July 26, 1978

Inflation Hurts So Good

President Jimmy Carter climbed to the economic summit at Bonn, Germany, last week, peeked over the edge and hurried home to bear down harder on inflation.

The possibility of a world recession is no longer remote.

Germany and Japan, high-flying industrial nations with the lowest rate of inflation, reluctantly agreed to "reflate" their economies - that is, print more currency to increase the money supply.

In return, Carter promised to slow U.S. growth by borrowing and spending less - principally with a tax cut and conservation of imported oil.

Before long, if the strategy is supported by uneasy citizens of the affected nations, the industrial countries will be closer in step.

Our main trading partners are reluctant to re-inflate their economies voluntarily after driving down inflation painfully and with some sacrifice.  Germany remembers the pre-World War II days when the mark was worth only four billion to the dollar - literally less than the paper it was printed on.  Japan remembers that it was only three years ago when its rate of inflation hit 25 percent.

From their viewpoint, America's trend to 10 percent annual inflation threatens the stability of U.S. dollars which all nations now use for international transactions.  The oil nations are on the verge of dumping their dollars in favor of a multi-currency trading base.

No one knows for sure what would happen if the dollar is toppled from its cat-bird seat.  But foreign investors are sure it wouldn't be good.  Their reluctance to hold or accept more dollars has driven the value of the dollar to an all time low.

Carter's dilemma is that there is advantage both ways - if we can stay on the thin edge between U.S. interest and collapse of our trading partners.  A cheaper dollar makes American goods more attractive to buyers in Germany and Japan, and this stimulates production and jobs here.

The president is playing a delicate game of brinkmanship.  If he plays it well he can hurt the other developed countries just enough to make them yell "Uncle Sam," but not enough to draw blood.

Germany and Japan indicated at Bonn a tolerance for pinching, but not much more.  The due bills they paid for economic prosperity are about to be called.  Wages have been depressed - by U.S. standards -to provide a competitive low cost.

For the last year or so, however, workers in Germany and Japan have mounted aggressive campaigns for huge pay hikes.  Since 1970, for example, wage rates in Germany have gone up 85 percent as compared to 68 percent in the U.S. Japanese workers are now organizing for the same improvement, in the face of declining demand for the consumer-type goods they turn out so efficiently.

Germany and Japan perceive evaporation of their present advantage, and increased inflation, without any help from Carter.

Free market specialists point out these facts and warn against too much tinkering.  In the long run, they say, markets will achieve equilibrium if left alone.  True, but nobody wants equality.  We all want as much more than the other guy as we can get him to stand still for.

The insidious thing about inflation is that it hurts so good!

It's like booze.  We know it is not good for us but it tickles going down.

The sad fact is that Americans have become inflataholics.  We are going to quit - tomorrow - but in the meantime let's all have another round.

Government likes inflation because it brings in additional revenue without an unpopular tax hike.  That, and the tremendous borrowing power bequeathed by the much maligned Herbert Hoover, has financed three wars and an incredible amount of social welfare.  If we could only quit while we're ahead.

And Americans like inflation because it brings more material things more cheaply, as long as credit holds out.  U.S. citizens -particularly those under 35 - are consciously depending on inflation to bring them the better life with less effort than their parents had to exert.

It is accepted practice these days for young couples to buy homes with payments half their combined incomes, for 10 percent down, at 10 percent interest, for 35 years.  Some lending firms even offer mortgage plans in association with savings certificates which finance expensive homes with only 1 percent equity to start.

Certainly times change, but there has to be inordinate risk in schemes that depend upon no-fail annual pay increases of 10 percent for two people and a steady 10 percent per year devaluation of the dollars owed.

It's all unreal, a feeling expressed by the seven national leaders wrestling with economic truth on the summit.

President Carter seems to understand the realities of economics, and has displayed some determination to tackle the problem realistically.

He is handicapped, however, by four decades of cheap money and rising expectations.  He can not cure inflataholics until they recognize their own weakness and take the pledge.

Author: Lindsey Williams