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SHADOW OPEN MARKET COMMITTEE
Policy Statement and Position Papers
September 17,1979
1.
Draft of Proposed Statement, September 17,1979
2.
Position Papers
SOMC Position Paper, September 1979 - Karl Brunner, University of Rochester
Weelky Federal Reserve Report - H. Erich Heinemann, Morgan Stanley & Company
A Report on Fiscal Policy for the Shadow Open Market Committee - Rudolph G. Penner,
American Enterprise Institute
Economic Projections-Jerry L Jordan, Pittsburgh National Bank
Economic Prospects Through 1980 - Beryl W. Sprinkel, Harris Trust and Savings Bank
The International Dimension - Wilson E. Schmidt, Virginia Polytechnic Institute
Draft of Proposed Statement
SOMC September 17, 1979
by Allan Meltzer
The country1s economic problems are serious and likely to get worse.
The
country's economic policies are destabilizing and there is a risk that
instability will increase.
Government has avoided, delayed and prevented solutions to the longterm problems of inflation and the low growth of productivity.
eighties with a heritage of unsolved problems.
quick solutions to past problems has
We enter the
Repeated attempts to find
had no lasting benefit but long lasting
harm.
The slow economic growth, high inflation, and high unemployment of
the past decade cannot be blamed on the oil cartel.
Monetary policy caused
consumer prices to rise at an average rate of 7% a year in the seventies.
Mishandling of the 1974 oil price increase slowed the rate of investment
and lowered the growth of productivity.
Reliance on wage and price controls
and on guidelines reduced the credibility of government without achieving
any reduction in the average rate of inflation.
Higher costs of government
and increased transfer payments raised the tax burden and discouraged
productive activity.
Oil price increases made us poorer, but inappropriate government
policies compounded the problem.
Now, as we adjust to the most recent
increases in oil prices, we appear eager to repeat the errors of the past
decade.
Problems and Policies in the Early Eighties
The main policy changes affecting the U.S. economy in recent months
have been made in Riyadh and Frankfurt, not in Washington.
The 60% increase
-2in the price of oil is a tax, levied abroad, but paid wherever oil is used.
The principal monetary action is the rise in interest rates dictated by
the Germans' decision to raise interest rates and our decision, in November
1978, to support the dollar.
The increase in the price of oil in 1979 permanently reduced the incomes
of the residents in the oil importing countries and increased the incomes in
the oil exporting countries.
There is no way that the transfer of real
income from oil importers to oil exporters can be avoided or recovered as
long as the cartel lasts.
If we all work as hard and as much as before,
we will have less to spend because we must export more to pay for our
imports.
The problem for government policy is to minimize the loss of real
income while reducing the rate of inflation.
Currently, there is no evidence
that the administration or the Federal Reserve has developed a rational
response to the stagflation that followed the oil shock.
The administration
has no fiscal plan to reduce the real burden of the shock.
immobilized by a mixture of hope and fear —
They seem
hope that the unemployment rate
will not reach 8% and fear that it soon will.
The Federal Reserve, beguiled
by the higher interest rates required to support the dollar, misinterprets
the thrust of its policy as less inflationary despite the higher growth
of money aggregates that add to future inflation.
The proper response to the oil price increase is a reduction in both
government spending and taxes.
First, we are poorer —
There are two reasons for tax reduction.
poorer than before the oil price increase and poorer
than we anticipated when we set the levels of government spending and transfers.
Second, the entire burden of the oil price increase falls on private consumption
and investment unless taxes and government spending are reduced.
-3Tax reduction without reduction in government spending - - o r with
increased transfers and government spending -- repeats the mistakes of
1974-78.
Then, we paid for the oil and the tax cut by borrowing at home
and abroad.
Increased borrowing raised real rates of interest, crowded
out private capital and reduced the amount of capital per employed worker.
Lower capital per worker means lower productivity, slower growth of output
and real income.
If we repeat the policies of 1974-78, we reduce the
prospects for real growth and productivity increases in the eighties.
The proper fiscal response to the oil shock is a prompt reduction of
$20-25 billion in government spending and in taxes for households and
businesses.
The cut in taxes and spending distributes the real loss between
all components of domestic spending.
Money cannot replace oil, and monetary policy cannot offset the loss
of real income resulting from the oil shock.
The attempt to do so converts
the one-time increase in the price level into a permanently higher maintained
rate of inflation.
This is the mistake of 1976 to 1978 and a repetition
will bring permanently higher inflation in the eighties.
Monetary policy
should not seek to offset the one-time increase in the price level resulting
from the devaluation of the dollar in 1978 and the oil price increases of
1979.
The Committee believes that the
Federal Reserve should not permit
excessive concern about currently reported rates of price increase to cause
a sudden, large shift to monetary contraction and a repetition of the policy
error of 1974-75,
A shift to slow money growth now means higher unemploy-
ment in 1980 and increases anticipation of another stop-go cycle in the early
eighties.
That route also leads to higher inflation and slow growth.
-4The underlying rate of inflation is now between 8 and 9%.
If there is
no further devaluation of the dollar and no further shock to supply, the
rate of price change will fall toward this range in 1980.
The reduction
from current rates of inflation will occur even if current rates of monetary
expansion continue.
What Should Be Done?
For several years, the Committee has urged the Federal Reserve to
adopt a policy of steady, pre-announced reductions in money growth.
If
this policy had been adopted and maintained for the past three years, we
would enter the 1980fs with low inflation, low market interest rates and
less uncertainty about the future.
The dollar would not have been devalued
in 1978 and some of the oil price increase might have been avoided.
At our most recent meetings, we urged the Federal Reserve to maintain
the growth of the monetary base at 8% until August 1979 and to announce a
five year program of gradual monetary reduction.
The Federal Reserve's
highly variable monetary policy achieved the 8% target rate by providing
two quarters of excessive expansion and two quarters of slow money growth.
The Federal Reserve's practice of using interest rates as a target of
monetary policy not only increased the problem of stagflation but also
increased the recent variability of interest rates.
To restore stability to the economy and permanently reduce inflation,
the growth rate of the monetary base should now be reduced to an annual rate
of 7% for the year ending August 1980.
Slower monetary expansion accompanied
by reduction in real tax burdens and government spending are the best means
of lowering inflation and lowering the cost of adjusting to the oil shock.
-5The effectiveness of these policies will be increased if they are accompanied
by a credible, firm commitment to further reductions in money growth and in
real tax burdens.
Heightened concern for inflation and rhetoric that makes inflation "the
number one priority11 raises the prospect of another round of stop and go and
another recession.
Federal Reserve efforts to manage interest rates increases
the risk that the destabilizing policy cycle will be repeated.
Another
round of this cycle will fix the underlying rate of inflation permanently
in the double digit range and will further lower productivity growth.
The mistaken policies of the past ten years can be avoided only if
the
Congress, the administration and the Federal Reserve adopt medium-term
policies to achieve growth and stability in the eighties.
that policy makers face and seem determined to fail.
This is the test
SOMC POSITION PAPER, SEPTEMBER 1979
Karl Brunner
I.
Our Inheritance of Permanent Drift
The Shadow Open Market Committee warned in its first meeting in
September 1973 against our drift into permanent inflation.
The Committee's
concern was motivated by the repeated failures of our policymaking in 1967, 1970
and again in 1972.
The monetary authorities abandoned in each case an anti-
inflationary policy within less than one year of its initiation.
The reversal of
monetary policy in the spring of 1972 terminated the gradual decline in the rate of
price changes and unleashed a new wave of inflation. From an inflation level below
4% p.a. in the spring of 1972 price movements accelerated to a rate of increase of
10% p.a. measured over the six months ending in the month of our first meeting.
The failure was repeated for the fourth time in 1976/77.
Inflation had been
lowered to 4.5% p.a. in the second half of 1976 as a result of the financial policies
pursued in 1974/75.
The SOMC recommended at the time that the prevailing
course in monetary growth be maintained with a gradual decline of the growth rate
over subsequent years. The adoption of our recommendation would have lowered
the rate of inflation by this time to at most 3% p.a. and most probably to a lower
level.
But actual policy proceeded, in contrast to the anti-inflationary rhetoric of
successive chairmen of the Board of Governors, on an entirely different course.
Monetary growth substantially increased beyond 1976 and more than doubled the
ensuing rate of inflation.
The entrenched failure of US policymaking became most dramatically
revealed by the collapse of the dollar on foreign exchange markets.
The
international repercussions of our inflationary policies ultimately motivated the
change in the Administration's attitude expressed by the events of October 24 and
November 1 last year. The President's program presented at the time to the public
contained however little relevant anti-inflationary substance.
message thoroughly disregarded monetary policy.
The President's
Still the Federal Reserve
Authorities lowered the growth rate of the monetary base beyond October 1978 by
a large margin. This growth rate measured almost 10% p.a. from the second to the
last quarter of 1978. It fell by almost 50% and settled around 5% p.a. between the
end of October last year and the end of March this year. But the stance adopted by
the Fed late in October lasted only five months. A reversal occurred in early April
and the monetary base shifted to a higher growth path. The rate of growth
approximately doubled and reached about 10% p.a. for the interval beginning early
April and extending to the end of August. The "basic" rate of inflation, expressed
in terms of the GNP deflator, would settle around 9% to 10% p.a. on this monetary
track.
II.
Ceterum Censeo . . . .
The task confronting monetary policy hardly changed over the past six years.
The urgency of the problem substantially increased however. The present track
initiated in early April is not compatible with an anti-inflationary policy. The
program formiAtted by the SOMC last March still offers in my judgment the best
chance for guiding the US economy at comparatively low social cost to a stable
price level. This program requires that the growth rate of the monetary base be
ultimately lowered to about 2% p.a. The Committee emphasized most particularly
that this reduction be distributed over several years in a series of gradual steps.
And most importantly, the Federal Reserve Authorities should publicly announce
now the precise nature of this long-range plan. The critical challenge confronting
the Fed at this stage is the creation of a credible, predictable and reliable course
of anti-inflationary monetary policy. The potentially high social cost associated
with an anti-inflationary program resulted dominantly from the erratic inflationary
course of our policies over the past fourteen years. The responsiveness of prices to
an anti-inflationary policy substantially declines with the likelihood of policy
reversals. Monetary decelerations are thus translated into losses of output and
rising unemployment. A new approach to policy procedures which raises the sense
of longer-run reliability and predictability forms thus a crucial element of an antiinflationary program. We should also note that the Committee on Banking and
Currency in the US House of Representatives and the Joint Economic Committee
of the US Congress offered this year very similar recommendations to the Federal
Reserve Authorities.
These recommendations are occasionally dismissed with the assertion that
"gradualism" has failed. The fact remains however that it was never tried in this
country within the last years of inflationary experience. Whatever attempts at
gradually lowering monetary growth over time were ever made were usually
abandoned within a few quarters.
2
HI.
The Specific Proposal
Implementation of the general program for an anti-inflationary policy
requires a definite target path for the immediate future and a specification of the
magnitude to be addressed. The monetary base is selected as on previous occasions
for our purpose. The data are promptly available with comparatively little
measurement error. Such errors still blur the money supply data for M- and M2 and
render interpretations based on these data uncertain. But the reliability of the
data is not sufficient to justify the selection of the monetary base. It is
occasionally argued that the monetary base is just the sum of currency held by the
public and bank reserves at the Fed adjusted for the changes in reserve
requirements. This is indeed true. But the conclusion that therefore it is mostly
determined by the public does not follow and is quite false. The base is also equal
to the sum of Federal Reserve Credit, the gold stock and a few other items from
the consolidated statement of the Fed and the Treasury's monetary account. Any
purchase or sale of any assets by the Fed or the Treasury necessarily changes the
monetary base. The magnitude of the base is thus determined by the monetary
authorities whether they plan this or not. And the public, interacting with the
banks, determines within the context of given reserve requirements the distribution
of the base between currency and bank reserves. The monetary base thus
completely reflects all the relevant actions of the monetary authorities.
This fact, with the quality of the data, is still not sufficient. It is also
important that the base systematically dominates, beyond the shorter-run horizons,
the movement of 1VL and M2. We may also look beyond the usual monetary
aggregates at nominal GNP. The base velocity V listed in table 1 attached to the
statement summarizes the link between the monetary base and GNP. This base
velocity occurs as the product of the monetary multiplier and a standard velocity
expression. The pronounced negative covariance between monetary multiplier and
standard velocity produces a variance for base velocity substantially below the
variance of standard velocity.
There emerges under the circumstances a
noteworthy pattern of regularity in the behavior of the base velocity. It follows
that a reduction of the rate of growth in the base to 2% p.a. can be reasonably
expected to lower the growth of nominal GNP to around 4% p.a. There will be
sufficient time and opportunity over the next five years to raise or lower the
"ultimate target" level above or below 2% p.a. should the trend growth in V
notably deviate from the 2% p.a. observed over the post-war period. Any reliable
adjustment would of course require a somewhat more responsible and more
competent attention to the collection and analysis of relevant data than the
Federal Reserve's past history would suggest.
3
The Shadow Policy Committee proposed last March that the Federal Reserve
Authorities should hold the growth rate of the monetary base at 8% p.a. from the
third quarter 1978 to the third quarter of 1979. The Committee recognized the
shift in policy initiated in October 1978 and approved the direction of the shift. It
warned however that the Fed should not lower the growth rate too much and too
rapidly. Excessive retardation within a short period seems to raise the likelihood of
a sharp reversal. As it happens, as a matter of pure chance, the growth rate
observed from the end of August 1978 to the end of August 1979 measures 8.3%.
The four quarter retardation of the monetary base proposed by the SOMC has thus
been approximately achieved.
The execution remains unfortunately at a
remarkably poor level of performance and continues to aggravate the pervasive
unpredictability of the Federal Reserve's course. It would appear at this point that
the target path for the next four quarter periods, i.e. from HI/1979 to ni/1980,
should be lowered by another notch. I propose therefore that the growth rate of
the monetary base be set at 7% over this period. Two caveats should be entered
however. This move need be made first as an integral part of a fully articulated
policy of anti-inflationary monetary control covering a five year period. This
policy should be publicly announced and explained in order to establish a credible
commitment by the Federal Reserve Authorities. As a further component of a
coherently developed monetary control the Fed must ultimately attend to lower the
variance of the growth rate pursued over one year. A lower variance in the growth
rate of the monetary base offers no serious technical problems. It only required
appropriate procedures and the political will to execute the program.
IV.
Major Obstructions to An Anti-Inflationary Policy
The drift into permanent inflation since 1965 and the series of failures in
monetary policymaking directs our interest to the conditions producing this result.
Two sets of conditions deserve our attention in this context: the Fedfs procedures
and mode of implementing policy and the prevailing conceptions concerning
monetary policy and the nature of the inflation process.
1. The Role of Implementation Procedures and Institutional Structure
The Fed traditionally executes policies by setting a target range for the
Federal Funds rate and adjusting open market operations in order to maintain the
fund rate within the target band. The detail of the procedure has been described on
4
many occasions. It has also been demonstrated that this procedure yields a poor
control over the movement of monetary aggregates including the monetary base.
The Federal Reserve's commitment to this mode of implementing policy severely
obstructs any effective attention to monetary growth or even the growth rate of
the monetary base. A reliable anti-inflationary policy described in a previous
paragraph requires a thorough restructuring of the Fed's procedures. The general
nature of the required procedure has been described in several position papers over
the past years. This procedure is based on an estimate of the desired target of
monetary growth. This selection depends on the desired longer-range movements
of the price-level and the economy's normal real growth. A second step formulates
estimates of the time profile for the monetary multiplier. These two steps imply
the required growth rate of the monetary base. Projections of the source
components of the base other than Federal Reserve Credit determine ultimately
the anticipated path of the Fed's net open market operations over various horizons
ahead. The accrual of data from week to week and month to month offers
opportunities for sequential shorter-run readjustments in the required volume of
open market operations. We may note at this point that this procedure essentially
corresponds to the arrangement developed over the past four years by the Swiss
National Bank.
This mode of monetary controls requires of course a substantial
investment by the Fed to obtain meaningful and reliable data on the domestic
money stock. The work of the Bach Committee need be continued for this purpose.
