Better-Buy-Now Mentality

Consumers are getting what they want and hoping to pay later

"We've bought everything we could get our hands on--buy it now and pay it back later with cheaper dollars." So says Walter Salvi, 36, a Boston public relations man. Like millions of other inflation-savvy consumers, Salvi, his wife and three children have caused wonder and befuddlement for the economics profession. Since interest rates are at their highest levels in a century, and the economy is by all accounts poised for its second slump in six years, experts have been predicting for months that people would soon start to cut back on spending and borrowing, and stash away more of their cash in the worry that hard times lie ahead. So much for fine economic theories.

With living costs locked in double digits for twelve consecutive months and no end to the spiral in sight, people are losing faith that inflation will ever come down. They are spending their paychecks as fast as they get them, cutting the nation's already low savings rate still further, pushing up credit, bloating the money supply, and generally intensifying the inflationary menace that they fear the most.

Not only has the staying power of the spree confounded and amazed economists, but it has also put off the widely predicted recession. Some economic reversal is probably necessary if the nation is to make even minimal progress in slowing inflation. Yet so long as consumer spending, which accounts for nearly two-thirds of the U.S.'s gross national product, stays strong, the economy is unlikely to ease down, and inflation is all but certain to remain oppressive.

The inflation outlook has grown bleaker, and the Carter Administration has prepared a budget-swelling 5.4% rise, above and beyond inflation, in defense spending for the fiscal year beginning in October. Largely because investors expect more inflation, Wall Street's trillion-dollar corporate a nd Government bond market last week took its biggest pummeling in years. Investors buy bonds to collect interest, but when the inflation rate is higher than the interest rate, the resale value of the bonds goes down. During the week, bond prices plunged through the floor, and interest rates rose to an unprecedented level of nearly 12% for U.S. Treasury bonds and more than 13% for Triple-A issues; many of those securities do not expire until well into the 21st century. The bond slump hurt not only substantial investors but also millions of members of pension plans and profit-sharing funds that hold bonds or other debt-related investments.

Because of inflation, real wages declined last year and average personal income from all sources was flat. So how much longer can consumers keep on spending and spending? None of the experts really knows, but all have been surprised by the American's insistence on maintaining his living standard and his ability to do so in the face of adversity.

More than simply spending what they earn, consumers are borrowing what they have not yet earned and spending that too. Their debt payments are rising, to an estimated 23.5% of disposable income in 1979, and probably will go higher this year. That, in turn, leaves them less to save. The nation's savings rate has plunged from a low 5.5% of income at the beginning of 1979 to a minuscule 3.3%.

Young adults, who are forming families and plunging into debt to pay for everything from cars to homes to appliances, are particularly heavy borrowers. Reports Albert Sindlinger, the public opinion pollster: "Before 1972, the practice was that if you wanted something you would build up your savings, usually for a down payment, then go into debt for the rest. But exploding inflation has changed all that. Whereas their parents took ten years to furnish their homes, today's young people do it in two weeks." Adds Stan Benson, a Los Angeles consumer credit counselor: "It is not unusual to see a 26-year-old come in here already $10,000 to $12,000 in debt, with an average take-home pay of $1,000 a month, and owing that amount to ten or 15 creditors."

The ingenuity of consumers and lenders has thwarted the Federal Reserve Board's efforts to tighten credit. Money is easily available, in large part because inflation has motivated people to discover new ways to lift borrowing and spending power. Anyone with a decent credit rating can get not just one Master Charge or Visa card but several of every kind--each from a competing bank, and each with credit lines that offer the opportunity to draw cash advances of up to several thousand dollars a month.

Some banks have become more cautious in shoveling out the plastic, but for many more it is simply business as usual. Says William Maulding, senior vice president of Atlanta's Citizens & Southern National Bank: "There has been no tightening of money at C & S. Any customer who meets our standards for a credit card will be issued one. We could make more loan money available this year than last if the demand were there." At New York's Citibank the average card customer in 1978 used about 38% of his available Visa credit line, but last year that figure rose to 44%.

By cashing in on more and more of the inflationary equity in their homes, people in an economic sense are actually "consuming" their dwellings. Before 1970, net increases in home mortgage debt rarely exceeded $15 billion annually, but since 1977 the borrowing has leaped to close to $100 billion a year. As Economist Alan Greenspan points out, much of the rise has been coming from people who sell their homes at bloated prices, then make the lowest possible down payment on a new and probably even more expensive dwelling, pocketing whatever is left over as profit. Still other borrowing is coming from "home equity loans," the bankers' euphemism for second mortgages, which at interest rates of as much as 18% or more have become among the trendiest and most profitable items in bank loan portfolios.

Tens of billions of dollars more in consumer spending are streaming into the economy as a result of the very thing that the Federal Reserve Board had hoped would slow spending: high interest rates. As short-term rates have climbed higher and higher, savers have switched in overwhelming numbers from low-interest bank savings accounts to the ultra-high-yielding money market funds managed by big investment firms. In the past twelve months, the funds' assets leaped from $11 billion to $45 billion; and the funds' customers are spending their high interest payments. Until now, the Fed has not even counted the funds' assets in any of its various measurements of the nation's money supply, but last week it belatedly began doing so.

To prevent banks and savings and loan institutions from being drained dry of deposits, federal regulators have authorized banks to offer affluent customers six-month time deposit accounts, for a minimum of $10,000, at interest rates competitive with the money market funds. The result: depositors have been pulling their money out of the 5% accounts, putting it right back into the six-month accounts, and automatically at least doubling their interest earnings. This has increased the payout costs of the banks and forced them not only to lend out money at higher rates but also to find means of luring more and more borrowers. One popular tactic: increasing the attractiveness of a high-interest loan for, say, a car or home improvement, by stretching out the permissible payback time from perhaps three years to four.

Most economists are gamely sticking by their forecasts that consumers will begin retrenching soon. Says Gary Wenglowski, chief economist of the Goldman >Sachs investment firm: "We think that 1980 will end up being a somewhat weaker consumer year than 1979. There will certainly be no collapse, but consumer spending is likely to be down by about 1% in the fourth quarter of this year as compared with the fourth quarter of 1979." One sign that Wenglowski may be right came last week when the Federal Reserve released installment credit figures for December. During 1979 as a whole, such credit grew at a brisk 13% clip, but in December the increase eased to a 6% annual rate.

A small but increasing number of officials and economists are calling for a quick fix that would make everything worse: wage and price controls. Besides Senator Edward Kennedy, former Administration Inflation Fighter Barry Bosworth and Brookings Institution President Bruce MacLaury have now reluctantly endorsed mandatory controls. Any such program would create distortions throughout the economy and bring about shortages of many goods, yet would not inhibit the price rises for food and energy, and ultimately would have to be scrapped anyway. Then the prices that had been artificially held down would explode.

If consumer spending slows, the appeal of wage and price controls will diminish. But if the nation's shopping spree continues much longer, there is no telling what dangers lie ahead.

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