate community and, more recently, the Federal
treasury. In my opinion, it is very unlikely that the real credit
needs of the economy can continue to decline for much longer, assuming,
that is, that they have not already started to rise. (The Federal
Reserve's estimates of the flow of funds in the economy, which should
have been published in mid-August, have been delayed and are still not
available.) Most important, obviously, is the explosive surge in Federal borrowing. The Treasury calendar is likely to be close to $60billion this fall, almost double the amount raised in the comparable
period last year. Furthermore, the drop in rates that has already
occurred is likely to generate a modest if temporary gain in the demand
for autos and housing, with concommitant increases in household credit
needs. Improved corporate cash flow should ease company needs for
credit somewhat, but the extent of this improvement is likely to be
limited. Add to this the risk that a reacceleration of monetary growth
may reignite inflationary expectations, and the prospects for a further
decline in interest rates seem to be limited.
To summarize, so long as the Federal Treasury remains as a disproportionate demander of credit in the marketplace, moves toward lower
interest rates are likely to be self-limiting. Not only will the
Treasury be the critical force driving the real demand for credit skyward, but in addition there is the ever-present threat that the Federal
Reserve ~ despite its excellent intentions — will be forced into a
reflationary course. In my opinion, the prospects for a sustained
improvement in bond prices from present levels are quite limited, as
are the prospects for a similarly sustained gain in real economic
activity.
Plus que ca change, c'est le meme chose.
66
miS MEUOKANDUM IS BASED UPON WFOKMATiW AVAILABLE TO THE PUBLIC. m> MEMESBfTATKm
IS MADE THAT IT IS ACCURATE OK COMPLETE MORGAN STANLEY 4 CO
mCOKPOKATED AND OTUEMS ASSOCIATED WTTHITMAV HAVE MtSmOMS IN. AMD MAV EFFECT JIANSACIONS IN. SSCUUflES O f COMPANIES MENTIOUED HEMEIK AND MAY ALSO
BMMKIMG SEKVICES FOK THOSE COMPANIES
Digitized forPEMFOMM
FRASEROS. SEEK TO FEMFOBMIHVESTMEHT
MORGAN STANSJEW
The iaterest rates regularly monitored by the Federal Reserve wer® as
follows*
Baily Average Week Ended
A u g . 25
Sept. 1
Sept. 8
Federal Funds
9.04%
10.15%
10.14%
90-Day Treasury Bills
7.43
8.00
8.31
90-Day Commercial Paper
3.01
9,72
10.28
tO-Day CDs (Secondary Market)
9.59
10.1?
JLO© 3*3
90-Day Eurodollars
10.36
j|» j!> o c> w
JL J> © 331^
20-Year Governments
J b t t i © £&&
12.56
4|j{& Q J J ,
Rate
H. E r i c h Beinentann
(212) 874=4410
September 10ff 1982
S7
WAT ST IS ACCVKATE OM COMPLETE MOKGAN STANLEY A CO
IMS MEMOKA/mUM IS BASED UPm WFOKMATim AVAILABLE TO THE PUBLIC HO KEMESBtrATtCm IS MME
Of CeUfMMlBS MEHnOMEB HEKUN AMD MAY ALSO
BSCOWOKATEB MID mWEMS ASSKiATEO WITH ITMAYmVE POWnONSJU. AMD MAY EFFECT mMSMXM$ , fSCUttiJES
».
KKFORM M S££« IB rgtfOSM BSVeSTMESftftttKSWSStBVKB FOK
@FedFRASER