The study prepared by the staff and published last January in the Federal Reserve
Bulletin forms just a beginning in the work on the data necessary for an adequate
monetary control. It follows that for the moment, until this work has been
seriously accomplished, the alternative to the Fed's traditional procedure remains
quite simple. The "ultimate target" for the growth of the monetary base need be
announced together with the stepwise reduction proceeding over the next three to
five years. The Fed knows under the circumstances the average of the monetary
base for each month in the forthcoming period. This information guides the
ongoing adjustment of the open market account.
2. The Role of Various Conceptions
a. The Fed's Tradition
The model of implementing policy gradually evolved over the decades.
It changed over time in some detail and the relative frequency of key words
5
occurring in policy statements may have shifted over time. But it always remained
anchored on a view centrally addressed to interest rates and money market
conditions. The underlying interpretation changed however during the 1960fs. A
Keynesian money market view replaced a free reserve doctrine originally derived
from the Strong-Riefler-Burgess conception dominating the Fed's approach to the
world in the 1920Ts and during the Great Depression. The change of interpretation
moved the demand function for money and its alleged instability to the center of
the FedTs attention. It did not modify however the Fed!s orientation centered on
interest rates. It just provided an up-dated basis with better opportunities at
rationalizations. Monetary control remained a marginal concern basically alien to
the Federal Reserve bureaucracy's tradition. The moderate pressure from Congress
and outside groups for an effective policy of monetary control was essentially
absorbed by astute gestures and rhetorical concessions. The story of the last four
years under House concurrent Rule 133 and the revised Federal Reserve Act
demonstrates that the demand for monetary control essentially encountered a
hostile rejection by the Federal Reserve's bureaucracy. The rhetorical concessions
were sufficient however to produce a useful confusion among the media and
financial analysts. An impression was generated that "monetarism" was really tried
and it failed to be feasible.
The entrenched views, customs and procedures of the Federal Reserve
bureaucracy thus form a subtle but powerful barrier obstructing the development of
an effective monetary control. The same views ultimately obstruct the determined
application of a reliable and predictable anti-inflationary policy. The role of the
established bureaucracy with its traditional posture and incentives also determines
the expectations concerning the impact of the new Chairman of the Board. The
intelligence, integrity and competence as a political administrator of the new
Chairman is hardly to be doubted. But this is not sufficient by itself to bring about
the necessary change in our policymaking. The basic thrust of our policies will be
determined by the established bureaucracy's traditional views and procedures. No
major incentives operate on the bureaucracy to change its accustomed ways.
Changes in personalities filling the position as chairman may affect under the
circumstances the style and the rhetoric but are unlikely to produce substantive
and maintained changes in policy. Any Chairman wishing to bring the Federal
Reserve on a new course recommended by the House Committee on Banking and
Currency, the Joint Economic Banking or the Shadow Open Market Committee
6
must start with an overhaul of the Fed's top level personnel. A new group of people
would offer the best chance for the necessary restructuring of policy. The likelihood of a successfully maintained anti-inflationary policy diminishes as the "old
crowd" continues on its accustomed way.
b. The Oil Price Shock and the Gap Syndrome
It was argued in 1975 that the large gap between "potential output" and
actual output justified a highly expansionary monetary policy. The large gap
produced by the recession of 1974 would essentially prevent any relevant
inflationary effect on even very large monetary expansion. Such expansion would
be absorbed by an increase in output with little spillover, if any, to the price-level.
Even an annual growth rate between 10% and 15% of the money stock would pose
no relevant inflationary danger under the circumstances. The Shadow Policy
Committee was naturally criticized for its lack of concern about the output gap
and the need to remove it. But the SOMC emphasized at the time that the
magnitude of the gap is irrelevant in terms of the inflationary consequences of
monetary expansions.
Sustained large monetary accelerations affect price
movements irrespective of the gap. Substantial work accumulated over recent
years in support of this view. The Federal Reserve Authorities did not follow the
expansionary advice at the time and moved more closely along the SOMCfs cautious
recommendation. But this was simply the outcome of the Fed's traditional
procedure in the context of comparatively stable and low short-term interest rates.
The onset of monetary acceleration beyond 1975 demonstrates the
fallacy of the gap syndrome. In contrast to the "gappist" thesis inflation mounted
and doubled over the subsequent years, inspite of the gap and inspite of an
unemployment rate in excess of the so-called "non-inflationary" benchmark level.
Short-run adjustments of monetary growth to the magnitude of the gap in the
context of an economy with long inflation experience contribute little to the
closure of gaps over time. They produce however higher average rates of inflation
and more erratic inflation. The latter implies moreover a corresponding variability
of the sequence of gaps experienced over time by the economy. The best
contribution monetary policy can make to lower the variability of output relative
to normal output is the committed adherence to a predictable and stable monetary
control path credibly understood by the mass of price and wage setters.
7
The obstacle posed by the gap syndrome to an effective antiinflationary monetary policy has been reenforced by a pervasive misinterpretation
of the oil price shock. The prevailing view interprets every decline of actual
output as a decline relative to normal output producing a corresponding gap to be
appropriately closed by expansionary monetary and fiscal action. The oil price
shock should caution us about the fallacy in this view. A large increase in the
relative price of energy inputs into the production process of western countries
lowers the normal output of these economies. The OPEC shock of October 1973
probably lowered the normal output of the US economy by about 5%. The decline
of 8% in real GNP observed from peak to trough reflected thus to a major extent
not a recession but an adjustment in normal output. Only the remaining portion of
about 3% expresses the effect of a recession. The order of magnitude of the
recession coincides thus with the patterns observed over the first fifteen years of
the postwar period. The oil price shock reminds us that we cannot infer from
output movements alone whether or not a recession occurred. We need additional
information in order to judge whether output declined as a result of a fall in normal
output or whether it dropped relative to normal output. If it expresses a fall in
normal output no increase in budgets, deficits and no increase in money stock
whatever its magnitude will raise output again. In the other case output will
rebound to the normal level provided policy does not aggravate recession by
unleashing additional erratic negative shocks.
The point made in the previous paragraph applies to our current state.
A second, fortunately much smaller oil price shock, imposes new adjustments on
our economy. The resulting lowering of normal output will appear as a retardation
in observable real growth. An interpretation of this adjustment as a recession with
the ensuing demand for expansionary policies would further endanger any hope for
an anti-inflationary course in our monetary policymaking. It is important that our
policymakers and the public understand this issue. The occurrence of important
real shocks is certainly generally acknowledged and discussed in the profession.
One also seems to recognize some mechanical effects of higher oil import prices on
domestic prices. But many fail to understand that real shocks are really "real",
they do modify an economyTs normal output. We would indulge a singular
inconsistency to grant a price effect to a negative real shock and (more or less
implicitly) deny any consequences with respect to normal output.
8
c. Anti-Inflationary Illusions and Inflationary Realities
A prevalent view asserts that the "inflation of the seventies is a new
and different phenomenon". It follows that it "cannot be diagnosed correctly with
old theories or treated effectively with old prescriptions" (Arthur Okun, 1979). The
"new phenomenon" requires a correspondingly new diversified approach. This would
include "enough fiscal-monetary discipline to provide a safety margin against
excess demand, a coordinated federal initiative to reduce private costs and
constructive measures to obtain price-wage restraint."
The case for the assertain of a "new phenomenon" is based on the
appearance of increasing intractability of the inflation process. This intractability
is expressed by the lowered responsiveness of price movements to emerging output
gaps as in 1970 or 1974. The "intractability of the new phenomenon" is however
less an expression of reality than the result of faulty analysis. We repeat first our
previous point that price movements are poorly associated with gaps. An output
gap affects price movements at most indirectly via the agents anticipations
concerning the policy responses generated by emerging output gaps. There is
however still another aspect of crucial significance for our purposes. Price and
wage setters proceed on the basis for the best information available about the
dominant trend. There are good reasons why price and wage setters disregard what
they perceive as transitory conditions or shocks and adjust their prices and wages
to the more permanent underlying conditions. This behavior, rationally adjusted to
an uncertain environment, implies that responsiveness of price movements to
monetary decelerations declines with the length of inflationary experiences, the
variability of monetary growth and the frequency of aborted anti-inflationary
policies, or the frequency of an anti-inflationary rhetoric in the context of
permanent inflationary policies. We need not search for sinister "technostructures"
or deeper sociological meanings behind the apparent intractability of our inflation.
This intractability was tractably produced by our policies in a world essentially
responsive to credible and sustained anti-inflationary policies. The pattern of
unreliable anti-inflationary policies in the context of a permanent inflationary
policy produces the observed price-wage momentum and a price-wage spiral
apparently disconnected from current market conditions.
9
The "diversified approach" thus results from a basic misinterpretation of the
ongoing inflation process. The background of the approach yields however little
information about the consequences. The discussions for the three strands
constituting the approach may be organized with the aid of an ancient relation
connecting monetary growth and changes in the price-level. We write
A logm + Alogv = Alogp + Alogy
i.e. monetary growth A logm and the relative change in velocity Alogv form the
changes in aggregate nominal demand confronting the relative change in the pricelevel Alogp, and the rate of real growth Alogy.
The conception of inflation underlying the "diversified policy approach"
centers on the nature of the process shaping Alogp. It is contended that Alogp
moves in the short and a very long intermediate run essentially independently of
the changes in aggregate nominal demand. The momentum of the price-level is
approximately predetermined. It follows therefore that a reduction of monetary
growth exerts a vanishing effect, if any, on Alogp and is dominantly absorbed by a
decline in real growth Alogy. Thus emerges the first strand of the "diversified
approach" requiring that (A logm + Alogv) not exceed the sum of inherited inflation
and normal real growth. It also requires that the change in aggregate nominal
demand be at least equal to the current change in the value of normal output. This
strand should thus assure that monetary-fiscal policy is never used to produce a
recession. The constraint that changes in aggregate nominal demand be always at
least equal to changes in the value of output implies of course that financial policy
can never be used to curb inflation. The two other strands of the "diversified
approach" are assigned this task.
The second strand imposes on the Federal Government the obligation to lower
costs in the private sector. Two sets of actions are noted in this context. One
refers to actions lowering real costs and the other to reductions in taxes which
essentially lower the wedge between gross market prices and net labor costs per
unit of output. The first group of measures would raise productivity via more
efficient use of our resources. There is little doubt at this stage that our
regulatory policies contributed to lower the normal rate of real growth over the
past ten years and thus lower future achievable levels of output. A reversal of this
trend in our overextended regulatory apparatus and activities would certainly be
important in terms of our long run welfare. But the effect on the rate of inflation
10
is unfortunately quite negligible. Even an increase of one percentage point in the
normal rate of growth would be an outstanding success and over the years signally
affect our welfare. But it lowers the inflation rate only one percentage point in a
basic inflation running now at 10% p.a. the courageous exercise of a "goodwill
theory" of government with the matching disregard of political reality thus
promises at best a minor decline in the rate of inflation.
The reduction of the wedge involves a very different story. We disregard for
our purposes the shorter-run adjustments induced by a reduction of the wedge. It is
important to penetrate beyond the appearances of the immediate impact and
examine the more persistent results. A reduction in the wedge produces a once and
for all decline in price level relative to the level otherwise existing provided the
supply of labor and the supply of output responds positively to the resulting
increase in net real income. This result also requires that suppliers do not
experience an increase in disincentives due to a shift in taxes from the wedge to
actual or anticipated higher levels of income taxes. Operations centered on the
wedge thus affect (possibly) the level of normal output and the price level
associated with a given money stock but hardly modify the persistent rate of
inflation maintained over time. This will remain governed by the movement of
aggregate nominal demand.
The problem associated with the "wedge approach" to control inflation may
be considered from a different angle. Let the price-level be partitioned into two
multiplicative components
p = w(l + a))
where w is the net labor cost, (= net remuneration received by labor per unit of
output and a> is the total wedge as a fraction of net labor costs. We obtain thus
approximately
Alogm + Alogv = Alogw + Aa) + Alogny
Two cases may be examined. In the first case a lower wedge raises via positive
supply incentives the level of normal output, whereas in the second case normal
output remains unaffected. If the decline of w raises normal output there emerges
over a transition period a layer Alogny matched by a negative Aw. The rate of
price change (= A log + Aw) thus falls temporarily reflecting the adjustment to a
lower price-level at any given money stock. But after the transition with Aw = 0
and Alog ny on its usual path inflation settles again at the "basic rate" determined
by permanent stance of financial policies.
11
In the second case normal output is unaffected and there occurs under the
circumstances no price-level effect. The reduction of w, i.e. Aw produces over a
transition period a corresponding increase in Alogw. The changes in net labor cost
bulges as the wedge is lowered and price movements are not affected beyond some
shortest run erratic movements. We conclude thus that in either case, the
"operation wedge" remains a useless exercise with respect to the more permanent
inflationary momentum, however useful it may potentially be in terms of the social
cost of government and the labor markets. Juggling the wedge thus satisfies at
best the myopic attention in policymaking attuned to short-run results combined
with systematic neglect of longer-range and persistent consequences. It creates
the impression of an anti-inflationary policy as the price-level shifts to a
comparatively lower level (permanently in the first case and shortly in the second)
but without significant effect on the permanent rate of inflation produced by
persistent financial policies.
The third strand offers an old story. Price controls have been tried since
political institutions controlling money exploited their opportunities in order to
extract resources. Controls usually failed and so have income policies of all
grades.
The proposal emanating from Brookings refrains from advocating
mandatory controls but does advance a "non-mandatory" procedure involving
threats and pressures. It is recognized that every program of income policy wears
out, loses effectiveness on the market place and encounters a rapid decay in
political support. A "large supply" of income policies is thus required allowing a
rapid succession of an imaginative array of such programs. The consequences of
this strand of a "diversified approach" enhance the uncertainty about the rules of
the game confronting the private sector. Previous position papers emphasized the
effect resulting from the trend in our policy and the expanded regulatory activism
on the development of the stock market and the stagnation of private investment
expenditures. The net effect of the extra-legal and extra-constitutional exercise in
political manipulation of price-wage setting would be a further deterioration in the
normal rate of real growth. The longer-run political implications of this approach
may deserve careful attention beyond the narrow confines of this position paper.
One last point concerning controls (mandatory or non-mandatory) need be
noted. Their reference point is the rate of inflation as an average of all price
movements. But allocative real shocks continuously modify relative prices.
12
Controllers, as the media, are naturally disposed to indulge in a "reverse Lucas
misinterpretation":
relative price increases are typically misinterpreted as
reflecting aggregate price movements.
This propensity obstructs allocative
efficiency and distorts the usage patterns of our resources.
The "diversified approach" to curb inflation seriously endangers our economic
and political welfare, it fosters policies raising the likelihood of permanent, high
and erratic inflation (strand one). It also obstructs our real growth and threatens
over the longer horizon the political institution of a free society (strand three).
Lastly, the second strand reinterpreted as a program to lower the social cost of
government would usefully contribute to our well being. As it stands it is poorly
conceived, dangerous to our longer-range welfare, and irrelevant as antiinflationary policies.
13
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h3
MORGAN STANLEY
INVESTMENT RESEARCH
WEEKLY FEDERAL
RESERVE REPORT
September 7, 1979
Credit markets are showing signs characteristic of the final stages of a cyclical
upsurge in short-term interest rates. Commercial and industrial credits on the books
of major New York City banks rose by $1-billion during the week ended September 5.
Over the past three months such loans have been rising at a seasonally adjusted
compound annual rate of 34%. It is typical that New York City banks should be the
last to feel the pressure of intense credit demands at the tail end of an interest
rate cycle. These institutions play a key role as lender of last resort to major
firms that normally are slow to be affected by a squeeze on corporate liquidity.
Thus, the usual cyclical pattern suggests that by the time truly intense demand
pressures hit the New York banks, the rise in interest rates is almost over. Indeed,
with the exception of a single, aberrational week in 1978, one has to go back to midJune 1974 to find an increase in business loans in New York City as large as the one
registered this week. Short-term interest rates peaked out in that cycle about six
weeks later.
