Regional President Speech

SK FINAL 9/24/84 SILAS KEEHN REMARKS DETROIT BRANCH MEETING KALAMAZOO~ MICHIGAN SEPTEMBER 24, 1984 I. INTRODUCTION A. PLEASED TO HAVE OPPORTUNITY TO MEET WITH YOU TONIGHT B. DETROIT BRANCH BOARD OF DIRECTORS MEETING HERE 1. PROVIDES VALUABLE OPPORTUNITY FOR US 2. PARTICULARLY PLEASED TO RECOGNIZE JIM DUNCAN A, WHO HAS SERVED SO EFFECTIVELY ON OUR BOARD II, HARDLY NEED REVIEW THE DETAILS OF CURRENT ECONOMIC SITUATION FOR THIS GROUP A. BUT THINGS ARE GOING SO WELL~ CAN'T LET OPPORTUNITY GO BY WITHOUT TOUCHING ON THE HIGH SPOTS B. THE GOOD NEWS IS NOW "OLD NEWS" 1. Now IN 22ND MONTH OF RECOVERY/EXPANSION A, ALMOST 2 YEARS SINCE THE TURN 2, MOST GENERAL MEASURES GAINING MORE RAPIDLY THAN IN PAST UPTURNS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 2 A, COMPARES VERY FAVORABLY WITH OTHER POST-WORLD WAR II RECOVERIES B, TOTAL OUTPUT - REAL GNP - MORE THAN 10% ABOVE 4TH QUARTER 1982 LOW C, INDUSTRIAL PRODUCTION 20% ABOVE BOTTOM D, PAYROLL EMPLOYMENT SOME 6% ABOVE E, GNP~ ALL OF THE BASIC INDICATORS SHOWING VERY STRONG GAINS 3, AND ACCOMPLISHED WITHOUT AN ESCALATION OF INFLATION A, ABOUT 4% ON CPI IN FIRST HALF B, INCREASE OF ,5% IN AUGUST (1) HIGHER THAN PREVIOUS 3 MONTHS (2) BUT CPI HAS INCREASED ONLY 4.2% IN LAST 12 MONTHS C. RECOGNIZE SOME IMBALANCE -- UNEVENNESS l, PARTICULARLY IN AGRICULTURE Nor A, INFLUENCED BY SAME SET OF ECONOMIC FORCES B, GOING THROUGH A VERY DIFFICULT ADJUSTMENT PERIOD Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 3 C, OUTLOOK NOT POSITIVE IN TERMS OF FARM INCOME AND LAND VALUES 2, AND IN HEAVY INDUSTRIAL EQUIPMENT AND RELATED CAPITAL GOODS A, AFFECTED BY (1) FOREIGN COMPETITION (2) EXCHANGE VALUE OF DOLLAR (3) INTEREST RATES (4) CHANGED STRUCTURE OF INDUSTRY DEMANDS B, WE ARE GOING THROUGH SOMETHING OF A uBOOM" IN CAPITAL INVESTMENT (1) Bur NOT IN TRADITIONAL SECTORS (2) EMPHASIS ON HIGH TECHNOLOGY D, ALSO RECOGNIZE SOME RECENT SLOWING IN ACTIVITY l, IN SEVERAL AREAS A, LEADING INDICATORS SLIPPING FOR SEVERAL MONTHS (1) nFLASH" GNP 3-Q: 3.6% Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 4 B, HOUSING ACTIVITY SLACKENED OFF C, NEW ORDERS FOR DURABLE GOODS NO LONGER SHOWING STRONG INCREASES 2. Bur COMING OFF A VERY RAPID PACE 3, THOUGH TURNS IN THE ECONOMY ARE VERY HARD TO CALLJ WE SEE NO EVIDENCE AT ALL THAT A RECESSION IS AROUND THE CORNER A, SIMPLY REVERTING TO A SUSTAINABLE PACE (1) BUT WILL NEED TO WATCH DATA VERY CAREFULLY E, OUTLOOK FOR ECONOMY IN 1985 GOOD 1, ALL THE VITAL SIGNS WOULD INDICATE A CONTINUATION OF GOOD RESULTS 2, GRADUAL RETURN TO LONGER TERM REAL GROWTH CONSISTENT WITH HISTORICAL AVERAGES A, 1985 - ±3% 4-Q - 4-Q B, LOWER GROWTH RATE THAN 1984J BUT FROM A MUCH HIGHER BASE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 5 3, CONSUMER SPENDING LIKELY TO BE LESS RAPID A, HARD TO BEAT 1984 PERFORMANCE IN AUTOS AND APPLIANCES B, REAL