Battling the Inflation Bears

In the first burst of cheering over Jimmy Carter's save-the-dollar program, some football-fan bankers compared the President to a quarterback who had thrown a spectacular pass from his own 1-yd. line for a touchdown. Last week it became evident that the quick score only got the Carter Comets back into a game that had been turning into a rout. To win, Carter must now call signals effectively for a long, grind-it-out-on-the-ground drive against the awesome defense of the Inflation Bears.

Overseas the dollar came under selling pressure again last week and gave up some of the gains it had made early in the rescue program. The selling came primarily from exporters in various countries who played what New York Money Trader Claude Tygier called "a cat-and-mouse game" with central banks. Having acquired dollars by selling their products, the exporters sold some of those greenbacks in order to test whether the government bankers really were determined to support the price.

The U.S. Federal Reserve Board and the central banks of Germany, Switzerland and Japan did in fact buy up enough dollars to hold the price well above the lows established in the pre-Halloween panic. But it was clear that the dollar has not yet developed any upward momentum of its own, and will not until Carter can convince the hard-bitten cynics of the exchange markets that the U.S. is prepared to follow a tough anti-inflation policy as long as may be necessary. Said Walter Seipp, vice president of the Westdeutsche Landesbank in Duesseldorf: "Everything depends on whether the U.S. Government will succeed with its very tight money policy in reducing the American inflation rate and improving its trade balance."

At home the pain of such a policy became more evident. The Federal Reserve has been trying to contain an inflationary increase in the U.S. money supply by raising interest rates to near record levels, but it is still unclear whether the policy is succeeding. Money supply jumped $2.1 billion last week, wiping out more than a third of a big drop registered the week before. That means interest rates will probably have to move even higher than the 10.75% that banks now charge on "prime" loans to their best business customers--possibly above the record 12% rate of 1974. And when money growth finally does slow, bankers increasingly fear a credit crunch in which house buyers, small businesses and other would-be borrowers will find loan money not just expensive but unavailable.

Last week economists and Government agencies began filling in some numbers on just how severe a slowdown in growth-or how bad a recession-the high interest rates are likely to produce. Morgan Guaranty Trust Co., which had been predicting a 6% rise next year in business spending for new plant and equipment, adjusted for inflation, slashed its forecast to a mere 2.9%, a rise that would Create few new jobs. The Commerce Department predicted that total spending on construction will drop 6% next year, following a 1978 rise of 4% to 5%.

The National Association of Home Builders forecast that housing starts, which have run just below 2 million annually in both 1977 and 1978, will fall to 1.5 million next year. Main reason: mortgage interest rates already average more than 10% nationwide, and may have to climb as high as 11% to stay roughly in line with other rates; but in states containing just under half of the U.S. population, usury laws limit many mortgage lenders to 10% or less. NAHB Economist Michael Sumichrast believes that these lenders, unable to earn a competitive interest rate, will simply stop making house-buying loans.

The 25% drop in starts that the NAHB foresees would be the mildest of the many housing declines that have repeatedly led the economy into recession since World War II. But its impact might be magnified by a reduction in credit-financed buying of other goods, notably cars. Last week General Motors cut its year-end dividend to $2.50 a share, from $3.25 a year ago. GM officials formally clung to their prediction that car sales will total a near record 11.5 million next year, but added that high capital outlays make it wise for the company to conserve cash.

The dividend cut shocked Wall Street traders, who apparently saw it as a harbinger of many more to come. Stock prices, which had registered their sharpest one-day run-up ever (35 points) during the initial euphoria over the dollar-rescue program, fell back heavily; last Tuesday the Dow Jones industrial average tumbled 14.81 points. At week's end it was moving in a narrow range just above 800, but nobody could be sure it would hold there. Some brokers fear that a combination of high interest rates and the threat (or fact) of recession could push the average down to the low 700s by mid-1979.

The next big test of Carter's determination to keep up the anti-inflation campaign despite the troubles it is bound to cause will be how much he can hold down federal spending and stem the flow of budgetary red ink. In January the Administration will send Congress proposals for small cuts designed to knock as much as $3 billion off the $39 billion deficit now forecast for fiscal 1979, which started Oct. 1. Over the weekend, as an earnest of his anti-inflationary intentions, Carter vetoed bills that in effect would have limited imports of low-priced beef and textiles and appropriated ten times as much money as the Administration had asked for the training of nurses; in addition, he announced a program for restricting planting that will raise agricultural prices less than farmers had hoped.

More important, the President has sworn to reduce the deficit for fiscal 1980 to $30 billion. To the dismay of some liberal advisers, he told an October meeting of Cabinet members and the White House staff that "my political future" depends on redeeming that pledge, which meant that nobody should dare bring him ideas for new programs.

Indeed, since the Administration has already promised NATO allies that it will increase defense spending by 3% a year, there will be no money for any new civilian programs, and some existing ones will have to be reduced. The paring is being done by Budget Boss James McIntyre, who vows to leave "blood all over the carpet." Budget slashers are even talking of making small cuts in Social Security and other federal pension payments, supposedly the most politically sacrosanct of all federal outlays. Samples:

1) At present, a person who reaches age 65 on, say, the 29th of a month draws Social Security retirement benefits from the first of that month; the Office of Management and Budget wants to start the payments on the 15th.

2) A veteran's family can now draw death benefits from both the Social Security and Veterans' Administrations; the budget cutters want to stop one or the other.

3) Federal pensions are increased twice a year to reflect rises in living costs; the budget planners want to make only one annual adjustment.

Another element in the anti-inflation strategy is a presidential promise to reduce Government regulation of business, and last week brought a welcome indication that this pledge is more than talk. A. Daniel O'Neal, chairman of the Interstate Commerce Commission, outlined a plan to deregulate trucking. Briefly, he would make it much easier for new truck lines to enter the business and would end the practice under which conferences of truckers, with ICC blessing, set freight rates. That would open the industry to more rate-cutting competition, a prospect that established truckers are likely to fight against; the ICC will need Carter's backing to put it through.

The President also faces a stiff fight to get his wage-price guidelines obeyed. The Administration has been counting on the Teamsters to settle next March within the guidelines, which call for wage-and-benefit increases averaging 7%. But last week Teamster President Frank Fitzsimmons announced that "if [Carter] said we endorse his program, then he is wrong." On the price side, major railroads applied to the ICC for an 8 1/2% increase in freight rates, setting the stage for an important test. A staffer of the Council on Wage and Price Stability observed that at first glance the increase would far exceed the guidelines; the railroads contend that the hike is being forced by wage contracts signed before the guidelines were announced.

On all these fronts, Carter is promising a dedicated battle. In his press conference last week, he vowed to present a "very tight, very stringent" 1980 budget and said he would "do everything I can that is legal" to see that the guidelines are observed. Unfortunately, however, the disarray in Administration policymaking continues. Carter at his press conference said that he has "no present plans" to call for a rollback of Social Security tax boosts; the next day Chief Economic Adviser Charles Schultze said that "we are sure going to look at" a rollback and came close to implying that the boss had simply been wrong. Such a mix-up in signals is a luxury that cannot be afforded. No more quick touchdowns are in sight; from now on the gains, if any, will be small and hard-fought.

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