Viewed more broadly, the data indicate that the crest of credit demand in the current
business cycle may already be passing. The Morgan Stanley proxy for total short-term
business credit outstanding dropped by $302-million in the week ended August 29, the
first weekly decline for this key measure of the credit markets in more than six
months. More importantly, the short-run (four-week to four-week) rate of change in
the Morgan Stanley proxy was 22.8% in the period ended on the 29th, down substantially
from the 30% to 35% rates of increase that were posted only a month ago. On the
assumption that our forecast of general economic activity is correct, and more pervasive
weakness in business becomes apparent in the fourth quarter, we would expect to see
additional declines in the rate of growth of short-term credit outstanding in the
weeks ahead. Should demand for short-term credit begin to subside as we anticipate,
we expect that the Federal Reserve System will acknowledge this development only
reluctantly. The authorities will undoubtedly allow the official target for shortterm interest rates to decline, but they
CONTENTS
will probably do so only hesitantly, well
after the shift in demand forces in the
1
Close to the Top
marketplace. As a result, monetary policy
- as measured by the rate of change in the
The Underlying Rate of
monetary aggregates -- is more likely to
3
Monetary Expansion -- M-l
tighten than ease as the economy slips
into recession.
"Solving" the Problem of
3
Excessive Money Growth
We should emphasize that this analysis
looks ahead to the end of the fourth
3
The Economic Outlook
quarter and the first part of 1980. In
the immediate future, the probabilities
The Underlying Rate of
suggest continuing increases in short-term
Monetary Expansion -- M-2
4 1
rates. Even with the jumps in the official
target for Federal funds that the authoriFigures of the Week
5
ties have allowed in the last month, it is
plain that rates have been too low, and
Statistical Appendix
that in order to slow the upward movement
THIS MEMORANDUM IS BASED UPON INFORMATION A VAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE
INCORPORATED AND OTHERS ASSOCIATED WITH IT MAY HAVE POSITIONS IN, AND MAY EFFECT TRANSACTIONS
ALSO
PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
THAT IT IS A CCURATE OR COMPLETE. MORGAN STANLEY & CO.
IN, SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
MORGAN STANLEY
-2-
of money costs, the Federal Reserve has been forced to add large amounts of high-powered
money to the marketplace. The monetary base, for example, averaged $150-billion in the
four weeks ended on September 5, up at a 14.2% seasonally adjusted compound annual rate
from the average of $148.4-billion in the four-week period ended August 8. Total effective reserves in the banking system averaged $45.8-billion in the four weeks ended August
29, up at a whopping 39.2% annual rate from the comparable average four weeks earlier.
These growth rates are obviously far above levels that could be considered consistent
with a noninflationary monetary policy.
Federal Reserve Data
(Weekly Averages of Daily Figures; in Millions of Doll ars)
Latest Week
Change From
Prev. Week
Rates of Change Over
3 Months 6 Months 1 Year
$374,700
$+ 600
+11.4%
+ 9.0%
+ 5.0%
M-l-Plus* (1)
598,900
+ 700
+10.5
+ 6.4
+ 2.6
Money Supply Plus Comm'l
Bank Time Deposits Other
Than Large CDs (M-2)* (1)
924,300
+1,700
+13.5
+10.7
+ 7.7
Adjusted Monetary
Base* (2)
150,600
+ 300
+12.6
+ 9.0
+ 8.5
Adjusted Federal Reserve
Credit* (2)
130,800
+ 400
+12.9
+ 8.5
+ 9.5
46,100
+ 300
+10.7
+ 4.6
+ 4.1
1,340
+ 224
NA
NA
NA
Money Supply (M-l)*(l)
Total Effective Bank
Reserves* (1)
Member Bank Borrowing (2)
Wednesday Figures
Short-Term Business
Credit* (1)
257,558
- 302
+28.4
+26.2
+22.0
Total Commercial Paper
Outstanding* (1)
105,298
- 747
+45.3
+46.4
+38.7
149,730
+ 246
+26.2
+23.4
+17.6
New York City Banks* **
(2)
42,911
+1 ,002
+34.0
+27.2
+20.6
Chicago Banks* (2)
15,386
+ 277
+ 7.1
+22.1
+24.0
Business Loans:
All Large Banks* (1)
*Seasonally Adjusted
**Excludes bankers' acceptances and commercial paper
NA = Not Applicable
N/AV = Not Available
Rates of change are compound annual rates. Short-term business credit includes
commercial and industrial loans at large banks plus loans sold to affiliates less
bankers' acceptances and commercial paper held in portfolio plus loans at large banks
to finance companies and nonbank financial institutions plus nonbank commercial
paper.
[1) August 29
(2) September 5
THIS MEMORANDUM IS BASED UPON INFORMATION A VAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
MAY
INCORPORATED AND OTHERS ASSOCIATED WITH IT MAY HA VE POSITIONS IN, AND MAY EFFECT TRANSACTIONS IN, SECURITIES OF COMPANIES MENTIONED HEREIN AND
Digitized for ALSO
FRASER
PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
MORGAN STANLEY
-3-
Figure 1
The Underlying Rate of Monetary Expansion - M-1
Shaded areas represent periods of recession as designated by the National Bureau of Economic Research
except for the mini-recession of 1966-1967.
Sources : Chase Econometric Associates Data Base; Morgan Stanley Research
If our reasoning is accurate, then this problem of excessive expansion in high-powered
money will be corrected -- to the extent that such problems are ever "solved" -- as
much by market forces as by official action. In other words, a combination of further
increases in the official target for the Federal funds rate and some easing in the demand for short-term credit should bring money costs into equilibrium only moderately
above present levels. Even on the assumption that short-term rates continue to rise,
we see very little additional price risk in the long-term bond market, and we continue
to believe that yields on long-term, high-grade corporate credits (for instance, the
obligations of selected telephone subsidiaries) posted their highs for this business
cycle in late April and early May. (At that time, quality telephone credits were
selling to yield about 9.8%.)
THE ECONOMIC OUTLOOK
The basic question that business forecasters must face at present is whether the surge
of money growth since the end of the first quarter this year has invalidated the program
of monetary restraint that the Federal Reserve System began to implement in the summer
and fall of 1978. Our answer to this question is "no." We believe very strongly that
if monetary actions are to be meaningful to the general economy, they must be sustained
for a substantial period. Short-run accelerations or decelerations in money growth may
THIS MEMORANDUM IS BASED UPON INFORMATION AVAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
IN, SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
Digitized forINCORPORATED
FRASER AND OTHERS ASSOCIATED WITH IT MAY HAVE POSITIONS IN, AND MAY EFFECT TRANSACTIONS
ALSO PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
MORGAN STANLEY
-4-
— and usually do -- affect inflationary expectations among market participants, but
they rarely have a significant influence on the trend of change in real output.
Furthermore, we have concluded that the measure we have dubbed the "underlying rate
of monetary expansion" -- see Figure 1 on page 3 and Figure 2 below — is the best
indicator that we have been able to devise of sustained changes in the rate of monetary
expansion. Both figures indicate clearly that the sustained slowdown in monetary
growth that has been in place for the past year (two years in the case of M-2) has
continued up until the present, despite the rapid increase in the aggregates since
last winter. In statistical terms, this is a function of the fact that monetary
growth at the end of 1978 and in early 1979 was exceptionally slow. We would be the
first to argue that the surge of monetary expansion in the past five months has been
damaging to inflationary expectations in the marketplace, and that it must be controlled.
However, if the surge of money growth is in fact brought under control (though a
combination, as we suggested, of official actions and changes in market factors), then
we would conclude that the fundamental pattern of restraint is still in place.
Our analysis indicates the pervasive weakness of real spendable income at the consumer
level has started to erode real final demand to the point where business firms are
finding themselves compelled to bring their stocks of unsold goods into better alignment
with realistic sales forecasts. This is showing up in the form of distinct weakness
in key sectors in transportation, as well as in the marked uptick in the unemployment
rate that was registered during August. On balance, we would conclude that with monetary restraint being pressed (albeit in a long-term sense), the income stream weakening,
Figure 2
The Underlying Rate of Monetary Expansion - M-2
The rate of change in a 12-month moving average of M-2 centered on the
sixth month of each period
Shaded areas represent periods of recession as designated by the National Bureau of Economic Research
except for the mini-recession of 1966-1967.
Sources: Chase Econometric Associates Data Base; Morgan Stanley Research
THIS MEMORANDUM IS BASED UPON INFORMATION A VAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS A CCURATE OR COMPLETE. MORGAN STANLEY & CO.
INCORPORATED AND OTHERS ASSOCIATED WITH IT MAY HAVE POSITIONS IN. AND MAY EFFECT TRANSACTIONS IN, SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
INVESTMENT BANKING SERVICES FOR THOSE COMPANIES
ALSO
PERFORM OR SEEK TO PERFORM
MORGAN STANLEY
-5-
unemployment rising, and the consumer balance sheet badly distorted by excessive debt
burdens, the probabilities are rising in favor of a pattern of sustained and cumulative
economic weakness through the middle of next year. A moderate inventory cycle (reinforced at a later date by a downturn in capital goods) should help to trigger (and
then extend) the decline, but the basic adjustments are likely to occur at the consumer
level. In this environment of sustained weakness in product markets, the reported
rate of change in prices should begin to show some marked improvement by mid-1980.
The interest rates regularly monitored by the Federal Reserve were as follows:
Rate
Daily Average Week Ended
September 5
August 29
Change in
Basis Points
11.16%
11.02%
-14
9.67
9.91
+24
90- to 119-Day Commercial Paper
10.76
11.03
+27
90-Day CDs (Secondary Market)
11.08
11.36
+28
90-Day Eurodollars
12.10
12.19
+ 9
20-Year Governments
9.01
9.13
+12
Federal Funds
90-Day Treasury Bills
H. Erich Heinemann
(212) 974-4410
September 7, 1979
THIS MEMORANDUM IS BASED UPON INFORMATION AVAILABLE TOTHE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
AND OTHERS ASSOCIATED WITH IT MAY HAVE POSITIONS IN, AND MAY EFFECT TRANSACTIONS IN. SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
INCORPORATED
ALSO
PERFORM
MORGAN STANLEY
-1-
STATISTICAL APPENDIX ~ CAPITAL MARKET ACTIVITY
Table 1
Bond Market Volume 1971 -1979*
Publlicly Offered Nonconvertible Debt
($ Millions)
1971
JJ72
1973
1974
1975
1976
1977
1978
1979
January
February
March
$ 1,960
2,115
3,924
$ 2,483
1,846
JU891
$ 1,130
602
_L662
$ 2,521
2,071
2,300
$ 3,680
3,759
3,684
$ 2,670
2,323
3,267
$ 2,964
1,371
2,652
$ 1,370
1,212
2,740
$ 1,891
1,862
1,731
Total 1st Quarter
$ 7,999
$ 6,220
$ 3,394
$ 6,892
$11,123
$ 8,260
$ 6,987
$ 5,322
$ 5,484
April
May
June
$ 1,797
1,968
_1,814
$ 1,876
1,563
1,316
$ 1,558
910
1,502
$ 2,149
2,288
1,917
$ 2,866
3,844
4,150
$ 2,713
2,425
3,610
$ 2,263
1,496
2,890
$ 2,591
2,328
1*867
$ 3,078
2,057
3,776
Total 2nd Quarter
$ 5,579
$ 4,755
$ 3,970
$ 6,354
$10,860
$ 8,748
$ 6,649
$ 6,786
$ 8,911
July
August
September
$ 1,547
1,458
2,154
$ 1,759
1,420
j^296
$ 1,200
937
671
$ 2,065
2,018
1,025
$ 3,112
1,287
1,569
$ 1,681
1,746
2,264
$ 3,053
1,825
2,104
$ 2,067
1,471
1,574
$ 2,028
2,005
Total 3rd Quarter
$ 5,159
$ 4,475
$ 2,808
$ 5,108
$ 5,968
$ 5,691
$ 6,982
$ 5,112
October
November
December
$ r,980
1,882
1,423
$ 1,940
1,951
1,390
$ 1,699
1,935
2,118
$ 3,565
3,111
j,701
$ 2,345
2,292
2,537
$ 2,857
2,423
2,687
$ 2,376
2,478
1,712
$ 2,363
1,712
1,094
Total 4th Quarter
$ 5,285
$ 5,281
$ 5,752
$ 9,377
$ 7,174
$ 7,967
$ 6,566
$ 5,169
Total
$24,022
120^73^
$15,924
$27,731
$35,125
$30,666
$27,184
$22,389
•Excludes Federal, state, and local issues as well as tax-exempt pollution control financings; includes a
limited number of underwritten offers by Federal agencies
Source: Morgan Stanley & Co. Incorporated
THIS MEMORANDUM IS BASED UPON INFORMATION AVAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
INCORPORATED AND OTHERS ASSOCIATED WITH IT MAY HAVE POSITIONS IN. AND MAY EFFECT TRANSACTIONS IN. SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
ALSO PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
MORGAN STANLEY
•IV
Table 2
Public Bonei S a l e s ; 1978 and Year-to- Date 1979
By Type of Issuer
($ M i l l i o n s )
)78
January
February
March
Total
1st Quarter
Banks
& Fin-
For. &
Provinc.
Industrials
$
$
$
150
650
500
950
.-321
$ 1,475
$ 1,450
27.7%
27.2%
Percent
75
337
200
$
612
$
$ 1,470
$ 1,126
$
21.7%
16.7%
$
Total 2nd Quarter
$ 1,952
28.8%
550
650
270
$
Utility
$
30
60
232
$
575
322
$
$
35
868
$ 2,591
2,328
1,867
$
518
$ 1,370
$
65
$ 6,786
7.6%
20.2%
1.0%
100.0%
525
375
405
—
$ 2,067
1,471
1,574
--
$ 5,112
4.,2%
$
258
353
569
$
360
450
185
$
39
18
55
Total 3rd Quarter
$
970
$
550
$ 1,180
$
995
$
112
$ 1,305
10.8%
23.1%
2.2%
25.5%
$
750
250
Total 4th Quarter
$ 1,213
$ 1,000
23.5%
19.3%
Percent
Total 1978
$ 5,610
)79
January
February
March
1st Quarter
$
500
225
585
$
575
610
$ 1,310
$ 1,185
23.9%
21.6%
Percent
$
19.5%
180
400
359
$
939
$
$ 3,857
$
275
400
150
$
775
120
120
$
42
15
825
$
57
$ 1,015
$
$
19.6%
$ 2,680
$ 1,009
$ 4,558
12.0%
4.5%
20.3%
16.0%
17.2%
$
$
1.1%
18.2%
20.0%
25.1%
Percent
Total
$ 4,470
$
100.0%
15
50
100
125
325
363
500
350
0.4%
$
$
$
$ 5,322
330
500
540
785
150
3j5
October
November
December
20
$
$
19.0%
20
174
196
148
July
August
September
Percent
i_
$
$ 1,370
1,212
2,740
$
250
285
315
165
388
Total
Misc.
16.3%
6.1%
10.8%
11.5%
$
$ 1,071
530
__..__351
300
Transport.
