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Such disasters hurt not only speculators but ordinary citizens. The New York Stock Exchange estimates that 106 million Americans, or almost half the total population, have at least an indirect interest in the market through holdings in trusts, mutual funds, policies issued by insurance companies that invest in stocks and—most of all—pension funds. The market collapse has wiped tens of billions of dollars away from the value of their paper assets.
Investors have been frightened of an economy that seems out of control. Worried about inflation, recession and what President Ford might or might not do, they are putting their money into safe investments that yield a return somewhere near what would be needed to keep up with rising prices.
People who can invest $100,000 or more are buying bankers' acceptances and high-grade commercial paper—types of promissory notes issued by corporations to raise money—or bank certificates of deposit. Most currently pay 11.5% to 13% interest. Investors who can put up only $1,000 to $10,000 are buying Treasury bills that yield around 9%, and the new "floating-rate" debentures issued by several banks and companies. They currently pay 10% to 11%, but the yield is adjusted up or down twice a year (after an initial holding period of about a year) to reflect the general level of interest rates.
Inflationary Stagnation. In addition, more than a dozen "money-management" mutual funds have been started lately to pool investments of as little as $1,000 each and place them in bankers' acceptances, commercial paper, Government securities or whatever yields the highest return. They currently pay investors 10% to 12%. Gold coins also are a favorite haven for stock-market refugees; their price has been rising steadily.
Over all hangs the threat of recession—or the likelihood that the U.S. already is in one, which will be given the name by economists only long after the fact.
In the past, rapid inflation has been associated with booms; the most frightening aspect of the present inflation is that it has hung on, and even got worse, through a period for which stagnation would be a mild word. During the first half of 1974, U.S. real gross national product—that is, total output of goods and services, measured in dollars of constant purchasing power—fell at an annual rate of 4.2%, v. a drop of a mere 0.4% in the recognized recession year of 1970. Unemployment has advanced from 4.6% of the labor force last October to 5.3% now. Yet inflation, measured by the broadest of price indexes, the so-called G.N.P. deflator, soared at a previously unthinkable annual rate of 12.3% in the first quarter and 9.6% in the second. In July, consumer prices were still rising at a compound annual rate of 10%.
No Guide. This situation raises for President Ford a dilemma to which the conventional postwar wisdom is no guide. In the 1940s, '50s and '60s the rules of economic management seemed rather simple: if inflation threatened, restrict Government spending and the growth of money and credit, and prices eventually would steady. If unemployment was the worry, pour out money and the economy would soon rise.