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At The Moment

Major Areas of Weakness Being Pointed to by Some
Official and Non-official Spokesmen:

Unemployment - about 4%

Wholesale price index - unchanged
in Sept., down in Oct.
Housing construction - down 22%
rate since Dec.

Industrial production index - off
slightly in Sept.
Retail sales - little change since March

Counter Areas of Strength

GNP - up 8% rate since end of 1965
Disposable income - up 6% rate since

end of 1965

Federal budget

Prices - Inflation
Wholesale - steady 1958 - 1964
Starting rise from mid-1964
(1964 to 1965 at 2%)


-2Rises have accelerated (so
far 1966 about 3.5% rate to
Industrial component
since last year 2.3% 1965 year 1.5%. (No
change since July)

Cost of Living
1958 to 1964 - 1.2% annual rate

Feb. to Aug. 1965 - 2%

Aug. 1965 to Feb. 1966 - 3%
Feb. to Sept. 1966 - 4%

The Build-up to Excessive Demand
Over-taxation of our ability to produce
Plant capacity - 93% (over optimum level)
Labor capacity 1.5%

W 1966 Emp.

Half of 1965

Unemployment of 4%
Why excessive demand

Government's Concern with Optimum Utilization of

-3Plant - labor
A necessary influence to long-run stability

Accepted doctrine among economic thinkers

The doctrine in action - from 1961
Public programs

The tax cut - a series over the period
The Vietnam War
The resulting fiscal pressure
The high employment budget

Reinforcement by monetary policy

Normal counteraction absent
Rates of growth of money, 6%
from Apr. to Apr.

Supply fell since Apr. -1.5% rate

The Fiscal-Monetary Mix
Dual expansionary forces
(until recently)

Money Market Reactions - Supply and Demand
Tremendous demand for credit



Business to meet demand

Past 12 months -17%
Jan. to July - 22%
Some tapering off recently 7% since July


The resulting tightness in money markets
Despite record growth of money

Demand forces rates upward
Policy tight only in sense didn't provide all

What do we do?
of economic intoxication
may lead to

National economic frustration
Everybody has it so good

Close our eyes to threatening
clouds of further inflation


We^are slow to take chances with
Our present eomfort to do
>ng-run well-

How It Can be Solved - With a Lag
Fiscal adjustment

Reduce spending

Increase taxes - while holding spending

Restore the Fiscal-Monetary Mix

Likely continued upward pressure on
Total demand continues 8%
growth rate
Productive capacity only 4% rate

Price lags

Can Monetary Policy Do the Trick?
Perhaps - If — But
If - economic forces only concern
But - social and political issues involved


Restrictive monetary - expansive fiscal

Non-selective in impact
Somebody gets hurt - housing

Social to political issues

Then comes talk of legal
control - and the great debate
goes on
Prices continue to move - they
don't roll back

Inflation continues to take its toll

The Solution
Restoration of Fiscal-Monetary Mix

- 7Impact of Higher Rates on Agriculture
Will push current expenses higher

Little effect on current production
Will tend to reduce purchases of
operating capital items

Slow down the rate of increase in
farm land values.