275
431
437
2 58
April
May
June
Percent
$
Telephone
325
58
371
$
150
550
450
$
754
$ 1,150
$
13.7%
21.0%
21
44
85
$
150
$
$
220
375
140
$
735
$
13.4%
2.7%
100.0%
100
$ 2,363
1,712
1,094
120
$ 5,169
20
2.3%
100.0%
205
$22,389
0.9%
100.0%
100
100
$ 1,891
1,862
1,731
200
$ 5,484
3.6%
100.0%
April
May
June
$ 1,495
625
1,125
$
200
300
300
$
443
564
1,113
$
200
75
350
$
59
48
213
$
675
445
675
$
6
$ 3,078
2,057
3,776
Total 2nd Quarter
$ 3,245
$
800
$ 2,120
$
625
$
320
$ 1,795
$
6
$ 8,911
9.0%
23.8%
3.6%
20.1%
0.1%
100.0%
100
$ 2,028
2,005
306
$18,428
1.7%
100.0%
36.4%
Percent
$
July
August
Total
Year-to-Date
Percent
Source:
890
681
$
275
100
$
698
562
7.0%
$
300
$ 6,126
$ 2,360
$ 4,134
$ 2,075
33.2%
12.8%
22.4%
11.3%
$
45
122
$
$
637
$ 2,790
3.5%
15.1%
120
140
$
$
Morgan Stanley & Co. Incorporated
THIS MEMORANDUM IS BASED UPON INFORMATION AVAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
IN, SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
INCORPORATED AND OTHERS ASSOCIATED WITH IT MAY HA VE POSITIONS IN, AND MAY EFFECT TRANSACTIONS
ALSO PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
MORGAN STANLEY
•1.1V
Table 3
Public Bond S a l e s ; 1978 and Year- to-Date 197 9
By Rat ing of Issuer
($ M i l l i o n s )
Moody's Rating
Aa
A
Aaa
1978
January
February
March
Total 1st Quarter
$
300
319
1^299
$ 1,918
$
_
$ 1,389
36.0%
Percent
225
150
_288
$
25
37
248
$ 1,370
1,212
2,740
$ 1,042
$
663
$
310
$ 5,322
19.6%
$
470
407
495
April
May
June
Total 2nd Quarter
$ 1,846
$ 1,820
$ 1,372
27.2%
26.8%
20.2%
July
August
September
$
Total 3rd Quarter
$ 1,528
29.9%
Percent
460
693
375
597
671
552
$ 2,591
2,328
1,867
335
$ 1,413
$ 6,786
4.9%
20.8%
100.0%
158
203
335
$ 2,067
1,471
1,574
$
$
$
$ 1,509
$ 1,179
$
29.5%
23.1%
$
100.0%
754
355
304
25
220
90
$
664
400
445
5.8%
12.5%
585
175
419
$
Total
$
26.1%
$
Unrated
or Lower
200
140
702
$
$
Percent
745
675
426
620
566
203
Baa
200
$
200
$
3.9%
696
$ 5,112
13.6%
100.0%
October
November
December
$ 1,275
650
400
$
375
692
210
$
225
230
285
$
235
100
75
$
253
40
124
$ 2,363
1,712
1,094
Total 4th Quarter
$ 2,325
$ 1,277
$
740
$
410
$
417
$ 5,169
45.0%
24.7%
14.3%
7.9%
8.1%
100.0%
$ 7,617
$ 5,995
$ 4,333
$ 1,608
$ 2,836
$22,389
34.0%
26.8%
19.4%
7.2%
12.7%
100.0%
25
58
41
$ 1,891
1,862
1,731
124
$ 5,484
2.3%
100.0%
Percent
Total 1978
Percent
1979
January
February
March
Total
1st Quarter
$ 1,071
1,059
791
$
530
170
559
$
$ 2,921
$ 1,259
$
53.3%
23.0%
Percent
April
May
June
$ 1,461
799
900
$$
Total 2nd Quarter
$ 3,160
$ 1,885
Percent
35.5%
July
August
$
Total Year•-to-Date
$ 7,726
41.9%
Percent
Source:
925
720
488
275
1,122
125
475
340
$
940
$
17.1%
140
100
240
$
$
4.4%
610
599
1,310
$
285
245
50
$
234
139
394
$ 3,078
2,057
$ 2,519
$
580
$
767
$ 8,911
8.6%
100.0%
$
21.2%
28.3%
6.5%
225
305
$
100
$
138
305
$ 2,028
2,005
$ 4,459
$ 3,989
$
920
$ 1,334
$18,428
24.2%
21.6%
5.0%
7.2%
100.0%
$
640
675
$
Morgan Stanley & Co. Incorporated
THIS MEMORANDUM IS BASED UPON INFORMATION AVAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
INCORPORATED AND OTHERS ASSOCIATED WITH IT MAY HAVE POSITIONS IN, AND MAY EFFECT TRANSACTIONS IN, SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
ALSO
PERFORM OR SEEK TO PERFORM
MORGAN STANLEY
-IV-
Table 4
Public Bond Sales; 1978 and Year-to-Date 1979
By Maturity
(5 Millions)
Five to Ten Years
Over Ten Years
Total
1978
January
February
March
$
175
350
900
$ 1,195
862
1,840
$ 1,370
1,212
2,740
Total 1st Quarter
$ 1,425
$ 3,897
$ 5,322
73.2%
100.0%
Percent
April
May
26.8%
$ 1,070
450
487
$ 1,521
1,878
$ 2,007
$ 4,779
June
,JL»M
$ 2,591
2,328
1,867
$ 6,786
Total 2nd Quarter
29.6%
70.4%
100.0%
Percent
$
560
175
406
$ 1,507
1,296
1,168
$ 2,067
1,471
1,574
$ 1,141
$ 3,971
$ 5,112
July
August
September
Total 3rd Quarter
Percent
22.3%
$
77.7%
100.0%
550
450
475
$ 1,813
1,262
_
619
$ 2,363
1,712
1,094
$ 1,475
$ 3,694
$ 5,169
28.5%
71.5%
100.0%
$ 6,048
$16,341
$22,389
27.0%
73.0%
100.0%
480
300
400
$ 1,411
1,562
J , 331
$ 1,891
1,862
1,731
$ 1,180
$ 4,304
$ 5,484
October
November
December
Total 4th Quarter
Percent
Total 1978
Percent
1979
January
February
March
$
Total 1st Quarter
21.5%
78.5%
100.0%
868
845
1,630
$ 2,210
1,212
2,146
$ 3,078
2,057
3,776
$ 3,343
$ 5,568
$ 8,911
37.5%
62.5%
100.0%
575
504
$ 1,453
1,501
$ 2,028
2,005
$ 5,602
$12,826
$18,428
69.6%
100.0%
Percent
$
April
May
June
Total 2nd Quarter
Percent
July
August
Total Year-to-Date
Percent
Source:
$
30.4%
Morgan Stanley & Co. Incorporated
THIS MEMORANDUM IS BASED UPON INFORMATION A VAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
INCORPORATED AND OTHERS ASSOCIATED WITH IT MAY HAVE POSITIONS IN, AND MAY EFFECT TRANSACTIONS IN, SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
ALSO PERFORM
MORGAN STANLEY
-V-
Table 5
Publicly Offered Convertible Debt;
1978 and Year-to-Date 1979
($ Millions)
Banks
& Ins.
Industrial s^
1978
Total 1st Quarter
—
-
April
May
June
$
Total 2nd Quarter
$
12
—
-
37.9%
—
-
—
—
$
85
100.0%
Total 1978
$
1979
January
February
March
Total 1st Quarter
-
-$
10
118
$
4
—
$
10
3.0%
—
285
$
$
12
-
54
15.5%
$
100.0%
$
85
$
85
100.0%
$
100
26
6
$
132
7.6%
$
10
—
2.9%
132
100.0%
$
349
100.0%
—
-
-
-
-
-
-
-
-
--
35
Total 2nd Quarter
$
35
--
$
15
Total Year-to-Date
$
50
$
10.3%
—
$
150
$
150
-
18.9%
July
August
Source:
-
-
$
Percent
-
4
April
May
June
Percent
—
$
81.7%
Percent
—
100
12
6
89.4%
Percent
Total
120
50
Total 3rd Quarter
$
~
$
85
Total 4th Quarter
—
82
$
$
-
50
—
October
November
December
-
$
July
August
September
Percent
Misc.
70
62.1%
Percent
Trainsportation
$
$
126
$
30
180
37.0%
185
$
185
-
81.1%
116.
10
25.9%
--
$
$
130
$
130
26.7%
100.0%
$
146
155
$
486
100.0%
Morgan Stanley & Co. Incorporated
THIS MEMORANDUM IS BASED UPON INFORMATION AVAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
IN. SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
DigitizedINCORPORATED
for FRASERAND OTHERS ASSOCIATED WITH IT MAY HA VE POSITIONS IN. AND MAY EFFECT TRANSACTIONS
ALSO PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
MORGAN STANLEY
-VI-
Table 6
Underwritter ) Public Commor i Stock SaltBS; 1978 and Year-to-Date 1979
By Typei of Issuer and Issue
($ M i l l ions)
Banks
& Fin.
1978
January
February
March
Total 1st Quarter
Industrials
1
14
$
$
14
$
Percent
1.2%
April
May
June
$
Total 2nd Quarter
$
Percent
40
173
$
16.8%
$
42
8
83
$
Total 3rd Quarter
$
133
$
8.4%
October
November
December
$
Total 4th Quarter
$
1979
January
February
March
Total 1st Quarter
$
$
$
Percent
$
Total 2nd Quarter
$
Percent
$
Total Year -to-Date
$
$
$
$
563
$
6.9%
18.6%
4
$
$
$
$
18
0.6%
42
102
26
-
170
--
67
84
90
--
241
19
56.4%
$
651
$
33
1.1%
$ 1,134
0.3%
100.0%
$
39
6
59
$
8
$
$
104
$
8
$ 1,267
8.2%
0.6%
100.0%
138
500
629
588
—
—
$
266
-—
$ 1,581
583
394
143
$
3
1,120
$
3
$
22
$
$
$
$_
916
$
33
74.8%
$
20
15
517
$
35
59.6%
-$
68
2.2%
2
946
414
215
189
$
2
$ 1,575
631
$
0.1%
$
100.0%
13
$ 5,557
0.2%
100.0%
$
13
10
75
$
4
$
$
98
$
4
$ 1,225
0.3%
100.0%
8.0%
398
546
281
$
15
22
Z4
$
5
$
309
257
301
$
61
$
5
$
867
4.0%
267
331
100.0%
$
11.4%
2.7%
222
123
172
414
515
652
167
12
10
12.0%
0.4%
33
67.1%
16.8%
0.2%
335
434
147
$ 2,031
$
3
$
$
$
33
$
—
$
83
157
72
423
147
564
52
144
70
61.9%
$
$
$
$ 3,439
$
3
—
71.1%
$
$
6.3%
1.5%
37.2%
$
Total
28
217
343
—
-
$
21.5%
$
-
27.8%
6
714
$
36
$
$
0.6%
13.9%
8
8
$
—
-$
31
—
-
1,017
71
Misc.
1_
19
2.0%
237
$
--
60
420
234
$
—
349
147
521
$
24
7
177
3
57
$ 1,032
4
5
Secondary
Offers
Trans.
89.7%
0.4%
268
139
156
384
$
5
15.0%
0.9%
July
August
Source:
24
0.3%
April
May
June
Percent
$
1.5%
Percent
12
34
158
35.6%
5
Percent
Total 197£1
19
$
—
-
28
16.1%
July
August
September
Percent
2£
204
Utility
-
2.5%
$
213
Telephone
7.0%
0.6%
$
24
32
$
$
215
$
7.1%
4
100.0%
$
411
526
13
$ 3,029
0.4%
100.0%
Morgan Stanley & Co. Incorporated
THIS MEMORANDUM IS BASED UPON INFORMATION AVAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
INCORPORATED AND OTHERS ASSOCIATED WITH IT MAY HAVE POSITIONS IN, AND MAY EFFECT TRANSACTIONS IN, SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
ALSO PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
MORGAN STANLEY
-vn-
Table 7
Public Preferred Stock Sales; 1978 and Year-to-Date 1979
By Type of Issuer
($ Millions)
Ut i1i ty
1978
January
February
March
Total 1st Quarter
116
127
102
$
345
~
100.0%
~
April
May
June
$
Total 2nd Quarter
$
110
177
105
Percent
$
Total 3rd Quarter
$
Percent
$
Total 4th Quarter
$
435
$
67
40*
136
93
$
12*
20*
$
35.6%
20
148*
$
168
$
7
28*
$
35
$
563
116
127
102
$
345
100.0%
$
185
222
487
$
894
32
100.0%
$
$
52
111
98
$
261
12.3%
16.4%
$
$
7.5%
53*
$
Total
$
32.9%
100.0%
10
$
37
176
10
$
213
4.7%
100.0%
109
$ 1,713
6.4%
100.0%
$
121
226
—
-
$
$
347
—
—
—
$
-
--
Percent
100.0%
$
Total 2nd Quarter
$
Percent
65
70
91
$
226
$
75.8%
$
170
August
$
853
47
$
$_
25*
$
25
$
74.5%
261
—
347
$
103
79
116
$
298
8.4%
30
184
121
226
100.0%
38
9*
15.8%
110
Total Year-to-Date
10
57*
48.7%
60.8%
Apri 1
May
June
July
$
91
45
$ 1,041
Percent
75
35
325*
$
78.9%
Percent
Percent
$
52.1%
October
November
December
Total 1st Quarter
392
43.8%
July
August
September
379
January
February
March
Ins. &
Banks
Telephone
$
Percent
Total 1978
Trans. &
Industrials
100.0%
$
6
$
200
300
$
31
$ 1,145
2.7%
100.0%
22.8%
•Includes convertible preferred stock
Source:
Morgan Stanley & Co. Incorporated
THIS MEMORANDUM IS BASED UPON INFORMATION A VAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
IN, AND MAY EFFECT TRANSACTIONS IN, SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
FOR THOSE COMPANIES
INCORPORATED AND OTHERS ASSOCIATED WITH IT MAY HAVE POSITIONS
ALSO PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES
MORGAN STANLEY
•viiv
Table 8
Private Placements by Type of Issuer* ; 1978 and Year^to--Date 1979
($ M i l l i o n s )
Banks
1978
January
February
March
Total 1st Quarter
$
$
Foreign
$
296
$
Transportation
$
10
25
$
70
657
402
794
70
$ 1,853
$
35
$
2.6%
67.9%
$
42
153
101
10.8%
Percent
Industrial Tel ephone
17
35
228
$
280
$
10.3%
1.3%
Total
Misc.
Utility
35
50
94
$
10
6
$
761
675
1,293
179
$
16
$ 2,729
6.6%
0.6%
100.0%
177
569
935
—
$
April
May
June
$
35
175
109
$
120
30
60
$
513
840
333
$
18
150
100
$
38
121
258
$
Total 2nd Quarter
$
319
$
210
$ 1,686
$
268
$
417
$ 1,681
~
$ 4,581
4.6%
36.8%
9.1%
36.7%
--
100.0%
Percent
7.0%
5.9%
901
1,885
1,795
July
August
September
$
92
108
120
$
255
125
60
$ 1,320
544
417
$
15
19
$
44
38
172
$
69
344
36
$
115
$ 1,910
1,178
805
Total 3rd Quarter
$
320
$
440
$ 2,281
$
34
$
254
$
449
$
115
$ 3,893
11.3%
58.6%
11.5%
3.0%
100.0%
8.2%
Percent
October
November
December
$
Total 4th Quarter
$
Total 1978
284
$
$ 1,219
Percent
$
8.3%
1979
January
February
March
Total 1st Quarter
$
$
78
74
53
$
205
$
6.7%
Percent
April
May
June
$
Total 2nd Quarter
$
312
139
198
$
649
$
12.0%
Percent
July
August
Year-to-Date
Percent
$
8.2%
Percent
Total
99
32
153
0.9%
534
209
961
$
148
$ 1,704
$
4.3%
49.4%
868
$ 7,524
5.9%
51.4%
27
35
86
$
30
$
147
6
143
$
286
65
388
—
$ 1,123
347
1,976
$
296
$
739
—
$ 3,446
245
$
180
6
39
$
758
636
432
$
225
$ 1,826
$
7.3%
59.3%
275
8.0%
8.6%
21.4%
612
$ 1,247
$ 3,048
4.2%
8.5%
20.8%
5
2
7
$
$
0.2%
9
49
$
794
332
1,202
$
58
$ 2,328
$
1.1%
43.2%
37
67
$
104
$
1.9%
$
81
57
$
123
$
323
360
$
33
52
$
992
$
406
$ 4,837
$
196
4.0%
47.1%
1.9%
9.7%
6.5%
$
86
78
256
$
420
$
~
$
131
$14,649
0.9%
100.0%
95
150
131
$_
20
$ 1,202
946
913
376
$
20
$ 3,079
0.6%
100.0%
4
90
$ 2,573
1,017
1,797
13.6%
12.2%
311
289
149
$ 1,110
137
158
$
749
$ 1,405
$
13.9%
26.1%
$
100.0%
94
$ 5,387
1.7%
100.0%
290
109
$
6
20
$ 1,048
748
$ 1,511
$ 2,180
$
140
$10,262
14.7%
21.2%
1.4%
100.0%
192
150
*Data prior to 1979 includes publicly announced private placements done on an agency basis only.
Source:
Morgan Stanley & Co. Incorporated
THIS MEMORANDUM IS BASED UPON INFORMATION AVAILABLE TO THE PUBLIC. NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. MORGAN STANLEY & CO.
INCORPORATED AND OTHERS ASSOCIATED WITH IT MAY HAVE POSITIONS IN, AND MAY EFFECT TRANSACTIONS IN, SECURITIES OF COMPANIES MENTIONED HEREIN AND MAY
ALSO PERFORM OR SEEK TO PERFORM INVESTMENT BANKING SERVICES FOR THOSE COMPANIES.
A Report on Fiscal Policy for the Shadow Open Market
Committee
Rudolph G. Penner
American Enterprise Institute
Requiem for 1979
Fiscal 1979 will come to an end in two weeks.