PERSONAL INCOME WILL INCREASE AGAIN C, EMPLOYMENT OPPORTUNITIES WILL CONTINUE TO GROW D, CONSUMER DEBT~ WHILE RISING~ STILL GOOD SHAPE 4, CAPITAL APPROPRIATIONS AND EXPENDITURES POINT TO CONTINUED GROWTH 5, AN IMPORTANT STIMULANT TO THE ECONOMY FEDERAL GOVERNMENT STILL SPENDING A, HAS A BAD ELEMENT B, BUT DOES POUR MONEY INTO THE ECONOMY 6, TAKING ALL OF THIS INTO CONSIDERATION A, ECONOMY STILL POSITIONED FOR EXPANSION NEXT YEAR B, THOUGH SOME FORECASTS CALL FOR A MINI-RECESSION~- THAT IS NOT OUR VIEW Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 6 III. Bur LEST YOU BE LULLED INTO A FALSE STATE OF EUPHORIA BY WHAT SEEMS LIKE A HIGH POSITIVE OUTLOOK A. THERE ARE SOME FORMIDABLE RISKS OUT THERE -- SIZE AND DIMENSION -- YET AT THIS POINT BEING CONTROLLED 1. Nor NEW RISKS 2, RESURGENCE OF INFLATION A, WAGE RISKS (1) RECENT EXPERIENCE -- SETTLEMENTS (2) PRODUCTIVITY GAINS IMPRESSIVE B, PRICE ESCALATION (1) CAPACITY UTILIZATION -- OPPORTUNITY FOR PRICE INCREASE (2) COMPETITIVE MARKET CONDITIONS PREVENT SIGNIFICANT INCREASES 3, DOMESTIC FINANCIAL STRAINS A, THE CURRENT ENVIRONMENT ONE OF UNCERTAINTY B, MARKETS IN A SOMEWHAT EXTENDED POSITION - ELECTRIC C, AN UNEXPECTED DEVELOPMENT COULD HAVE ADVERSE EFFECTS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 7 4, THE ENTIRE INTERNATIONAL AREA -- WHICH, IN TURN, DIVIDES INTO 3 SEPARATE AND SIGNIFICANT CATEGORIES A, THE EXTERNAL DEBTS OF THE LDC COUNTRIES (1) SHOWING SOME IMPROVEMENT -- THE FUNDAMENTALS IN SOME CASES ARE BETTER B, BETTER TONE TO LAST WEEK'S MEETING OF THE LATIN AMERICAN MINISTERS C, FOR THE LONG RUN, A CONTINUED WORLDWIDE RECOVERY IS THE BEST, PERHAPS ONLY, SOLUTION D, THOUGH CONTROLLABLE, IT IS A SERIOUS PROBLEM, A VERY LONG WAY TO GO, AND ONE THAT COULD CAUSE SIGNIFICANT REPERCUSSIONS FOR THE WORLDWIDE MARKETS (INTER) B, OUR GROWING TRADE DEFICIT 1, ALL LOGIC WOULD SUGGEST THAT IT IS INCREASING AT AN UNSUSTAINABLE RATE A, HEADING TOWARD AN ANNUAL RATE OF $120 BILLION 2, HELPFUL IMPACT ON INFLATION BUT VERY, VERY ADVERSE FOR EXPORTING INDUSTRIES SO IMPORTANT TO THE MIDWEST A, CATERPILLAR TRACTOR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 8 (INTER) C, EXCHANGE RATES l, VIRTUALLY EVERYONE (EXCEPT THE MARKET WHERE IT REALLY MATTERS) HAS BEEN EXPECTING A DECLINE IN THE VALUE OF THE DOLLAR 2, BUT OUR HIGH INTEREST RATES, LOW LEVELS OF INFLATION, GOOD ECONOMIC CONDITIONS, AND SOLID POLITICAL SYSTEM MAKE THE DOLLAR ATTRACTIVE 3. Bur MARKETS CAN CHANGE, AND WITH LIGHTNING-LIKE SPEED, AND IF THIS TURNS AROUND, IT COULD HAVE A VERY SERIOUS EFFECT A, LAST FRIDAY AN EXAMPLE D, BUT THE LARGEST RISK IS THE CONTINUING AND GROWING FISCAL DEFICIT 1. IT IS RECEIVING SO MUCH PUBLICITY THAT I ALMOST DARE NOT MENTION IT 2, BUT, IN MY VIEW, THIS IS THE MOST SERIOUS RISK 3, OUR TRADE DEFICIT IS CURRENTLY MASKING SOME OF THE IMPACT OF THE FISCAL