Who's Afraid Of Hard Times?

Last September, the President of the United States called a bunch of economists together and asked them to look at the mess the country was in and to come up with some ideas for cleaning up the mess. He got all shades of opinion—red, brunet, blond. He was told that the mess was caused by too much money, too little money, too many Arabs, too much laissez faire, not enough laissez faire. So much for the problem. As for the solution, he was told that all would be well if we simply had more money, or less money or just about the same amount of money, more spending, less spending or just about the same amount of spending, less regulation, more regulation, more self-discipline, higher wages, lower real wages, sunspots, price controls, crotch crickets, index numbers, jambalaya.…

If, since then, you have stopped reading articles on economics, you're on the right track. The subject has ceased to make sense—that part of it, at least, that gets talked about in public, by politicians, by economists paid by politicians and by journalists who studied hockey in college. Witness the headline in a Chicago paper recently: "2nd Largest Prices Spurt in 28 Yrs. Feeds Inflation." That's like saying, "2nd Largest Flood in 28 Yrs. Causes Torrential Rains." Or witness professorial types who think nothing of reversing themselves overnight, as Dr. Paul McCracken did, in July 1971, when he argued powerfully against wage and price controls and then, within six weeks, accepted Nixon's appointment of him as a member of the newly proclaimed council to control wages and prices. Like getting a physicist to accept an appointment to a Presidential Commission to Repeal the Law of Gravity. If (continued on page 152)Hard Times(continued from page 138) physicists did that sort of thing, you'd soon stop reading articles on physics, too.

The whole thing would be funny if it weren't so serious. These people are not just arguing an abstract point in mathematics; their discussions are going to get translated into policy. These questions involve taxing and spending, the buying power of your dollar, the future of investment programs, the value of your savings and pension rights, the attractiveness of moving to some foreign country, the wisdom of buying a house. It's not just a clutch of double-domes dancing in the footnotes. Those guys with the horn-rims are wrecking your economy and your chances for survival within it. Their problems, their confusions, their errors are either going to be corrected or you're going to pay for them.

OK, but doesn't President Ford have a plan with a name like Whip Inflation Now?

Yes, and it's about as relevant as a program to Whip Gravity Now. For instance, one of Ford's cures for snake-bite is to "Learn how to use credit wisely. Postpone unnecessary borrowing. Wait for interest rates to come down, as they will." But this is saying that newly created purchasing power (a bank loan) is a cause of inflation—which it is—and if that's bad, then why doesn't the Federal Reserve Board issue regulations to prohibit the banking system from making any new loans? The Fed has full power to do that. But who ever heard of a Government bureaucracy accepting responsibility for the results of its own regulatory decisions? And interest rates will most assuredly not come down so easily. They did not rise to historic heights because you and I were living it up on credit cards. Interest rates rise because lenders see further monetary inflation ahead, causing further rot in the buying power of the currency; they ask a price in terms of the interest rate to compensate them for the expected loss in buying power of the cash they get back when the face amount of the loan is paid. If Ford thinks interest rates are coming down, then he must think we should be buying long-term bonds as a smart speculation. If he were in the investment-advisory business, he'd be out of work within six months, peddling quack ideas like that.

Professor Ford's next answer to the problem of gravity is, "Save as much as you can and watch your money grow, which it will." He can't really mean that, can he? Suppose we all put all our money into coffee cans. The country would go onto a barter economy. We would be unable to function except at a greatly reduced level of economic activity. It is not the existence of money that creates inflation or rising prices; it is the excessive creation of new money—bank loans—and this is permitted and even encouraged by Governmental policy, not by you and me. If you and I create money, it's called counterfeiting, right?

Dr. Ford also proposes that we "conserve energy, save on fuel and take the pressure off scarce supplies." Every natural resource is scarce—that is, someone has to perform work in order to find it and make it usable. The way to economize is to let the price express the scarcity. The most desirable girl in town can accept only one dinner date per day; her time is a scarce resource. A thousand guys would like to take her out for a hot dog and a root beer. She finds herself, however, saying yes to champagne and chateaubriand. But why did Ford pick on petroleum as a supply whose market behavior somehow has caused inflation? Every item in the market place has a price because it is scarce. Ford must be saying that the cure for inflation is for us all to get along with less and less of everything. With one great exception: Like every politician, he never proposes that we get along with less and less money creation. He owns the counterfeiting machine and he intends to keep it running full speed.

• • •

The whole thing, I repeat, would be funny if it weren't so serious. And the whole thing rests on the old and very tired ideas made popular by John Maynard Keynes in the Thirties. He held that the Government could cure unemployment by engaging in monetary inflation without harmful side effects. (Inflation here means an increase in the money supply beyond whatever increase might be enough to keep the price level fairly constant.)

Along with this notion of Keynes's went the notion that if you inflated the money supply to achieve full employment, you would automatically have boom times, the perpetual quasi boom of the Keynesian paradiso. Well, we have had 30 or 40 years of those policies in Washington. Let's look at the record. The unemployment rate was 3.9 percent in 1946. The money supply was 100 billion dollars. Since then, we have printed enough counterfeit money—that is, "created new purchasing power through the banking system"—to treble the money supply. It is now almost 300 billion dollars. The unemployment rate? Worse than before. Around 7 percent. Inflation, far from curing unemployment, makes it worse in the long run.