The perils involved in
making deficit forecasts are well known, but it may be worthwhile to review
the Administration's own 1979 deficit recommendations over time to provide a concrete example of the sensitivity of the deficit to policy changes
and economic events.
TABLE 1
Administration Estimates of the 1979 Budget Totals
At Various Times Through 1978 and 1979
(Billions of dollars)
Outlays
Receipts
Deficit
Original 1979 Budget, January
1978
500
440
-61
Mid-Session Review, July 1978
497
448
-49
1980 Budget, January 1979
493
456
-37
Mid-Session Review, July 1979
496
467
-30
August 1979
497
467
-30
Less than one-half of the $31 billion fall in the estimated deficit
over time was the result of changes in policy, the most important of which
was a one-quarter postponement and a reduction of the tax cut requested
by the President in his original 1979 budget.
The rest of the reduction
was the result of errors in economic forecasting and errors in predicting
2
spending and receipts levels for a given set of economic conditions.
The 1980 Budget
While estimates of the 1979 deficit were steadily lowered since the
budget was first submitted in January 1978, estimates of the 1980 deficit
are very likely to move in the opposite direction over time. The latest
Administration estimates were provided at the end of August in correspondence with the Senate Budget Committee.
They are as follows:
TABLE 2
Outlays
$543.1
Receipts
B.
513.9 B.
Budget deficit
$ 29.1 B.
Off budget
deficit
$ 11.6 B.
Total deficit
$ 40.7
Note that the estimate of the off-budget deficit has been lowered by
$4.5 B.
since the Mid-Session Review of July 12, 1979.
These estimates are based on the following economic forecast.
TABLE 3
Administration's Short-Run Economic Forecast
(Calendar Years)
1979
1980
-0.5
2.0
10.6
8.3
6.6
6.9
GNP (1972 dollars) percent change
4th quarter over 4th quarter
CPI (percent change, December over December)
Unemployment rate (percent, 4th quarter)
3
The Administration's official forecast published in July, is more
optimistic than most private forecasts (and also more optimistic than their
own recent internal staff forecasts that have been leaked to the press),
but there are many private forecasts that would not greatly alter the
Administration's deficit forecast, given the President's current policy
recommendations.
For example, DRI's forecast is given below:
TABLE 4
DRI's Economic Forecast (July 24, 1979)
(Calendar Years)
1979
1980
-1.1
2.7
11.3
8.5
6.4
7.1
GNP (1972 dollars), percent change,
4th quarter over 4th quarter
CPI (percent change, December over December)
Unemployment rate (percent, 4th quarter)
On the receipts side, the slightly deeper recession is offset by
slightly higher inflation and receipts would fall only marginally.
On
the outlay side, higher inflation would raise outlays by less than
$2.billion.*
The DRI forecast is used here as being typical of the "mild recession"
forecast where that recession is assumed to have started already and a
recovery is expected in early 1980.
Many other forecasters assume that
the real recession has not yet begun and that real GNP will grow in the
third and perhaps in the fourth quarter abstracting from the effects of
*The DRI forecast assumes a small discroj^anary increase in outlays.
$2 billion estimate refers only to endogenous spending changes.
My
4
a possible auto strike. A "real" recession is then expected for the first
half of 1980.
This scenario poses significant difficulties for any budget forecast.
Total receipts in fiscal 1980 will be extremely sensitive to the exact
timing of the gyrations in GNP and their amplitude during the rest of
1979 and in early 1980. These gyrations will, in turn, be very sensitive to the length of the probable auto strike at the end of the third
quarter.
It is also a scenario that is conducive to a higher inflation
rate throughout 1979 and early 1980 and this could have a significant
positive effect on receipts.
For example, if real GNP is assumed flat for the rest of 1979; the
auto strike is short
enough to have a minimal effect on the macro ag-
gregates; inflation is assumed to continue at a 10 percent rate through
the end of 1980; and there is a fairly mild recession in the first half
of calendar 1980; the unified deficit could actually be lower than in the
Administration forecast by something less than $5 billion.
Specifically,
the economic forecast which goes with this deficit is as follows:
TABLE 5
Alternative Economic Forecast
(Calendar Years)
1979
1980
-0.2
+1.1
11.0
10.0
6.3
7.4
GNP (1972 dollars), percent change,
4th quarter over 4th quarter
CPI (percent change, December over December)
Unemployment (percent, 4th quarter)
5
However, a slightly longer auto strike combined with a slightly
deeper recession and lower inflation rate could cause the 1980 unified
deficit to soar.
Roughly speaking, a change in money GNP of one percent,
extending through the fiscal year, changes receipts $6 to 7 billion dollars,
although the impact can be far outside of this range depending on the
distribution among different types of income, such as corporate profits,
labor compensation, etc.
A one percent downward adjustment in the CPI
beginning in the first quarter of calendar 1980 would lower outlays on
indexed programs by about $0.3 billion in fiscal 1980, and if short interest rates were reduced by the same amount, roughly another billion
would be saved on net interest payments.
A one percentage point increase
in the average unemployment rate would cost about $3 billion.
Therefore,
downward deviations in either real growth or inflation, that are minor
relative to typical forecasting errors, could easily cause the deficit
to soar to the $40-50 billion range.
All of the above assumes Presidential tax and spending policies.*
These policies are almost certain to change with or without the acquiescence of the President as unemployment begins to rise.
However, it would be dangerous to assume that there will be the
same scramble to implement "stimulative" spending policies that we observed
in 1975 and 1977.
There is definitely a new mood in the Congress.
For
*At the moment there are some ambiguities in these policies. For example,
it is not clear whether the "extra'1 pay raise recently announced by the
President will have to be absorbed by agencies out of existing budgets or
whether a supplemental will be requested. The above assumes that the extra
$1.1 billion will be covered out of existing budgets. In addition, ongoing
bargaining over the windfall profits tax could have a small effect on 1980
receipts.
6
the first time, the Senate Budget Committee is using the power provided
in the Budget Act to direct Senate committees to take a second look at
the spending legislation which has already been approved for 1980.
This
action is taken because those committees did not implement savings recommended
in the First Budget Resolution.
Further, the August Report on the second
Budget Resolution is filled with rhetoric that gladdens the hearts of fiscal conservatives.
For example:
M
inflation is the nation's most serious
problem;11 "We must not jump ship at the first sight of a storm;"
"fiscal stimulus might come too late to rescue the economy from what many
still predict will be a moderate and relatively brief recession."
Unfortunately, this rhetoric is mixed in with statements favorable
to "targeted" stimulus programs, and the Report was published while unemployment was still constant.
I do not expect the conservative sentiments
of the Senate Budget Committee to prevail as the process evolves through
the year, but it is important to note that the majority of the Committee
is doing and saying things that have not been experienced in recent years.
I, therefore, expect spending increases to be quite modest and will be
surprised if discretionary increases exceed $5 billion if unemployment
does not go beyond 8.0 percent.
Much of the conservative rhetoric is stimulated by concern over the
size of the deficit.
Even many liberals who favor a large government
sector are, nevertheless, concerned that we are not moving faster toward
a balanced budget.
These sentiments create a formidable barrier against
tax cuts as well as spending increases, but I would still forecast a sig-
7
nificant tax cut in 1980.
Concern over the deficit may delay the enact-
ment of the tax cut until early next year, but it is my guess that, in
that case, it will be made retroactive to January 1, 1980.
I believe that concern over the deficit will be
overridden by the
by the fact that arguments for a tax cut can be based on a variety of very
different economic theories and political motives.
1.
Obvious politics - 1980 is an election year.
It is also
a year in which personal income tax increases caused by inflation, scheduled social security tax increases, and possible energy taxes will push
the ratio of Federal receipts to GNP to unprecedented peacetime levels.
Indeed, without a tax cut, we could even exceed the levels reached in
the era of the Vietnam surtax.
I cannot believe that this will be
allowed to happen.
2.
Subtle politics - Those concerned about rising tax burdens
in the short run will be joined by those who believe that, in the long
run, tax cuts provide the most effective method of cutting spending growth.
3.
Keynesian economics - The built-in tax increases combined
with virtually no real growth in Federal spending in 1979 and 1980 is causing
a dramatic shift to fiscal restraint.
According to CBO estimates, the
full employment surplus will rise $54 billion over the two year period f(i^.J
1979 and 1980.
With sluggish real growth and rising unemployment, many
economists will testify in favor of reducing this increase.
4.
Supply-side economics - Inflation is causing a rapid in-
crease in marginal tax rates.
For most of the population, those rates
are now higher than they were before the Kennedy-Johnson tax cut.
The
most serious problem involves the tax rates imposed on the real return
• 8
to business investment. Feldstein and Summers estimate that inflation
in 1977 raised the effective tax rate on the real return in the non-financial corporate sector from 43 to 66 percent. Between 1976 and 1977, the
inflation rate was less than 7 percent. Thus, the ninflation tax11 on capital is likely to be much higher this year and next.
The shape of the 1980 tax cut and its effect on the fiscal 1980 deficit will depend crucially on when it is passed. After January 1, it
becomes virtually impossible to change 1980 social security taxes.
Further, there is almost a two month time lag between enacting a personal
tax reduction and changing withholding.
My own guess is that the Congress will act too late to change social
security taxes in 1980 and that the tax cut will be heavily weighted toward
£r0
Jp[ " e a s i n g the burden on investment by adopting very generous depreciation
*7/i T tit& * av i s s^m^ax
l ^hJJ*
A$*%\
to those provided in Jones-Conable. However, I also expect
• some cuts in personal taxes. A total business and personal cut of $20
to $30 billion in 1980 liabilities seems likely, although it must be re-
fjjLf^
emphasized that there will be considerable concern over the effect on the
I ?^fjb
deficit.
f\f*J0P^
£MC~*~
I suspect the cut will be delayed sufficiently to keep the im-
pact on the 1980 deficit to less than $10 billion.
It is not easy to summarize the above analysis as it piles uncertainty
on uncertainty. To give the Committee something to criticize, I shall,
therefore, attempt a "best guess."
My own favorite economic scenario involves somewhat less real growth
and inflation than assumed in the economic assumptions of Table 5. With
4
j1°
k\<<>r
9
current Presidental policy I would guess that the unified budget deficit
would be around $40 billion. To that, I would add a $5 billion discretionary increase in appropriations, only $2 billion of which will be
spent in fiscal 1980. Adding a $8 billion tax cut yields a unified budget deficit of $50 billion. The off-budget deficit will be about $12
billion for a total financing requirement of $62 billion.
Appendix A
Outlays of Off-Budget Federal Entities, Fiscal 1978
(in billions of dollars)
Federal Financing Bank
Rural Electrification and Telephone
10.6
0.1
revolving fund
Rural Telephone Bank
0.1
Pension Benefit Guaranty Corporation
- *
Postal Service fund
- 0.5
U.S. Railway Association
TOTAL
0.1
10.3
*$50 million or less
NOTE:
Since the Export-Import Bank and the elderly housing fund have
been returned to the budget, off-budget activity has been
dominated by the Federal Financing Bank.
Appendix B
Table 10.—EFFECT OF A ONE PERCENTAGE POINT INCREASE IN THE
UNEMPLOYMENT RATE ON OUTLAYS
(dollar amounts in millions)
First Year
Unemployment benefits:
Regular benefits 1/
Extended benefits
Subtotal
t
Other.transfer programs:
OASI
DI.
Food stamps
GI bill
AFDC
Medicaid
Subtotal
4
Total
Second Year
1,600
600
1,600
800
2,200
2,400
150
50
400
75
100
50
275
200
425
125
200
100
825
l_f_3.25.
3,025
3,725
ADDENDUM
Unemployment-induced o u t l a y s as a
p e r c e n t of t o t a l o u t l a y s :
Unemployment b e n e f i t s
Other t r a n s f e r s
Total
0.49%
0.18
0.53%
0.29
0.67%
" 0.82%
1/ I n c l u d e s $100 m i l l i o n for former Federal p e r s o n n e l and
ex-servicemen.
J!/ Assumes t h a t extended b e n e f i t s a r e t r i g g e r e d in some
S t a t e s , but not for t h e Nation as a whole.
Source:
Darwin Johnson, Office of Management and Budget, and Brookings
Institution. The estimates are preliminary.
PITTSBURGH NOTIONAL BRNK
TO.
SOMC
FROM
Jerry L. Jordan
SUBJECT
ECONOMIC PROJECTIONS
I.
PHONE No.
DATE
Sept. 7, 1979
Tables I and II show projections for 1979 as of the March 1979 meeting
and for this meeting.
TABLE I
(percent change)
Projections for 1979 as of March 11, 1979 meeting
GNP
Output
Deflator
Ml
£
vi
£
Q4/78Q4/79
10.5
2.0
8.3
7.0
8.0
3.3
2.3
19781979
11.8
3.3
8.3
6.8
8.3
4.7
3.2
TABLE II
(percent change)
Projections for 1979 as of September 16, 1979 meeting
GNP
Output
Deflator
M1
V1
2
2
M
V
MB
VB
04/78Q4/79
9.1
-0.3
9.4
5.1
3.8
7.6
1.4
7.2
1.8
19781979
11.0
1.8
9.1
4.8
5.9
7.3
3.5
7.9
2.9
Output growth is now expected to be less than projected in March, and
inflation will be greater. These
the automobile industry.
projections do not assume a strike in
Money growth dropped sharply in the first three
months this year, then accelerated rapidly in the subsequent five months.
-2-
The two quarter annual rates of change of Ml, M2, and monetary base (MB)
are shown in attached charts and tables.
growth, for
The contraction of monetary
two-quarter periods, in Ql/79 and Q2/79 was as sharp as in
any period in the past thirty years. However, the subsequent re-accleration
was equally as sharp.
This roller-coaster pattern of monetary growth
is similar to that experienced in 1966-67, the time of the first
"credit crunch" and "mini-recession11.
Other assumptions about 1979, made last March, are holding up.
Unemployment is still expected to be in the 5.5 to 6.5 percent range this
year.
Short-term market interest rates have risen somewhat more than the
75 to 100 basis point rise projected last September, as recognized in
March, of this year.
Long-term yields have not yet risen by 50 basis points,
on balance, but are still expected to do so. Residential construction
activity is down as expected; non-residential has risen on balance;
real capital spending in 1979 will exceed 1978. The decline in total auto
sales may be somewhat more than the 10 percent projected, and the decline
has been greater in domestic and less in imports than had been expected.
Exports have been strong, as expected, but imports in dollar terms have
risen more than projected (because of the world oil price increase) so the
trade and current account deficits will not show the expected improvement.
II.
Table III shows projections for 1980, based on assumed monetary
growth rates, rather than recommended growth rates.
-3-
TABLE III
(percent changes)
Projections for 1980
GNP
Output
Deflator
M^
V^
M^
V^
MB
VB
Q4/79Q4/80
8.0
-0.4
8.4
4.0
3.9
7.0
0.9
6.2
1.7
19791980
8.1
-0.8
8.9
4.9
3.1
7.6
0.4
6.5
1.5
The acceleration of monetary growth that occurred in Q2/79 and
Q3/79 is not expected to continue.
Pressures on the U.S. dollar in
foreign exchange markets, and rising expectations about the trend rate
of inflation are causing the Federal Reserve to tolerate a continuing
rise in short-term market interest rates in order to slow the growth of
bank reserves, the monetary base, money supply and bank credit.
It is
expected that the growth of the base and monetary aggregates will be
reduced, beginning in Q4/79.
Furthermore, it is expected that the Federal
Reserve will not seek another acceleration of monetary growth in the first
half of 1980, even when it becomes clear that a recession is occurring and
unemployment is rising.
The average rate of inflation will remain quite
high at least through the first half of 1980, and the pressures on the dollar's
value of forex markets will continue to be a primary concern.
The level of new housing starts at the end of 1979 is expected to be down
about 25 percent from the end of 1978, with most of the decline occurring in
single family starts.
New residential construction activity may contract
somewhat further in the first half of next year before beginning a gradual
recovery in the second half.
-4-
Consumer spending is expected to decline in real terms on balance
during 1980, although some increase is likely to occur in the latter part
of the year.
Non-residential construction and capital spending are ex-
pected to decline in real terms for the year, but plans for future
spending should be increasing by year-end.