DEFICIT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 9 A, TO A VERY SIGNIFICANT EXTENT THE FOREIGN MARKETS ARE FINANCING OUR DOMESTIC DEFICIT B, IF FOREIGN MARKET SENTIMENT REVERSES1 IT WILL ESCALATE THE DOMESTIC EFFECT OF THE DEFICIT RAPIDLY AND SIGNIFICANTLY C, THIS COULD LEAD TO RISING LEVELS OF INTEREST RATES -- NEED TO FINANCE FISCAL DEFICIT DOMESTICALLY D, JEOPARDIZING THE RECOVERY IV, THE DEFICIT IS A TICKING TIME BOMB A, EVERYONE SEEMS TO AGREE 1, THAT CURRENT LEVELS ARE TOO HIGH AND UNACCEPTABLE 2, THAT THE DEFICIT SHOULD BE REDUCED B, BUT THE DISCUSSION IS LARGELY IN THE FORM OF POLITICAL RHETORIC -- INTELLECTUAL PLANE 1, IT LACKS PRACTICALITY 2, l REALLY DON'T THINK WE TAKE THE PROBLEM SERIOUSLY A, AND PERHAPS THERE IS A GOOD REASON -- AFTER ALL1 THINGS ARE GOING REASONABLY WELL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 10 3, AT THIS POINT I'M NOT SURE WE ARE WILLING TO MAKE THE HARD CHOICES NECESSARY A, OUR TRACK RECORD SO FAR IS NOT VERY GOOD 4, TIME RUNNING PERILOUSLY SHORT A, EARLIER IN ECONOMIC UPTURN HAD LITTLE PRIVATE INVESTMENT B, BUT APPROPRIATIONS FOR CAPITAL EXPENDITURES ARE INCREASING C, PRIVATE CREDIT DEMANDS VERY POWERFUL (1) IN SOME RESPECTS~ A CREDIT BOOM UNDERWAY D, AT SOME POINT FOREIGNERS MAY STOP SENDING SO MUCH CAPITAL TO OUR MARKETS (1) PRECIPITOUS DECLINE IN EXCHANGE RATE COULD RESULT IN SERIOUS PRESSURE ON INTEREST RATES E, THEN PROBLEMS REALLY GROW (1) IN INTERIM~ WE HAVE BECOME CAPTIVE TO THE FOREIGN MARKETS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 11 V. MAGNITUDE OF CURRENT PROBLEM WIDELY REPORTED A. CONSEQUENTLY, NEED NOT BELABOR NUMBERS -- BUT REGARDLESS OF HOW YOU ANALYZE THEM, THE ENORMITY AND INTRACTABILITY OF THE PROBLEM IS FRIGHTENING 1, NOT ONLY ARE THE NUMBERS LARGE IN AN ABSOLUTE SENSE 2. Bur IN A RELATIONSHIP TO THE SIZE OF OUR ECONOMY A, OVER 5%, DOWN FROM OVER 6% OF GNP B, Bur CERTAINLY FAR LARGER THAN THE 2% OF GNP FROM MID-'60s TO EARLY '80s (1) AND NOW 2 YEARS INTO RECOVERY (2) How ABOUT A SURPLUS C, FREQUENTLY HEAR THAT OTHER COUNTRIES HAVE LARGER GOVERNMENT SECTORS THAN OURS (1) BUT IN TERMS OF DEFICITS TO GNP (2) OURS FAR LARGER THAN OTHER MAJOR COUNTRIES 3, DEFICITS HAVE TO BE FINANCED BY SAVINGS, OR BY MONETIZING THE DEBT -- INFLATION -- NO INTENTION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 12 A, THIS YEAR TAKE 35-40% OF INVESTABLE FUNDS -- ALMOST HALF B, LEAVES A VERY NARROW MARGIN FOR PRIVATE INVESTMENT VI, BUT LET ME INTRODUCE A SLIGHTLY DIFFERENT THOUGHT AND VIEW THIS IN A DIFFERENT PERSPECTIVE -- A COMPOUND INTEREST SYNDROME A, MARVELOUS EFFECT OF COMPOUND INTEREST AS A SAVER B. DEFICITSJ OF COURSEJ RESULT IN DEBT l, THE CURRENT LEVEL ON A GROSS BASIS IS ABOUT $1,5 TRILLION A, AT THE CURRENT RATE THE LEVEL IS RISING BY $4,6 BILLION PER WEEK B, OR SOME $900 MILLION EACH AND EVERY WORKING DAY 2, IT TOOK OUR COUNTRY 200 YEARS TO REACH A DEBT LEVEL