A Time of Wild Gyrations

Inflation shakes markets, thins pay checks, angers voters

Inflation has often been compared to a mysterious, debilitating fever, and rarely has the analogy seemed so clinically exact as in the U.S. last week.

The afflicted economy suffered from shaking chills (wild gyrations in commodity and stock markets) and persistent weakness (the 7.3% drop in workers' purchasing power in the past twelve months is the worst since the Labor Department began keeping such figures 16 years ago). U.S. consumers and voters reacted by expressing anger against the head physician, Jimmy Carter.

Their fury showed clearly in the New York and Connecticut Democratic primaries, which Carter unexpectedly lost to Ted Kennedy. The defeats did not seriously threaten Carter's 2-to-l lead in delegates so far selected for the Democratic nominating convention in August, but they did indicate the depth of the national dissatisfaction with the President. That mood had many causes, both foreign and domestic. But one theme rang clear among the voters who were interviewed as they left the polling booths: about half believed that they were worse off financially than they had been a year earlier. And those who felt that way voted overwhelmingly against the President.

The voters' perception was quite accurate: most of them really are worse off financially. Government figures released while the polls were still open last week showed that the Consumer Price Index leaped up at an annual rate of 18% in February, every bit as bad as the January figure that so rattled the nation. Worse, prices rose so much faster than wages that the purchasing power of a typical U.S. urban worker's after-tax pay dropped 1.4% in February alone. Major banks raised their prime interest rate on business loans yet again, to 19 1/2%.

More unnerving still, Administration experts now estimate that the U.S. will suffer inflation rates at or close to double-digit levels throughout the 1980s, which could mean a steady erosion in material standards of living. Previously, the Administration had contended that the current hyperinflation was largely a consequence of recent OPEC price increases and other sharp rises in the costs of energy, plus the soaring cost of housing. (Housing in particular distorts the CPI because increases in the cost of mortgage loans are weighted as if everybody bought a house every month, which of course nobody does.) The Administration has been hoping that energy and housing costs will soon level out.

Speaking to the National Press Club last week, Treasury Secretary G. William Miller clung hopefully to a prediction that inflation will average only 11% to 12% this year. With a quarter of the year gone, this implies a drop well below 10% by the end of 1980, lower than most private economists think is conceivable. But other Administration economists concede that even when or if energy and housing costs stabilize and the budget is balanced, inflation will remain high for a long time.

Said Chief Economic Adviser Charles Schultze, speaking to the Communications Workers of America: "In the first two months of this year, unfortunately, inflation began to spill out into areas other than energy and housing, into the economy more broadly. It is a very, very dangerous development." The nation, said Schultze, "will continually be wrestling" with high inflation throughout the 1980s. C.W.A. President Glenn Watts asserted that American workers for the next decade would have to accept wage boosts "at least 2 1/2% lower" than the rise in prices, out of fear that larger increases in pay would prompt still more inflation. Concluding the gloomy chorus, John T. Dunlop, who sets the voluntary wage guidelines that the Administration asks labor to follow, said that it might take "a decade or two" before workers' pay catches up with the present "enormous rises in living costs."

The nation's financial and commodity markets are reacting to these grim developments with exaggerated tremors characteristic of a hyperinflationary period. For many months, investors have been putting their cash into hard, tangible assets, especially gold and silver. Speculators then jumped in, buying more with borrowed money and driving prices to levels beyond all reason. Markets gripped by such frenzy are always vulnerable, especially in a time of sky-high interest rates. Any drop in prices causes some speculators, unwilling to keep paying high interest on their loans, to sell out. The further drop caused by their selling leads to forced sales by other speculators unable to meet their creditors' margin calls--demands for more cash because of the decline in value of something bought largely on credit. By this time, a chain reaction is under way.

The one last week was a classic. What happened, apparently, was that Nelson Bunker Hunt, one of the world's richest men (see following story), set out with some associates to accumulate immense hoards of silver last year. Their buying helped drive up prices from $6 per oz. in early 1979 to $50 two months ago. The Hunt group then seemingly borrowed against its silver profits to buy other commodities and stocks. But the $50 price of silver could not be sustained, and when it began to slip the whole pyramid began to tumble.

By midweek silver was down to $15.80 per oz.; on Thursday it lost roughly a third of its value in a single day, falling as low as $10.20. Stories that Hunt was also selling other commodities touched off a frenzy that hammered prices not only of gold but also of copper, cotton and even cattle. Gold alone, which had reached a preposterous height of $850 per oz. in late January, dropped to a low of $463 last week. In the stock market, further rumors reported that Hunt and his associates were dumping stocks to raise cash in order to repay their silver loans, and that their maneuvers had threatened the major investment house of Bache Halsey Stuart Shields. That led to what one Wall Street veteran called "a classic case of panic." The Dow Jones industrial average fell 25 points within a few hours, then recouped 23 points of the loss within the half-hour before the close, as traders apparently realized that Hunt's adventures had not changed the basic worth of such blue-chip stocks as Exxon, General Motors, AT&T and the like.