Short-term market interest rates are expected to be on a declining
trend throughout 1980, but long-term yields may continue to rise into
early 1980 before beginning a gradual decline.
SOMC
TWO-QUARTER COMPOUNDED ANNUAL RATES OF CHANGE
Ml
M2
MONETARY
BASE
M1+
Q1/71-Q3/71
8.2
11.5
8.2
10.1
Q2/71-Q4/71
4.9
8.1
6.6
Q3/71-Q1/72
5.5
10.2
Q4/71-Q2/72
11.4
Q1/72-Q3/72
7.7
8.0
6.0
7.8
6.4
7.8
Q2/72-Q4/72
)9.1
11.0
7.8
8.9
Q3/72-Q1/73
9.0
10.4
10.1
Q4/72-Q2/73
7.0
9.0
Q1/73-Q3/73
7..9)
Q2/73-Q4/73
5.3
5.4
8.8
8.1
8.6
7.4
4.3
4.6
Q3/73-Q1/74
,655
10.0
Q4/73-Q2/74
5.9
5.9
5.8
Q1/74-Q3/74
•411
8.9
6.7
8.1
9.5
8.8
Q2/74-Q4/74
4.3
6.5
8.5
4.9
5.4
Q3/74-Q1/75
3.3
4.0
6.6
8.3
7.7
5.5
8.5
6.7
5.2
10.1
7.1
8.3
8.2
3.8
5.6
5.4
5.9
7.6
7.6
8.9
Q4/74-Q2/75
Q1/75-Q3/75
Q2/75-Q4/75
Q3/75-Q1/76
Q4/75-Q2/76
Q1/76-Q3/76
Q2/76-Q4/76
Q3/76-Q1/77
Q4/76-Q2/77
Q2/77-Q4/77
8.3
8.2
Q3/77-Q1/78
Q1/77-Q3/77
10.7
8.7
10.6
9.7
11.1
12.3
10.4
9.9
7.8
9.2
8.7
7.7
7.9
8.1
9.2
9.1
8.6
9.4
8.3
5.7
11.6
9/3
10.4
13.7
10.7
11.5
14.2
10.9
8.5
9.5
7.7
7.2
9.3
7.7
9.8
Q4/77-Q2/78
8.2
7.9
9.3
6.0
6.2
Q1/78-Q3/78
8.8
9.4
9.0
Q2/78-Q4/78
6.2
Q3/78-Q1/79
Q4/78-Q11/79
1.0
2.7
9.0
4.8
9.9
7.9
6.1
Q1/79-Q111/79
8.9*
* Projected by Pittsburgh National Bank
5.3
10.4*
8.4*
6.8
4.4
-1.2
-0.7
SOMC
MONEY GROWTH RATES
(% Change from Previous Year)
FROM:
TO:
Ml
M2
MONETARY
BASE
M1+
1971/Q1
1972/Q1
6.8
10.9
7.1
8.9
Q2
Q2
6*3
9.7
7.2
7.7
Q3
Q3
6.7
10.4
6.9
8.2
Q4
Q4
8.4
11.2
8.3
9.2
1972/Q1
1973/Q1
8.5
10.5
8.9
8.4
Q2
Q2
8.0
10.0
8.9
7.5
Q3
Q3
7.2
9.2
9.1
6.3
04
Q4
6.2
8.8
8.1
5.2
1973/Q1
1974/Q1
5.9
9.0
8.1
5.1
Q2
Q2
5.6
8.8
8.4
5.2
Q3
Q3
5.3
8.3
8.4
5.4
Q4
Q4
5.1
7.7
9.0
5.6
1974/Q1
1975/Q1
3.7
6.7
8.2
5.2
Q2
Q2
4.2
7.3
7.8
6.8
Q3
Q3
5.0
8.4
8.0
8.5
Q4
Q4
4.6
8.4
7.6
8.8
1975/Q1
1976/Q1
5.3
9.6
8.0
11.0
Q2
Q2
5.4
9.6
8.7
11.5
Q3
Q3
4.6
9.3
8.3
10.6
04
Q4
5.8
10.9
8.4
12.6
1976/Q1
1977/Q1
6.5
11.0
8.3
12.5
Q2
Q2
6.8
10.8
7.9
11.2
Q3
Q3
8.0
11.1
8.5
11.3
Q4
Q4
7.9
9.8
8.8
9.3
1977/Q1
1978/Q1
7.7
8.8
9.5
7.2
Q2
Q2
8.2
8.6
9.4
7.0
Q3
Q3
8.1
8.5
9.4
6.4
Q4
Q4
7.2
8.4
9.6
5.3
1978/Q1
1979/Q1
4.8
7.0
8.4
2.7
Q2
Q2
4.4
7.1
8.0
1.8
Q3
Q3
4.9*
7.5*
8.2*
by Pittsburgh
Digitized *
for Proiected
FRASER
National Bank
TRENDS AND FLUCTUATIONS OF MONEY GROWTH
1957
1957
1959
1959
1961
1963
1961
1963
1965
1965
1967
1969
1967
1969
1971
1973
1973
1971
1975
1975
1977
1977
1979
1979
The shaded areas represent periods of business recessions as defined by the National Bureau of Economic Research.
Latest data plotted:
3rd
Quarter
• Projected by Pittsburgh National Bank.
w
PITTSBURGH NRTIONnL BRNK
Money Stock
Ratio Scale
Billions of Dollars
1000
Ratio Scale
Billions of Dollars
1000
Monthly Averages of Daily Figures
Seasonally Adjusted
i
i_J 220
* Projected by Pittsburgh
National Bank.
Percentages are annual rates of change for periods indicated.
Latest date plotted: September
1—Li
•
PITTSBURGH NOTIONAL BRNK
Monetary Base and Fed. Reserve Cre^.i
Monthly Averages of Daily Figures
Seasonally Adjusted
Ratio Scale
Billions of Dollars
160
Ratio Scale
Billions of Dollars
i 160
150
+9.4C/o
140
/ y /
X1
130
120
+ 10.C
+8.1% >
Monetar y Base
110
+8.2% y * i
.^^^
100
+8.6%
ys.jr
90
+8.9%
J
/
^
F
ed. Reser ve Credit
80
r
xi\^*S
+9.6%
70
4-»
1 °~
+-> ,
c
1 ^
CN
cr
cr
c
V)
CN
1
L._t
t
1972
1973
1974
1975
,°"
cr
1976
li 1977
x:
•5-
1978
1979
1. Uses of the monetary base are member bank reserves and currency held by the public and nonmember banks.
Adjustments are made for reserve requirement changes and shifts in deposits among classes of banks.
Latest data plotted: September
* Projected by Pittsburgh
National Bank
w
PITTSBURGH NRTlONRL BRNK
60
MONEY STOCK PLUS TIME DEPOSITS (M2)
Averages of Daily Figures
Seasonally Adjusted
Average so far this quarter:
800
918.0
Last date plotted:
J
J
F
M
A
M
J
J
1978
A
S
O
N
D J
F M A M J J
1979
A
S
O
N
D
J
8/29/79=924.3
L
i
J
L
F M A M J
1980
1
MONEY STOCK (Mi)
Averages of Daily Figures
Seasonally Adjusted
$ Billions
391
Average so far this quarter:
335
$Bil
373.2
Last date plotted: 8/29/79=374.7
i
J
F
M
A
M
J
J A
1978
S
O
N
D
J
F
M
A
M
J
J
1979
A
S
O
N
D
J
JL L
J__L
F M A M J
1980
MONETARY BASE & BANK RESERVES
Averages of Daily Figures
Seasonally Adjusted
$Billions
156
$Billions
1156
—M54
154
152
HORIZONTALS PLOTTED ARE
ACTUAL QUARTERLY LEVELS.
MONETARY BASE
-J152
150
-11*50
Last date plotted: 9/5/79=150.6
148
146
11/79=145.7
Average so far this quarter:
us. 9
—(148
—Il46
144
52
142
51
140
50
138
—! 49
i
136
i
H 48
134
1 47
132
H 46
130
128
~-\ 45
~' 44
43
-142
41
^_i
L
0
N D
J
J
J
1 L
L
40
F M A M J
1980
g^S HARRIS
{|^£ BANK
lUltfFrf^^M^
|p||jg,|^|^|S^
Harris Economic Research Office Service
September 4, 1979
Although the attached anlaysis includes the usual detailed
projections, I want to emphasize that the uncertainty
concerning projected trends is higher than usual. Much of
the uncertainty relates to (1) the extreme volatility in
monetary policy and (2) the supply effects emanating from
higher oil prices.
As you are well aware, monetary policy moved from massive
stimulus in the first 10 months of last year to restraint
November '78 through March '79, and back to rapid growth in
monetary aggregates since March. The attached table provides
several measures of change. The critical assumption in our
projection for the balance of the year and into 1980 relates
to our assumption of very slow money growth over the balance
of the year. If this does not occur, the recession will be
short lived, but inflation and interest rates will soar.
Recent increases in the fed funds rate suggest that the
Federal Reserve is attempting to slow monetary growth, but
so far there is very little evidence that the objective has
been accomplished.
Once again we have witnessed volatile monetary growth induced
by the Federal Reserve's effort to regulate the fed funds rate.
To my knowledge there is no evidence in the minutes of the
Open Market Committee indicating an intent to induce volatile
growth in monetary aggregates.
Beryl W. Sprinkel
Executive Vice President
and Economist
September 4, 1979
MONETARY GROWTH
(Compound Annual Rates of Change)
Targets
12/77 to 10/78
10/78 to 3/79
3/79 to last 4 weeks
9.3%
Monetary base*
10.1%
6.2%
Bank Reserves*
10.4%
-0.5%
6.2
1.595- 4. 5%
8.1%
-1.2%
10.4
5%-8%
9.1%
2.7%
12.0
M
i
* Adjusted
Source:
Federal Reserve Board and St* Louis Federal Reserve Bank
STS HARRIS
2 y | BANK
August 10, 1979
ECONOMIC PROSPECTS THROUGH 1980
The downturn in business activity which began earlier this year is
continuing into the third quarter. Although a recent increase in monetary
growth will have a moderating effect on the downturn temporarily, higher
than expected energy costs should offset any short-term stimulus from
money. As a result, the recession is still expected to continue into 1980
and to be characterized as moderate.
Monetary Developments - Departing From Script
Although the recession arrived essentially on time (aided in part by
energy problems), the recent spurt in the money supply was completely
unexpected. The forecast had called for increases averaging 4.3% at an
annual rate between the first quarter and fourth quarter of 1979 in the
narrowly defined money supply (demand deposits plus currency). This policy
would have resulted in a typical recession and left the economy poised
for a normal cyclical recovery in early 1980 • The pattern was altered
when monetary growth soared at an 11% annual rate between March and July.
Without any further negative developments, this boost in money would have
contributed to a pickup in spending this fall which could have temporarily
reversed the economic downturn. As it turns out, the negative impact of
sharply higher oil prices is expected to offset the short-run positive impact
of rapid money growth. The net result is likely to. be an economy which continues to trend downward and remains sluggish for a longer period of time.
Future Monetary Growth - Returning to the Script
A key assumption in'the present forecast is that the Federal Reserve
will restrict Mi growth to an annual rate of just under 5% between mid-year
and the end of 1979. All of the arguments previously presented for tight
money during 1979—inflation is public enemy number one, defense of the
dollar is crucial/ etc.—are still valid. In addition, there is the
appointment of Paul Volcker as Fed Chairman. It is crucial that Mr. Volcker
prove immediately that he is serious about reducing inflation by controlling
monetary growth if the Fed is to be viewed as anything other than an
engine for inflation* If its actions fail to control monetary growth when
unemployment is still less than 6%, the Fed1 sr.credibility would be
completely gone.
In spite of the latest forecast of renewed monetary restraint,
nagging doubts about the future course of Fed actions remain. President
Carter's four appointments to the Fed all share his sensitivity to the
unemployment problem along with a preference for viewing interest rates
instead of money as a guide to policies. Although not considered the
-2most likely development/ it is still possible that Fed actions will
be geared toward minimizing the influence of the present recession by
continuing a policy of rapid monetary growth* If this occurs, inflation
would remain in the 10%-15% range in 1980/ interest rates would soar
and the end result would be a protracted downturn in business activity
throughout 1980.
Interest Rates - Will Recession or Inflation Dominate?
The major question regarding interest rate movements is whether the
recessionary forces now underway will reduce credit demands sufficiently
to lower interest rates or whether inflationary forces will drive them up
further* With respect to short-term interest rate developments/ it appears
that rates might have to go up another notch (25 to-75 basis points) in
order to slow monetary growth significantly. Once growth is slowed/
short-term rates will fall. The turning point is expected to occur within
the next two months. As for long-term rates/ the cyclical forces
associated with the present recession are expected to dominate with rates
declining by approximately 75 basis points from present levels. This
would take the new issue AA industrial rate from 9h% at.present to 8%%
at the trough.
Although there is considerable uncertainty over both monetary
developments and inflationary expectations/ past experience supports the
view that during recessions cyclical factors dominate movements in long-term
rates. In 1970 a mild recession in the U.S. was accompanied by a 200 basis
point decline in long-term rates and the more severe 1974 downturn helped
to contribute to a 160 basis point reduction in rates. The reduced
magnitude of decline last time around suggests that "rational expectations"
were at work mitigating the decline. Although expectations of renewed
stimulus might be expected to prevent any significant decline in rates
during the present recession/ evidence from abroad shows that cyclical
forces tend to dominate movements in long-term rates. For example, in
the U.K. long-term rates dropped by 280 basis points during 1975 as business
activity declined. This occurred in spite of a sharp acceleration in
both inflation and monetary growth. Also, in West Germany during 1974,
long-term rates fell after six months of declining business activity in
spite of little improvement in inflation and sharp increases in monetary
growth.
The key to long-term interest rate developments over the next six
to nine months rests with future Fed policy. If, in contrast to our
assumption, Fed policies attempt to minimize the discomfort of the
recession by a policy of renewed monetary growth, then recessionary
forces would give way to rapid increases in spending and long-term rates
would quickly reverse direction and move higher.
Energy Adfustments - A S20 Billion Shift
Over time an increase in oil prices per se will neither add to
inflation nor reduce spending. Higher oil prices initially lead to more
spending on oil products, but with no change in income, this increase
must be associated with less spending on non-oil products. Although
energy prices are presently increasing faster than inflation, non-energy
prices will rise slower than inflation as demand is reduced in those areas
-3Consumer spending on purchases of non-oil related items will be lowered
at first as those funds go to oil producers. However, these funds
eventually will be funneled back into the economy as the recipients
of oil revenues spend their unanticipated gains. The magnitude of this
impact is estimated to be approximately $20 billion per year this time
around. That is, some $20 billion more per year than had been anticipated
will be transferred from the income of" U.S. oil consumers to oil producers!
During the transition stage, as consumers cut back on purchases to pay
for higher price energy products and before the recipients of these profits
have spent the funds, there will be lower spending and higher inflation.
About half of the estimated $20 billion energy adjustment is assumed to
raise inflation during the remainder of 1979 and half is assumed to
reduce nominal spending as the shift in income serves to rearrange buying
patterns. Some positive adjustment is made for both inflation and
spending in 1980 as the impact of the oil transfer works its way through
the economy.
Fiscal Policy
As unemployment increases in the upcoming months, prospects for a
tax cut will improve. The present forecast assumes that taxes are
reduced by approximately $30 billion from what would have been generated
by present tax laws. In terms of the mix, roughly one third of the
reduction is. likely to be geared toward the corporate sector, probably
through accelerated depreciation and reduction in planned social security
increases. The remainder will represent a cut in personal taxes with at
least a portion of this applied to social security taxes.
Corporate Profits
Extremely high inflation rates have taken their toll on corporate
profits. Revised GNP figures show that after-tax profits of nonfinancial
corporations adjusted for replacement depreciation and inventory profits
fell to 4.9% of gross corporate income during 1976-78. This compares with
5.1% during the previous expansion. The continued deterioration in
this ratio suggests that profits have not flowed through to the bottom
line during the course of the most recent business expansion. Although the
proportion of corporate income going for dividend payments averaged 3.4%
during the recent expansion (up from 3-2% during the previous expansion),
the proportion of income retained by corporations dropped to 1.6% from
1.9% during the 1971-73'expansion. This reduction in retained earnings
represents a discouraging development which has adverse implications for
corporate and, in turn, economic growth in future years.