One element of the situation that deserves close attention is the inflexibility of Government budgets. This factor has been important in the accuracy of the forecasts prepared by orthodox economists. In the past eight years, the Federal expenditure has doubled, but almost 90 percent of the increase has come in programs that are uncontrollable. Director Roy Ash of the Office of Management and Budget says that uncontrollable items account for three quarters of the Federal budget.

What are these items and why are they beyond control? Most of them are direct handouts to individuals. Once the Congress has passed a law setting up a system of handouts, it finds it politically difficult to back down. For another thing, before a giveaway program is set up, there's no way of knowing how many people are going to come around with their hands out. Year after year, the claims keep getting bigger and bigger—claims on the relief programs, Social Security, Medicare, retirement plans, payments to disabled miners, disaster relief, Railroad Retirement.

Hence, a new feeling of doom. Not only the New Economists but more and more American citizens are joining the orthodox economists in feeling that a monster has been created in Washington, a monster that is growing ever more threatening, more destructive and more uncontrollable. For the first time in our history, there are respectable numbers of people who think the system itself—Government—is out of control. There is uncertainty in the air. The stock market is saying it can't see beyond tomorrow, so it prices a stock such as Exxon at six times earnings, down almost 50 percent from its high of a couple of years ago. The bond markets are saying money isn't going to be worth much, so you have to pony up ten or twelve percent in order to borrow two-year money. The labor market shows all the signs of interventionist distortion—high, inflexible and rising wage rates for those lucky enough to hold jobs, coupled with unemployment that also seems to be high, inflexible and rising. Corporate profits are weakened. Corporate liquidity is at an all-time low. Many industries—the airlines, the public utilities, the steel industry—find it difficult to raise new capital for expansion. Wall Street is a cemetery. The banking industry is in a critically frail condition—all loaned up long-term and unable to meet payments on short-term debts without luck or subsidy. Brokerage houses, banks and insurance companies are going under. Individual investors (except those in precious metals) are being crushed. A man I've known since 1955, a Wall Street professional, last year lost everything he had—simply by owning blue-chip stocks in a margin account. Mutual funds are down 40 and 50 percent in net asset value. Savings banks watch as their deposits drift away.

In the midst of this unspeakable chaos, we find economists in positions of power mouthing the same old formulas from a dead dreamer whose solutions have been proved to be worse than the problems and whose forecasts don't pan out. Paul A. Samuelson, the illustrious economist whose textbook taught the nation that we have nothing to fear from inflation, now says there is no hope of finding any feasible policies to offset the problems we have—problems caused in large part by his very own policies.

There is one man, to be sure, who has the answer to the problems caused by inflation. He says we should lick our plates clean, give up expensive women, plant rhubarb, stay healthy and brag that we're penny pinchers. If he could only perform simple arithmetic, he might be brought to understand the problem. But he's over the hill.

• • •

Perhaps because the President seems insanely removed from the realities of the problem, like a man chasing butterflies in the midst of a volcanic eruption, the people are beginning to panic. They are, for the first time in 30 years, talking about a depression. There are prophets of doom running about the land, saying the banks will close, the stock market will crash to 200 on the Dow-Jones index, all prices will collapse save those of gold and silver. They say mobs will roam the streets, shouting for bread. They advise you to head for the hills. Buy a cabin in the north woods! Buy food in tin cans! Learn to sew! Put your money in an old sock! Plant beans! Oil up your trusty flintlock! Learn to read books again! Grab a blonde! Forget reading! Refuse to pay taxes! Hole up till it blows over! ... and so on.

Will there really be a great depression once again? Well, the same people who have brought you a correct analysis of the present situation (who foresaw it 20 years earlier) are now in a position to issue a rather encouraging forecast. There is not going to be a great smashing depression.

If the Government continues its present mixture of recklessness and ignorance, we might stagger along for 30 years or more before we reach the end of the road. (England has been mismanaged since 1890 at least. It will reach the end of the road before 1980. That will have taken 90 years.) Vast economies, with world-wide connections, created by large and intelligently adaptable populations, can withstand incredible quantities of abuse, mismanagement, taxation, regulation, inflation, corruption, neglect. But there is always an end to such trends. The question is, will the end come soon?

No. There has never been a serious depression that was not related to a great decrease in the money supply. Under the current institutional arrangements, it is impossible to foresee such a deflation. Therefore, we shall not have a great depression. But this may only mean that we'll stumble along for many years of the present mindlessness. Long-term rates for money will go higher and higher. Corporate profits will suffer erratically. The stock market will follow the course of corporate profits, sometimes following, sometimes leading; it won't enter a great new upswing, but it may very well finish 1975 higher than it started. Unemployment will remain about the same or get worse. Crime will rise, as will the suicide rate, the insanity rate and other measures of social stress or decay.