Thursday's market upheavals aside, investors, worried that inflation is jeopardizing all values, have bid down stock prices at a strenuous pace for the past two months. Despite a late rally that carried the average up 55 points from its Thursday low to its Friday high, the Dow index still lost 7 points for the week as a whole, closing at 778. That was down 14% from the Feb. 13 high of 904, one of the fastest drops in stock market history. The Dow average, composed of 30 blue-chip issues, understates the case; prices of less seasoned shares have fallen even more. The almost 900 issues on the American Stock Exchange have nosedived an average of 24% from their Feb. 29 high.

Carter's response to the nation's economic worries, an anti-inflation program, his fourth, focuses on credit controls and cuts in federal spending, moves in the right direction but it is widely regarded as very late and still inadequate; at best it will take a long time to work. Former Federal Reserve Board Chairman Arthur Burns last week told the Joint Economic Committee that the spending reductions are "minuscule" and will not reassure the public that "the era of persistent federal deficits is coming to an end." Most probably, he said, the nation will go into a recession during which inflation might come down a bit, but then "the next economic recovery will start from a higher level of inflation than anything we have experienced in the past."

Small as it is, Carter's program will pinch consumers further before it yields its desired effects. On March 14, the President authorized the Federal Reserve Board to curb consumer credit, on the theory that heavy borrowing has fueled inflationary buying. The Fed immediately issued tough guidelines. Last week banks, department stores and other lenders began setting up rules to stay within the guidelines. Samples from Manhattan's Citibank, the second largest bank in the U.S.: no new Visa or Master Card credit cards; cash advances on existing cards to be limited to $300, vs. a previous maximum of $10,000; minimum monthly payment on bills charged on cards now outstanding raised to $15, from $5. All that will make it more difficult for consumers to borrow to meet bills that they can no longer cover.

Meanwhile, the centerpiece of Carter's anti-inflation strategy, a balanced federal budget for fiscal 1981, encountered further delays.

The White House, which had talked of cutting $13 billion

from the $628 billion in federal expenditures previously estimated for next year, passed word that it would try for a bigger reduction of $15 billion. At week's end the Administration still had not produced a list of which programs were to be reduced by how much, but it promised an announcement at the beginning of this week.

The House Budget Committee already has voted to trim planned spending by $16.5 billion, pushed hard by Chairman Robert Giaimo of Connecticut, who announced last week that he will retire from the House after eleven terms. Floor debate on the committee's resolution, however, which had been scheduled to begin last week, was put off until after Easter. Giaimo said darkly that "there are forces at work trying to delay the vote. They want labor and the special-interest groups to work the members over during the Easter recess."

Some of the greatest concern is arising in the major cities, which will be hurt by a proposed cancellation of revenue-sharing funds from Washington. Chicago stands to lose $55 million for its school system, which is already so strapped that teachers suffered four payless paydays last winter. Cleveland may have to buy fewer buses and rapid-transit cars; Miami fears its parks will deteriorate without federally paid help; St. Louis may be forced to stop serving free meals to the elderly poor.

Liberal Democrats have tried twice, with President Carter's backing, to restore $500 million in aid to cities, but they have been beaten both times. Meanwhile, Giaimo has won the agreement of House Republicans, who usually vote en masse against any Democratic budget proposals, to back his program--eventually. What the Senate may do is uncertain; its Budget Committee has only begun to draft spending and revenue proposals.

The big question is whether budget cutters can get the congressional committees that oversee specific federal programs to stay within whatever spending limits the nonbinding budget resolutions set. Last week, amid all the talk of slashing expenditures, the House Armed Services Committee voted to spend $2.2 billion more on Navy shipbuilding next year than President Carter had requested, and the House Agriculture Committee voted higher price-support loans to farmers, estimated to cost anywhere from $1.7 billion to $3 billion. Giaimo has included in the House Budget Committee resolution a statement that would in effect order other committees to respect the overall spending limits, but some committee chairmen are rebelling.

A balanced budget for one year will not by itself do much to bring down the nation's inflationary fever. But economists and politicians now agree that it is necessary if the fever is to be kept from rising still higher. And time may be running short, as last week's shudders in the financial and commodity market made all too plain.

This file is automatically generated by a robot program, so viewer discretion is required.