SUMMARY
The U.S. economy has entered the first stage of an inflationary
recession. The downturn is expected to be moderate in terms of length
and depth with industrial production declining close tcx 10% from peak to
trough. However, the uncharacteristic behavior of monetary policy in
recent months bears close watching and suggests that more than the usual
amount of uncertainty exists with respect to the economy and the outlook
for financial markets.
Robert J. Genetski
Vice President and Economist
8/7/79
ECONOMIC OUTLOOK
(BILLIONS OP DOLLARS—SEASONALLY ADJUSTED ANNUAL RATES)
ACTUAL
rORgCAST
1978s4 1979s1 1979s2 1979s3 1979s4 1980sl 1980s2 1980:3 I980s4
1977
YEARS
1978 ~~1979
1980
2348.7 2542.3
8.2
10.4
2235.2 2292.1 2327.2 2372.7 2402.8 2438.9 2500.4 2576.7 2653.2
10.6
6.3
14.8
8.1
5.2
6.1
10.5
12.8
12.4
1899.5 2127.6
11.6
12.0
CONSTANT DOLLAR GNP
%CH
1426.6 1430.6 11418.8 1411.0 1396.5 1388.311396.6 1412.8 1429.7
-2.2
-4.0
-2.3
5.6
2.4
4.7
4.9
1340.5 1399.2
5.3
4.4
PRICE DEFLATOR
%CH
1.5668 1.6022 1.6403 1.6816 1.7206 1.7567 1.7903 1.8238 1.8558
10.5
9.6
8.7
7.9
7.7
7.2
9.3
9.9
8.7
1414.2 ( l 4 0 6 j \
1.1
\ ^ )
1.4167 1 . 5 2 0 0 1 . 6 6 1 2 1 . 8 0 6 7
6.0
8.8
7.3
9.3
1415.4 1454.2 1474.2 \1509.2 1532.4 1563.2 1602.8 1653.6 1699.9
14.2
8.3
10.5
13.3
11.7
11.4
5.6/
9.9
6.3
1210.0 1350.8
11.0
11.6
GROSS NATL PRODUCT
ICH
CONSUMPTION EXPENDITURES
%CH
1492.5 1629.9
9.2
10.5
207.3/210.0
-11.6 \
5.3
204.0
-10.9
205.0
2.0
215.0
21.0
235.0
42.7
250.0
28.1
178.8
13.6
200.3
12.0
208.8
4.2
226.3
8.4
578.7
5.4
591.8
9.4
603.8
8.4
616.0
8.3
628.0
8.0
639.9
7.8
651.9
7.7
481.4
8.4
530.6
10.2
586.4
10.5
634.0
8.1
669.3
15.9
688.2
11.8
707.4
11.6
724.6
10.1
742.2
10.1
759.8
9.8
778.7
10.3
798.0
10.3
549.8
12.5
619.8
12.7
697.4
12.5
769.7
10.4
370.5
17.1
373.8
3.6
391.3 j 385.8
-5.5
20.1
376.5
-9.3
367.8
-8.9
380.5
14.5
398.2
19.9
416.0
19.1
303.3
24.8
351.5
15.9
381.8
8.6
390.6
2.3
236.1
19.3
243.4
13.0
247.1
6.2
254.0
11.6
256.6
4.2
258.0
2.2
259.4
2.2
262.9
5.5
268.2
8.3
189.4
14.9
221.1
16.7
250.3
13.2
262.1
4.7
PRODUCERS DUR EQUIP
ICH
151.8
15.8
158.5
19.0
156.9J
-4.0
160.6
9.7
161.4
2.0
161.6
0.5
162.6
2.5
165.1
6.3
.169.3
10.6
126.8
17.9
144.6
14.1
159.4
10.2
164.7
3.3
BUSINESS STRUCTURES
ICH
84.4
25.9
84.9
2.4
90.2
27.3
93.4
15.1
95.2
7.9
96.4
5.1
96.8
L7
97.8
4.2
98.9
4.6
62.6
9.3
76.5
22.2
90.9
18.8
97.5
7.2
RES FIXED EXPEND
ICH
113.7
13.3
111.2
-8.5
112.9
6.3
111.8
-3.8
109.9
-6.6
110.3
1.5
118.1
31.4
127.3
35.0
135.8
29.5
91.9
35.0
108.0
111.5
17.5
3.2
122.9
10.3
INVENTORY CHANGE
20.6
19.1
31.4
20,0
10.0
-0.5
3.0
8.0
12.0
21.9
22.3
20.1
-4.5
4.0
-7.0
-2.0
0.0
4.3
4.0
2.0
1.0
-9.9
-10.3
-1.3
GOVT PURCHASES
ICH
453.8
12.2
460.1
5.7
468.7 j 479.
7.7/
9.
493.9
12.4
503.6.
8.1
513.1
7.8
522.9
7.9
536.3
10*7
396.2
9.7
FEDERAL
ICH
MILITARY
159.0
18.8
101.2
163.6
12.1
103.4
162.9
-1.7
106.0
167.2
11.0
108.8
174.6
18.9
112.9
177*1
5.9
114.9
179.7
6.0
117.0
182.3
5.9
119.1
188.3
13.8
123.6
144.4
11.3
93.8
435.6
9.9
152.6
5.7
99.0
475.6
9.2
167.1
9.5
107.8
181.8
8.8
118.7
OTHER
57.8
60.2
56.9
58.4
61.7
62.2
62.7
63.2
64.7
50.6
53.6
59.31
63.2
294.8
8.9
296.5
2.3
305.81 312.5
13.ll
9.1
319.3
9.0
326.5
9.3
333.4
8.7
340.6
8.9
348.0
9.0
251.8
8.7
283.0
12.4
DURABLES
%CH
212.1
18.0
13.8
3.2
NONDURABLES
%cu
558.1
16.9
571.1
9.6
SERVICES
%CH
645.1
10.6
INVESTMENT EXPENDITURES
ICH
NONRES FIXED EXPEND
%CII
NET EXPORTS
STATE & LOCAL
ICH
NOTES
PERCENTAGE CHANGES AT ANNUAL RATESf
PRELIMINARY DATA FOR 79s2
308.5
9.0
5.6
2.8
519.0
, 9.1
337.1
9.3
8/7/79
ECONOMIC OUTLOOK
(BILLIONS OF DOLLARS—SEASONALLY ADJUSTED ANNUAL RATES)
1977
YEARS
1979
1978
1980
210.0
10.1
177.1
13.5
206.0
16.3
217.8
5.7
201.3
-7.6
71.3
17.3
73.1
10.1
72.6
13.8
84.5
16.4
85.5
1.1
70.0
-18.1
128.4
8.3
133.7
17.3
136.9
10.1
104.5
13.4
121.5
16.3
132.3
8.9
131.2
-0.8
87.1
36.5
89.1
9.7
'92.8
17.2
95.3
11.5
77.3
22.7
83.2
7.6
83.6
0.6
91.1
8.9
54.6
6.1
55.5
6.8
56.5
7.4
57.5
7.3
58.5 i
7.1 |
42.1
12.3
47.1
12.0
53.1
12.5
57.0
7.4
1934*0
9.0
1967.0
7.0
2000.0
6.9
2039.0
8.0
2086.0
9.5
2139.0
10.6
1531.6
10.9
1717.4
12.1
1911.6
11.3
2066.0
8.1
290.9
15.8
296.4
7.8
304.1
10.8
300.9
-4.1
292.5
-10.7
307.9
22.8
318.9
15.1
226.5
14.9
259.0
14.4
292.9
13.1
305.1
4.1
1572.2
13.0
1601.7
7.7
1637.6
9.3
1662.*9
6.3
1699.1
9.0
1746.5
11. 6
1778.1
7.4
1820.1
9.8
1305.1
10.2
1458.4
11.7
1618.6
11.0
1761.0
8.8
1453.4
14.3
1493.0
11.4
1514.5
5.9
1549.7
9.6
1572.9
6.1
1603.7
8.1
1643.3
10.2
1694.6
13.1
1741.3
11.5
1240.2
11.1
1386.4
11.8
1532.5
10.5
1670.7
9.0
71.5
3.4
79.2
50.5
87.2
46.9
87.9
3.2
90.0
9.9
95.4
26.2
103.2
36.9
83.5
-57.1
78.8
-20.7
65.0
-5.3
72.0
10.9
86.1
19.5
90.2
4.8
4.7
5.0
5.4
5.4
5.4
5.6
5.9
4.7
4.3
4.9
5.0
5.3
5.1
95.616
3.8
96.596
4.2
96.415
-0.7
97.000
2.4
96*400
-2.5
96.200
-0.8
96.000
-0.8
96.300 / 96.900
1.3
2.5
90.543
3.5
94.381
4.2
96.603
2.4
96.350
-0.3
ACTUAL
FORECAST
1980:1 1980:2
1980:3
1980:4
193.1
-15.3
197.0
8.3
205.0
17.3
79.1
-22.1
67.2
-47.9
68.6
8.3
130.1
-13.5
122.2
-22.1
125.9
12.7
83.8
-16.4
82.6
-5.6
80.6
-9.3
51.5
15.3
52.3
6.4
53.8
12.0
1803.1
14.7
1852.6
11.4
1892.6
8.9
278.2
19.6
280.4
3.2
1524.8
13.7
PERSONAL OUTLAYS
ICH
PERSONAL SAVINGS
ICH
T9T8TT l979il
1979:2
1979:3
1979:4
227.4
32.4
233.3
10.8
222.2
-17.7
214.3
-13.5
201.3
-22.1
95.1
39.5
91.3
-15.1
87.3
-16.3
84.2
-13.5
132.3
27.1
142.0
32.7
134.9
-18.6
AFT TAX PROF ADJ1'
ICH
89.8
9.4
87.6
-9.4
DIVIDENDS
%CII
49.7
16.9
PRETAX PROFITS*
%CH
TAX LIABILITY
ICH
AFTER TAX PROFITS
%CH
PERSONAL INCOME
%CH
TAX & NONTAX PAYMENT
ICH
DISPOSABLE INCOME
ICH
SAVING RATE(I)
EMPLOYMENT
ICH
LABOR FORCE
ICH
101.524 102.475 102.295 103.200 103.700 104.000 104.300 104.700 105.100
3.1
3.8
-0.7
3.6
2.0
1.2
1.2
1.5*
1.5
97.375 100.417 102.918 104.525
2.8
3.1
2.5
1.6
UNEMPLOYMENT RATE(I)
5.833
5.733
5.733
6.008
7.040
7.500
7.958
8.023
7.802
7.025
6.000
6.128
7.821
PRODUCTIVITY*
ICH
1*186
1.0
1.177
-3.0
1.160
-5.7
1.156
-1.4
1.149
-2.4
1.144
-1.7
1.147
1.1
1.154
2.5
1.160
2.1
1.165
1.8
1.178
1.1
1.160
-1.4
1.151
-0.8
INDUSTRIAL PRODUCTION
ICH
1.497
7.6
1.515
4.7
1.511
-1.1
1.478
-8.4
1.432
-11.9
1.400
-8.6
1.408
2.3
1.433
7.3
1.459
7.5
1.371
5.6
1.451
5.8
1.484
2.3
1.425
-4.0
NOTE:
PROFITS FOR 7 9 : 2 ARE ESTIMATESj PRODUCTIVITY I S MEASURED AS OUTPUT PER HOUR—NONFARM BUSINESS
1)
AFTER TAX PROFITS ADJUSTED TO EXCLUDE INVENTORY PROFITS AND ALLOW FOR DEPRECIATION AT REPLACEMENT COST
0/7/79
ECONOMIC OUTLOOK
INTEREST RATES
ACTUAL
FORECAST
"1970741979:1 1579*2 l9?9i3 l9?9ii \900:l 1900: 2 1900:1 1900:4
1977
_YEARS
1970
1979
1900
NEW *SSUE AA INDUS UONDS
9.000
9.H0
9.420
9.200
0.900
0.500
0.500
0.500
0.750
7.910
0.715
9.200
0.563
NEW ISSUE AA UTIL BONDS
9,370
9.720
9.930
9.700
9.400
9.000
9.000
9.000
9.250|
0.325
9.090
9.600
9.063
9.000
0.500
0.500
0.400
6.024
9.057
11.567
0.600
0.500
0.000
0.000
7.700!
5.612
7.994
10.000
0.050
l40Cf>*"l50.l152T?
0*5 - J*.\m
6.0
4.9
7.0
157.9
0.0
161.0
0.1
124.9
0.4
136.7
9.5
146.9
7.5
156.5
6.5^
PRIME RATE
COMMERCIAL PAPER 4 - 6 MOS
MONETARY
*CH
BASE-(MB)
VELOCITY OF MO
%C»I
1 0 . 0 1 0 1 1 . 7 5 0 1 1 . 7 1 7 11.000 11.000
9.097
10.097
141.4
10.0
143.5
5.9
15.004
4.3
9 . 0 5 3 10.300
145.6
6.1
9.750
15.977 15.904
0.2
4.4
16.142 16.319 16.400
15.211 15.561 15.904 16.230
2.9
2.3
2.7
1.6
3.2
4.4
4.0
300.0
7.0
395.5
0.0
403.5
0.J
327.3
7.3
352.0
7.0
360.0
4.5
392.1
6.3^
MONEY S U P P L Y - ( M l )
%CII
361.0
4.2
359.1
-2.1
365.9
7.0
VELOCITY OF Ml
1CII
6.192
10.1
6.303
12.9
6.360
-1.5
6.344
-1.0
6.390
3.0
6.393
0.2
6.444
3.3
6.515
4.5
6.575
3.0
5.002
4.0
6.029
3.9
6.369
5.7
6.402
1.0
Ml-ADJUSTED
%CI1
366.0
10.1
360.4
2.6
375.4
7.0
303.7
9.1
305.7
2.1
391.4
6.0
390.1
7.0
405.0
0.0
413.9
0.2
327.3
7.3
354.0
0.2
370.3
6.9
402.3
6.3
VELOCITY OF M l - A D J
ICII
6.107
4.2
6.222
7.7
6.199
-U4
6.104
-1.0
6.230
3.0
6.231
0.1
6.201
3.2
6.350
4.5
6.410
3.9
5.002
4.0
6.007
3.5
6.209
3.3
6.310
1.0
CPl-ALL
ICII
2.020
9.1
2.074
11.I
2.141
13.6
2.190
11.0
2.251
10.0
2.303
9.6
2.353
9.0
2.399
0.1
2.443
7.5
1.016
6.5
1.955
7.7
2.166
10.0
2.175
9.6
10.633 10.500
9.500
9.500
9.900
10.700
11.400
I)
URBAN
AUTO SALES 2)
11.104 11.293 10.575 10.375
DOMESTIC
9.200
9.300
0.167
0.200
7.500
7.500
7.9001
0.600
9.3u0
9.132
9.305
0.292
0.325
IMPORTS
1.900
2.300
2.533
2.300
2.000
2.000
2.000*2.100
2.100
2.066
1.992
2.203
2.050
2.070
1.615
1.037
1.600
1.500
1.600
1.000
1.950
1.963
2.007
1.630
1.013
HOUSING STARTS 2)
U
2)
11.100 11.667
1.900
Ml ADJUSTED BY HARRIS BANK FOR INSTITUTIONAL AND STRUCTURAL CHANGES BELIEVED TO DE AFFECTING REPORTED Ml DATA
IN MILLIONS OF UNITS-SEASONALLY ADJUSTED ANNUAL RATES
September 12, 1979
The International Dimension
by Wilson E. Schmidt
Virginia Polytechnic Institute § State University
The near term foreign influences on the domestic economy are likely
to exacerbate our problems at home.
First, policy makers may be led to expansionary policies not otherwise
justified because the measured output of the economy, namely real GNP,
will appear to be weaker than it actually is.
The error in the measurement of real GNP stems from a long standing
mistake in methodology at a time when. international forces exagerate the
error.
The Commerce Department deflates the bulk of our exports of goods
and services with an index of export prices. But investment income receipts
(excluding reinvested earnings which are not counted in the GNP) are deflated
by an index of import prices which have been rising more rapidly through
June than export prices because of petroleum developments. As there is
no difference between the economic effects of investment income receipts
and the other exports of goods and services, the different deflation methods
are unjustified.
The error is compounded in the deflation of imports of goods and services.
