Wesern slump as bad as '74-75 -- a German forecast
Kiel, West Germany
The noncommunist industrial world has entered a recession. Moreover, say the economists at the Institute of World Economics at the University of Kiel, "There is an increasing danger that the current recession may prove to be as deep as in 1974-75."Skip to next paragraph
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That last recession was the worst since the Great Depression of the 1930s.
Some members of the staff here suspected in 1972 that a recession was coming soon. But the group was overruleD, and the institution was too optimistic in its official predictions.
"We were not strong enough monetarists," noted Alfred Boss, one of the team of 15 economists here that makes periodic forecasts of the status of the domestic German economy, and also of the economics of the noncommunist industrial nations as a whole.
Today, howeveR, this Kiel institutin is regarded as the most "monetarist" of the five prominent economic research institute in West Germany. It believes strongly that changes in the growth of the supplyof money (M1 -- currency in circulation plus demand deposits in the banks) is the best measure to follow in forecasting the future of the business cycle, or, for that matter, in conrolling the economy.
After reading recent money-supply figureS, the instititue says that the current recession "is mainly due to pronounced restrive policies in almost all countries, instituted in the light of the acceleration of inflation, which was as strong as in 1973."
It adds: "Monetary expansion decelerated as sharply was in 1973-74."
The institute sees some hope that business investment in plant and equipment willnot be hit as badly as during 1974-75. This is because in some countries wage increases were not so large, taking into account at least partly the deterioration in the terms of trade of oil-importing industrial countries as a result of the boost in the price of oil in the last year or so. In other words, these countries must deliver more goods and services abroad to obtain the same amount of oil. Their standard of living has been damaged. But relatively small wage increases make the adjustment to this change easier with less inflation.
Nonetheless, the institute figures that because of the lage of six to nine months or so between changes in monetary policy and its actual impact on economic growth, the depth of this recession is "more or less predetermine."
In addition, the institute maintsin that the current tough stance of economic policy in the major countries "is likely to prevail for some time because of the priority to fight inflation and the unwillingness to increase the government deficit. Furthermore, policymakers seem to have realized that it is not possible to achieve and to maintain a high level of employment by stimulating demand."
It used to be that economic policyakers in the United States, Britain, France , and elsewhere believed they could stimulate employment through easier monetary and fiscal and not kick up too much inflation. But they have found that such stimulative policies prompt so much extra inflation that another round of recession and high employment is needed to the rise of prices. The economy ends up worse than before.