OF $500 BILLION A, JUST 5 MORE YEARS TO DOUBLE THAT TO $1 TRILLION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 13 B, AND NOW, NOT YET MIDWAY IN THE CURRENT DECADE, WE HAVE ADDED ANOTHER $500 BILLION TO REACH $1,5 TRILLION LEVEL (1) RATE OF ESCALATION PRETTY FRIGHTENING C, THE INTEREST COST OF SUPPORTING THIS DEBT HAS OMINOUS IMPLICATIONS l, CURRENTLY SOME 3% OF OUR GNP IS COMMITTED TO INTEREST PAYMENTS 2, BUT ESTIMATES BY THE CONGRESSIONAL BUDGET OFFICE THROUGH THE END OF THE DECADE SHOW THE NUMBER RISING TO 4% AND BY THE END OF THE CENTURY ALMOST 10% 3, IN FISCAL '84 INTEREST PAYMENTS WILL AMOUNT TO ABOUT $110 BILLION A, ON THIS BASE, INTEREST COSTS WILL INCREASE BY $21 BILLION IN 1985 B, OVER $40 BILLION IN 1986 C, $125 BILLION IN 1989 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/64 PAGE 14 D, AND OVER A TRILLION DOLLARS BY THE END OF THE CENTURY E, THE END OF THE CENTURY IS NOT LIGHT YEARS AWAY F, AT THAT POINT THE DEBT LEVEL IS ESTIMATED AT OVER $10 TRILLION D. ANY REASONABLE ANALYSIS OF THE PROBLEM WOULD SUGGEST THAT WE CANNOT ALLOW THIS TO HAPPEN l, As MANAGERS OF YOUR BUSINESSES YOU WOULD NOT LOOK AT THESE KINDS OF FORECASTS AND NOT TAKE CORRECTIVE ACTION 2, NOR AS A PEOPLE CAN WE ALLOW IT TO HAPPEN E, NOT INCIDENTALLY, IT WOULD BE EXCEPTIONALLY DIFFICULT TO DEVELOP A VIABLE MONETARY POLICY IN SUCH AN ADVERSE FISCAL ENVIRONMENT l, THERE SIMPLY MUST BE SOME REASONABLE BALANCE IN ORDER TO MAINTAIN OUR CURRENT POLICY OF CONTROLLING INFLATION AND RETURNING THE ECONOMY TO CONDITIONS OF PRICE STABILITY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 15 2, FISCAL/MONETARY POLICY SIMPLY CANNOT BE MOVING IN DIAMETRICALLY OPPOSED DIRECTIONS VII. As I SAID I WOULD END UP WITH A "DUNCANISM" A, DESPITE WHAT SEEMS LIKE A VERY DISCOURAGING OUTLOOK 1. THE NUMBERS SEEM HUGE 2, THE TRENDS ARE AT BEST DISCOURAGING 3, THE IMMEDIATE PAST RESULTS ARE DEPRESSING 4, WE ARE LOSING GROUND NOT GAINING B, BUT A MUCH LONGER RANGE VIEW OF THIS PROBLEM CAN BE QUITE ENCOURAGING 1. LOOKING AT THE ENTIRE HISTORY OF OUR COUNTRY 2, GOING BACK TO THE TIME OF THE REVOLUTION 3, THIS DEFICIT/DEBT PROBLEM IS ONE THAT WE HAVE FREQUENTLY FACED AND IN EACH AND EVERY INSTANCE WE HAVE SOLVED IT C. LET ME QUICKLY REVIEW THE HISTORICAL RECORD 1, OUR DEFICITS HAVE BEEN EVENT-ORIENTED -- CAUSED BY A WAR, A PANIC, AN ECONOMIC RECESSION -- OR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 16 SOME SIMILAR EVENTJ WHICH OBVIOUSLY SHOULD BE DEALT WITH BY RUNNING A DEFICIT 2, BUT AFTER THE EVENT WE HAVE RUN BUDGETARY SURPLUSES AND WE HAVE ELIMINATED THE DEBT D, THE FIRST EXAMPLE GOES BACK TO THE REVOLUTION 1, THE DEBT THAT WAS CREATED TO WIN OUR FREEDOM WAS REDUCED BY BUDGETARY SURPLUSES THAT OCCURRED UNTIL THE WAR OF 1812 E, AFTER THE WAR OF 1812J WHICH WAS FINANCED ALMOST ENTIRELY BY BORROWINGJ WE EXPERIENCED AN UNBROKEN SERIES OF SURPLUSES 