These are deducted from the total value of output to determine the GNP
because they are unavoidably included in the reported data. While the bulk
of such imports are deflated by the Commerce Department by an index of import
prices, investment income payments to foreigners (excluding reinvested calculation)
are deflated by export prices.
By overstating real imports, which are deducted,
this procedure understates the real GNP.
All petroleum imports have a weight of almost 30% in the index of import
prices. As measured by Commerce for GNP purposes, investment income receipts
2
and payments together equal about 1.92% of nominal GNP in the first half of
1979. With the prices of all petroleum imports expected to rise by 60% in
1979, the understatement of the real GNP will be 35/100 of one percent.
Second, the fundamentals suggest that the dollar will depreciate on the
foreign exchange market. At our last meeting I summarized the work of Peter
Hooper and Barbara Lowery of the Fed staff who estimated that a decline in
the real effective exchange rate (which is the average change in the rate
adjusted for changes in consumer prices here and abroad, multilaterally
weighted) of 10% leads to a 1.5% to 1.75% increase in consumer prices within
2-3 years with about half of the impact coming in the first year. Though
we correctly anticipated the rise in the real effective rate for the dollar
from 81.8 in February to 82.4 in August we probably are still feeling the
effects of the long slide from 95.4 at the end of 1976.
To analyze the outlook for the dollar, I calculate the money supply growth
rates for a number of countries which are consistent with exchange rate
stability over the longer run, using a modified version of the methodology
employed by Professor Pieter Kortweg at the last Shadow European Economic
Policy Committee meeting, and compare the results with actual growth rates of
money supplies.
I assume an underlying rate of inflation in the United States
of 10%. For exchange rate stability to prevail, prices in other countries
should rise by 10% plus or minus any change required by other underlying forces.
These other underlying forces are taken to be measured by the annual average
deviation of the exchange rate from purchasing power parity in 1974-1978.
Having calculated the "consistent inflation rate," the next step is to
calculate the money growth rate necessary to achieve that target. Using the
period 1974-78, this requires three steps:
1) Divide the rate of inflation by
the growth in money per unit of output to obtain the f'inflation-money multiplier;"
3
2) Divide the "consistent inflation rateM by the f'inflation-money multiplier"
to obtain the "required growth in money per unit of output" which will achieve
the rtarget)inflation rate; 3) Add to the "required growth in money per unit
of output" the trend in output to obtain the "required growth in money."
Supplementing Kortwegfs data with the figures for Canada and Japan and updating
his 1978 figures Table I displays the "consistent inflation rates," the actual
inflation rates over the last year with the parentheses indicating the last
month for which data are available, the "required growth in money," and the
actual money growth.
It is quite apparent that Germany and the Netherlands
are far below the "required growth in money."
These two countries have a weight
of almost one third in the effective exchange rate index for the dollars.
Only Italy errs greatly on the other side; its weight is 9%.
the outlook for the dollar is dim.
On this analysis,
But if one constructs a pressure index by
taking the difference between the required rate and actual rate of money
growth as a percentage of the required rate, weighting it multilaterally,
the index suggests little change in the dollar.
I am inclined to put more
weight on the role of the outliers despite this result.
The dollar often gets into trouble when there are changes in exchange
rates among the European countries. Eight of the nine members of the
European Economic Community are members of the recently established European
Monetary System which provides narrow margins for fluctuations in the exchange
rates among them (2%% on either side of the central cross rate) except
for Italy whose margin is 6% on either side. The United Kingdom decided
not to participate in the margins part of the System.
Table II displays
the results of replicating the previous analysis for the EMS countries
alone on the assumption that the underlying rate of inflation in Germany is
5%.
It shows that Belgium, Germany, and the Netherlands, are below the
4
required rate of monetary growth to maintain exchange rate stability within
the EMS while the other members are above it. This portends exchange rate
tension within the EMS which in turn may lead to trouble for the dollar.
Current research suggests that, while the exchange rate tends towards
purchasing power parity in the longer run, in the short run it depends on
the demand and supply of the dollar relative to the demand and supply of
foreign currencies, the so-called asset approach.
The supply of nominal
money is determined by the monetary authorities while the real supply is
determined by the behavior of prices and the nominal supply together. The
demand for money is seen as a decreasing function of interest rates, an increasing
function of income, and a decreasing function of inflationary expectations.
As noted above, the dollar seems to be above its purchasing power parity
and therefore the long run forces will depress it. Assuming that the shorter
run forces were at work since we last met, would they have held the dollar
up or down?
In what follows we compare developments between our last meeting and
now in the United States and those in the Big Six plus Sweden and the Netherlands, weighted by their multilateral weights in our effective exchange rate.
On the supply side, the growth of real money abroad, while reduced from
5.9% before our last meeting, is still positive at 2.8%.
In the United
States the growth in real money has risen from -4% before our last meeting
but is still negative at -2%.
The supply forces should have caused an
appreciation of the dollar.
Among the factors affecting the demand for money, three month interest
rates rose from 6.1% to 8.9% or by 280 basis points while the three month
CD rate in the United States rose from 10.3% to 10.9% or sixty basis points.
By reducing the demand for money abroad by more than in the United States,
5
these relative interest rate shifts should have appreciated the dollar.
Industrial production is a proxy for the role of income in determining
the demand for money.
It slipped slightly abroad from 6.3% to 6.11 while
it fell from 8.6% to 4.5% in the United States. The relative decline in the
demand for money in the United States should have forced a depreciation in
the dollar.
Inflationary expectations have been found by J. Frankel to have a
powerful effect on the exchange rate. He measures them by the long term
government bond rate. Since we last met, that rate has risen from 8.3% to
8.6% abroad while it has hardly changed in the United States. With higher
expectations of inflation abroad, reducing the demand for money there, the
dollar should have appreciated.
The bulk of the short run forces should have been appreciating the
dollar but in fact it fell slightly from 88.3% last February to 87.4 in
the last two weeks of August.
Since the short run forces could not hold
the dollar up, it seems likely to decline in the next six months. Purchasing
power parity is having its way.
This judgement is confirmed by the market
place where the forward premium, i.e., the extra dollars paid for foreign
currencies for delivery in the future compared with the dollars paid for them
now, is still positive at 2.5%, though reduced from 3.6% before the last
meeting.
TABLE 1
Consistent Inflation Rates § Required Money Growth Rates
^ _
Inflation = 10%)
Country
Consistent
Inflation
Rate
Actual
Inflation
Rate
Required
Money
Growth
Actual
Money
Growth
Belgium
15.30
4.5 (6)
8.0
5.4 (3)
Canada
8.1
8.5 (7)
5.3
8.0 (6)
Denmark
14.7
7.0 (4)
11.3
France
12.0
10.5 (7)
7.3
11.5 (2)
Germany
12.2
4.5 (7)
31.7
8.0 (6)
Italy
10.1
13.5 (5)
6.7
26.0 (12)
Japan
15.6
4.0 (6)
14.2
12.0 (5)
Netherlands
14.7
4.0 (7)
9.2
.5 (4)
United Kingdom
13.7
15.5 (7)
11.9
12.5 (7)
16.5 (2
TABLE II
Consistent Inflation § Required Money Growth Rates in EMS
Country
Consistent
Inflation
Rate
Actual
Inflation
Rate
Required
Money
Growth
Actual
Money
Growth
Belgium
8.1
4.5 (6)
5.7
5.4 (3)
Denmark
7.3
7.0 (4)
6.4
16.5 (2)
France
4.5
10.5 (7)
4.5
11.5 (2)
Germany
5.0
4.5 (7)
14.0
8.0 (6)
Italy
2.4
13.5 (5)
4.6
26.0 (12)
Netherlands
8.8
4.0 (7)
6.7
• 5 (4)
United Kingdom
9.5
15.5 (7)
9.0
12.5 (7)
SOURCES OF BUDGET FINANCING
1970-1979
a)
1970
1971
1972
1973
1974
1975
1976
1977
1978
- 2,999
-10,650
6,209
- 1,703
3,291
72,219
49»569
19,390
22,337
(2)
C3)
5,111
7,820
1,454
8,117
6,988
7,101
6,462
11,396
14,283
9,028
28,581
7,648
- 1,195
1,884
4,464
7,023
29,381
29,025
C4)
228
C5)
- 1,062
2,504
3,846
- 1,796
2,682
916
. 1,264
-12,763
11,368
24,689
17,815
9,065
10,367
86,466
62,138
61,431
52,882
3,612
- 3,111
6,972
- 2,174
- 2,165
- 4,126
1,998
517
450
6,641
-16,440
- 3,003
4,891
8,285
16,289
- 6,049
2,748
- 8,401
7,984
6,113
- 2,873
14,751
4,504
4,640
1978 HONTHLY
J
F
M
A
M
J
Ju,
A
S
0
N
D
-
-
8,617
1,894
1,180
609
2,119
2,122
2,256
4,994
567
2,321
3,115
1,49-9-
^11 ,'054
7,750
2,848
275
4,726
- 1,631
1,131
428
T* 1,211
1,232
8,818
1,521
3,716
1,752
7,649
- 2,991
- 1,932
522
2,599
1,208
645
4,557
9,011
4,623
1979- MONTHLY
(11
J
F
M
A
M
12,221
559
6,036
5,560
12,432
(21
- 8,39-4
3,227
3,285
3,826
958
(3)
129
2
3,453
5,797
7,723
8,067
5,700
10,19-8
-11,497
1,415
z.W
(11
(21
C31
C4)
(51
(4)
NET CHANGE IN PRIVATELY HELD DEBT
CHANGE IN NET SOURCE BASE
CHANGE IN FOREIGN OFFICIAL ACCOUNTS
CHANGE IN OTHER ACCOUNTS
TOTAL FINANCING REQUIREMENTS
- i ux* 'x
(5)
3,696
6,033
13,722
- 9,834
4,822
~ /1 2,-5^
Table 1: Money Multiplier Components Forecasts and Actuals
1980
1979
RATIO
T2
13
a+L
B
FORECAST
ORIGIN
APR
ACTUAL
12/78
3/79
6/79
.363433
.362489
ACTUAL
12/7S
3/79
6/79
.044403
.025206
ACTUAL
12/78
3/79
6/79
1.918660
1.941783
ACTUAL
12/78
3/79
6/79
.377239
.369620
ACTUAL
12/78
3/79
6/79
2.339925
2.340941
ACTUAL
12/78
3/79
6/79
.052865
.053022
ACTUAL
12/78
3/79
6/79
.001110
.000980
.383950
.380957
.032652
.027559
2.042093
2.060379
.391818
.378986
2.482691
2.473117
.049947
.050350
.001104
.000980
.386515
.383153
.025480
.029074
2.056056
2.068726
.382203
.383468
2.505684
2.490106
.049380
.049523
.001130
.000980
.373458
.373126
.376702
.019813
.029796
.031721
.389168
.3881A9
.392499
.032495
.026096
.028915
OCT
AUG
MAR
APR
MAY
.409790
.396475
^412638
.397968
.385338
.402434
.396347
.040147
.039548
.037069
.036516
.034155
.033645
.030876
.034755
.043751
1.990262
1.967594
1.954781
1.970076
1.955718
2.097778
2.084624
2.108797
2.092235
2.007127
2.092816
2.050601
.392995
.377732
.284451
.392658
.377071
.282135
.378688
.282176
.381474
.283816
.376928
.279959
.271657
.269713
.262789
2.518255
2.389749
2.672808
2.533662
2.695578
2.541930
2.446570
2.536374
2.489038
NOV
JUNE
JULY
.382132
.38A59A
.389013
.380952
.383933
.388655
.380393
.390310
.3957A6
.3873A8
.388035
.393550
.383980
.386325 .392325
.392129' .398859
.381577 .388141
.388821
.395408
.383565
.387905
.375287
.048727
.024574
.026601
.025206
,021250
.023004
.022575
.032142
.034794
.034274
.023781
.025743
.025359
.029754
.032209
.031728
.032769
.040344
.039742
2.035472 2.037919
2.008564 2.012937
1.996622 2.003020
.040541
.033048
.035775
1.979439
2.000799
1.981650
2.062282
2.075798
2.057933
2.018769
2.040438
2.024657
2.004061
2.020231
1.997206
1.988016
2.061428
2.039918
2.032613
2.045556
2.025994
2.015522
.346168
,380453
.375274
.343907
.387299
.380737
.316817
.387071
,375859
.310078
,387514
.374820
,300408
.388162
,374922
.295104
.389140
,374951
.288066
.387410
.372514
.282112
JUNE
2.407477
2.421528
2.436233
2.492457
2.506621
2.526400
2.441066
2.482415
2.504499
2.417866
2.473249
2.494796
2.419709
2.517102
2.543621
2.464387
2.510020
2.538995
2.447085
2.504657
2.533108
2.430211
2.510847
2.543958
2.437972
2.462977
2.497946
2.381401
.049466
.049512
.049210
.049938
.050208
.049932
.049757
.049811
.049537
.050193
.050433
.050156
.050302
.049944
.049669
.049837
.049546
.049274
.049440
.050117
.049842
.050010
.049756
.049483
.049650
.049915
.049641
.049809
.0514908
.051664
.048763
.048927
.048175
.048338
.048336
.048831
.048628
.001294
.000980
.001130
.001552
.000980
.001130
.001552
.000980
.001130
.001552
.000980
.001130
.001552
.000980
.001130
.001552
.000980
.001130
.001552
.001130
.001552
.001130
.001552
.001130
.001552
.001552
.001552
.001552
.001002
.000980
.001130
.001977
.000980
.001130
.001552
.000980
.001130
TABLE 2:
ACTUAL
Dec 78 Fcst
Kar 78 Fcst
June 78 Fcst
3:
ACTUAL
Dec 78 Fcst
Mar 78 Fcst
June 78 Fcst
SEASONALLY ADJUSTED Ml MONETARY BASE MULTIPLIER
MONEY STOCK COMPONENT DATA AS OF AUGUST 9, 1979
JAN
2.51487
2.51596
FEB
2.49637
2.49807
MAR
2.49563
2.49858
APR
2.51407
2.49921
2.49914
1979
MAY
JUNE
2.50626
2,51513
2.49358
2.48860
2,49108
2,48638
1980
JULY
2.51424
2.48667
2.48584
2.52549
AUG
2.48176
2.47887
2.51826
SEP
2.48171
2.47817
2.52316
OCT
2.47120
2.46888
2.51788
NOV
DEC
46503
46037
50908
45610
45078
50384
NOV
DEC
2.45917
2.51586
.APR
MAR
JAN
2.43701
2.49210
2.43469
2.49355
2.50644
MAY
2.49676
JUNE
2.49783
SEASONALLY ADJUSTED M2 MONETARY BASE MULTIPLIER
MONEY STOCK COMPONENTS DATA AS OF AUGUST 9, 1979
JAN
6.11406
6.16268
FEB
6.10345
6.14779
MAR
6.11735
6.15572
APR
6.13952
6.14302
6.19849
1979
MAY
JUNE
6.14295
6.16293
6.13821
6,13021
6.08960
6.08516
1980
JULY
6.17058
6.12428
6.06860
6.17025
AUG
6.14266
6.08339
6.18882
SEP
6.13945
6.08148
6.19809
OCT
6.11940
6.05047
6.17659
6.12977
6.05650
6.18646
6.10270
6.03087
6.16907
MAY
JAN
6.00771
6.15362
5.98842
6.13523
5.99201
6.14594
6.13965
JUNE
6.13899
6.14037
11.08752
11.07719
NOT SEASONALLY ADJUSTED M5 MONETARY BASE MULTIPLIER
MONEY STOCK COMPONENTS DATA AS OF AUGUST 9, 1979
ACTUAL
Dec 78 Fcst
Mar 78 Fcst
June 78 Fcst
JAN
11.10396
11.15091
FEB
11.30967
11.32898
MAR
11.35397
11.38581
APR
11.33476
11.39437
11.35298
1979
MAY
' JUNE
11.20148 11.20098
11.28613 11.30140
11.23955 11.25468
1980
JULY
11.11964
11.24692
11.18815
11.12923
AUG
SEP
OCT
NOV
DEC
JAN
11.27813
11.21660
11.14788
11.31246
11.25240
11.17415
11.29369
11.22256
11.13818
11.22042
11.14593
11.05652
11.14258
11.07125
10.97694
11.12179
11.02238
APR
11.28908
11.18615
11.32574
11.21951
11.20583
@FedFRASER