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It is a feat that almost all democracies have tried, and usually failed to bring off. They have either pressed too hard and too fast on the brakes, jolting the economy into recession, or let up too soon, permitting inflation to keep on rising. All too often, they have followed erratic stop-go policies that produced inflation and recession combined. Washington's soft-landing rhetoric of today is unnervingly reminiscent of the Nixon-Burns "game plan" to achieve a gentle slowing in 1969-70. That led to a recession in 1970, wage-price controls in 1971-72, double-digit inflation in 1973-74, and finally the violent recession of 1974-75.
The U.S. is now in its 40th month of recovery from that slump, and clearly inflation is its greatest immediate danger—but the threat of recession is real. Business spending for new plant and equipment has not hit the levels necessary to keep the expansion going, largely because executives fear that the cost of operating a new factory will rise faster than the prices of the products it sells, thus erasing potential profit. Consumers have kept up a rapid buying pace only by plunging into debt; installment credit rose a record $11.7 billion between March 1 and June 1.
If a recession strikes, it almost certainly will be blamed on Bill Miller's Federal Reserve. The potential script: The Fed pushes interest rates up still more and doles out new money at a miserly pace. Seeking higher interest payments, people put their money into high-yielding bonds and pull it out of savings institutions, leaving them with no funds to make mortgage loans; so housing collapses. Small and new businesses cannot borrow because only the blue-chip corporations can afford to pay the high interest rates. Finally, Treasury borrowing to cover Government deficits soaks up most of what lendable money is still available at any price.
Starved for credit, companies slash production and lay off workers.
The worst part is that such a "credit crunch" might not bring any lasting gains against inflation. It takes a very deep recession to reduce the rate of price increases significantly, and then the effect may be ephemeral: witness the rapid rise in prices today, only three years after the last punishing downturn.
The U.S. certainly is not in a credit crunch now. Money supply during the past three months has grown at an annual rate of 11.4%, which is well above the Federal Reserve's own target of 4% to 6.5%. But interest rates have spiraled up fast enough to worry some economists. Since Miller has become chairman, the "Fed funds" rate at which banks borrow from each other has jumped a full point, to 7¾%. The prime rate on bank loans has just hit 9%, a level that some bankers even in early June had thought it would not reach until the end of the year.