1, THE NATIONAL DEBT WAS ELIMINATEDJ AND IF YOU CAN BELIEVE ITJ SURPLUSES WERE GIVEN BACK TO THE STATE GOVERNMENTS IN 1835 AND 1836 f, AND SO IT HAS BEEN DURING MOST OF OUR HISTORY l, AN EVENT WAS FINANCED EITHER DIRECTLY WITH DEBT 2. OR WITH DEFICITS WHICH RESULTED IN DEBT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 17 3, BUT AFTERWARDS WE WENT ABOUT SOLVING THE PROBLEM G, THE IMMEDIATE POST-WORLD WAR II PERIOD REPEATS THIS PATTERN l, IN THE 14 YEARS FROM 1947 THROUGH 1960 THERE WERE 7 FISCAL DEFICITS AND 7 SURPLUSES 2, Bur SINCE 1960 THERE HAS BEEN ONLY ONE SURPLUS YEARJ 1969J AND THAT WAS ONLY $3 BILLION A, WHEN THE HISTORIANS LOOK BACK AT THE RECORDJ 1960 MAY BE TURNING POINT IN THIS H. WE SEEM TO HAVE ENTERED A NEW PHASE IN OUR HISTORY l, WE SEEM TO BE WILLING TO EXPERIENCE DEFICITS AND INCREASE DEBT TO SUPPORT OUR NORMAL ACTIVITIES DEFICITS ARE NOT EVENT RELATED 2. THIS INVOLVES A SIGNIFICANT PHILOSOPHICAL CHANGE IN THE MANAGEMENT OF OUR AFFAIRS 3, MY HUNCH IS THAT OUR POPULATION IS BECOMING VERY AWARE OF THIS, WE ARE MOVING TO A MORE CONSERVATIVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 18 APPROACH IN OUR ATTITUDE TOWARD THESE PROBLEMS I. MY REASON FOR GOING THROUGH THIS HISTORY IS TO SIMPLY EMPHASIZE THE POINT THAT OVER THE LONG SPAN OF YEARS 1, THERE IS A CLEAR HISTORICAL RECORD 2, As A NATION WE HAVE RUN BUDGETARY SURPLUSES IT CAN BE DONE 3, WE HAVE BEEN ABLE TO SIGNIFICANTLY REDUCE THE LEVEL OF OUTSTANDING DEBT -- THERE ARE FREQUENT EXAMPLES IN THE RECORD 4, THIS HISTORICAL PRECEDENT GIVES ME CONFIDENCE THOUGH THE MAGNITUDE OF THE PRESENT PROBLEMS SEEMS OMINOUSLY LARGE 5, THE FACTS ARE WE HAVE REVERSED BUDGETARY DEFICITS WITH SURPLUSES 6, I CANNOT IMAGINE OUR COUNTRY ALLOWING THESE TRENDS TO CONTINUE AND TO FALL INTO THE STATUS THAT EXTERNAL FORCES, EITHER INTERNATIONAL MARKETS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK FINAL 9/24/84 PAGE 19 OR EVEN MORE DRACONIANLY THE INTERNATIONAL MONETARY FUND, WOULD HAVE THE RIGHT TO MAKE OUR DECISIONS FOR US GUIDE OUR DESTINY VIII, CONCLUSION -- I HAPPEN TO BE AN OPTIMIST AND I THINK THE RECORD SUPPORTS MY VIEW THAT WE WILL SUCCESSFULLY SOLVE THESE DIFFICULT ISSUES A. IF I'M RIGHT, I THINK THAT WE MAY WELL HAVE ENTERED A NEW AND VERY REWARDING PHASE IN OUR NATION'S HISTORY 1, THAT THE OUTLOOK FOR THE ECONOMY, IN ITS BROADEST SENSE, CAN BE REALLY VERY EXCITING B. ON THAT OPTIMISTIC NOTE LET ME CONCLUDE BY AGAIN EXPRESSING MY APPRECIATION FOR HAVING THIS OPPORTUNITY TO BE WITH YOU THIS EVENING * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1984, September 23). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19840924_silas_keehn

@misc{wtfs_regional_speeche_19840924_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1984},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19840924_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}