Will a man on horseback ride onto the national scene and capture the people's imagination with his clean new visage, his courageous program to solve our problems, his startling identification of the enemy in our midst? It could happen, but there is no fundamental need for the story to work out that way. Inflation causes higher prices and the misallocation of capital, leading to a lower standard of living and a rising emphasis on speculation. It does not necessarily lead to dictatorship. Collapse, despair and misery are the seedbed of dictatorships. Or military defeat.

Muddling along for years to come—that's about the outlook, unless we get some people into office who know something about what they're doing. We need new and correct interpretations of the real world, and this means we don't need the fundamentalist preacher type who tells us inflation is a sin for which we must pay the penalty. There is no sort of spiritual chastisement we must go through. Inflation is simply a deliberate Governmental policy that happens to be dead wrong.

Many writers on inflation show a commendable ability to restrain themselves until the very end of their discourse, whereupon they take off into some ethereal region of moral judgment, usually dressed up in the rhetoric of the binge and the hangover. I happen to agree that there is a moral dimension in the universe that we ignore at our peril, but I also happen to believe that we are paying the price right now and don't have to await the Day of Judgment for the wages of inflationary sins.

Every time the buying power of the dollar goes down, there is a genuine loss of wealth by all those who hold cash, cash equivalents, dollar-denominated contracts, pension rights, fixed-income rights, and so on. They suffer now for the distortions caused by inflation. Everyone who has to put up with shabby goods because he can't afford better is suffering now; inflation is the birthplace of shabbiness. Everyone who, with naïve patriotism, follows Ford's silly advice is suffering now because of inflation. It is simply fatuous to claim that some future generation must pay for the current inflation. We're all paying for it right now. That's why the king called his economists together to study the entrails of the royal bird. The peons were glowing restless and His Majesty sought a conciliatory gesture.

Does anyone enjoy some benefit from inflation? There are, of course, vested interests in inflation. They are, mainly, politicians and bureaucrats, but there are hundreds of other groups who mistakenly think they are somehow favored by the goings on. Government salaries have risen much faster than any other salary group in the country. Workers who get their pay increase earliest can trade their new money for items of value in the market before their pay increase has caused the money supply to rise and cause a general rise in prices. If all prices and wages could rise simultaneously and at a uniform rate, no one group would ever feel benefited by inflation. And there are millions upon millions of individual patterns and decisions that have been built on the assumption of a long continuing inflation. Contracts, pension plans, real-estate valuations, insurance programs, depreciation schedules, tax policies.... It would be bad public policy to upset all of these arrangements overnight, in the name of putting an end to upsets.

But can't something be done—other than licking our plates clean? Sure. The Government could move very slowly to return to a perfectly balanced budget. It could slowly withdraw from the financial markets. It could slowly remove its hobbles from the free market. It could return gradually to a policy of stabilized money supply. The proposals are not new. But the idea of putting them into effect gradually should be yelled day and night at every bureaucrat and every legislator in Washington—the town where overkill east is followed by overkill west, day after day, until the population reels in confusion. Steadiness, stability, order, predictability, evenhandedness—these are the hallmarks of the only kind of policy that can be successful in this situation.

Note: Whereas the usual critic of the free market complains that it's the law of the jungle, a mere chaos to be replaced by the rationality and orderliness of Government planning, it is actually the reverse that is true: Government planning leads to planned chaos, and the invisible system of free-market orderliness is the only substitute.

As for personal investment survival in the immediate period, there is no magic formula, and you should beware of anyone who claims he has the magical secret of wealth. Starting in 1970, I have advocated increasing the proportion of your portfolio invested in gold-mining shares or equivalent by ten percentage points for each year of the decade. This policy should continue to provide adequate protection during the uncertain period between now and the resumption of sane policies in Washington. Some time before that resumption, the stock market will already have correctly foreseen the glimmer of happier times and will have started its next ten-year bull market. Consequently, it seems wise to prepare for that moment—gradually, again—by moving into common stocks beforehand. A very aggressively managed portfolio right now would be 50-50 gold (or other precious-metal positions) and short-term market instruments. Starting now, and looking ahead to the eventual return of sane policies in Washington, you could move from the money-market instruments into common stocks, perhaps on a program of ten percent of market value per year.

What kind of stocks?

The kind I call Old Man River companies—companies that make and sell products that have an excellent chance of being bought, year in and year out, during good times and bad. Companies without major labor-union problems. Companies relatively immune to Government regulation or interference. Companies without too much debt. Companies with strong cash positions. Companies with a long record of steady growth through thick and thin and a good prospect of extending that trend into the next ten or twenty years. If you buy stocks in such companies, paying six or seven times current earnings, acquiring a cash dividend that amounts to seven or eight percent of your purchase price, you are putting your money to work in a way that will look pretty wise in hindsight.

I don't mean to minimize the problems we face. But it is evident that the problems would seem far worse if there were no answers. There certainly are answers, good ones. There are theories that explain the origin of the present difficulties and that have correctly anticipated them. Thus, the problems, though large, are not mysterious or insoluble. It is only a matter of getting the good word from here to there—from the minds of the many great economists who have stuck to the truth into the minds of the officials and the spokesmen who have it in their power to set the stage for the next great economic miracle. If they will ever so gently remove their feet from the country's neck, it will rise up and start running again very nicely.