Jimmy Carter vs. Inflation

(8 of 10)

deficits, and 2) to the extent that a cutback in driving reduces oil imports, the U.S. will make itself less vulnerable to petroleum price increases that the OPEC cartel may decree. But the fee will not spur all that much conservation: a reduction of only 100,000 bbl. a day the first year, by Carter's estimate, in petroleum imports that now average 8 million bbl. a day. In order to prompt really significant conservation, a gasoline tax on the order of the 50¢-per-gal. bite that Republican John Anderson has been proposing might well be required.

The biggest question of all is whether Carter's plans will have enough shock value to break the inflationary psychology that has gripped the nation. The most familiar manifestation of that psychology has been the compulsion of consumers to dip into savings or to borrow in order to buy before prices go higher. That action turns the expectation of more inflation into a self-fulfilling prophecy.

In the past few weeks, however, a new side of inflationary psychology has begun to show itself among businessmen and investors: plain, old-fashioned fear. Executives talk of inflation rates going to 20% or more in the next few months, creating an environment in which reasonable planning is impossible. The jitters have unhinged the investment markets. As recently as mid-February, stocks were widely considered a hedge against inflation and thought to be grossly undervalued. The Dow Jones industrial average hit a high of 904 on Feb. 13. But since then it has tumbled 92 points, to 812; nine points of the decline came last week. The average is now lower than it was 16 years ago. Would-be investors fear that accelerating inflation is making corporate profits illusory because they are earned in cheapening currency. More generally, they fear that the uncertainties of inflation undermine every rational investment strategy. Says Arthur Levitt Jr., chairman of the American Stock Exchange: "There is no confidence whatsoever that any price has any meaning or validity."

Skyrocketing interest rates have just about destroyed the bond market, once a pillar of stability and the source of most of the cash that corporations, states and cities borrow to build factories, schools and waterworks (see box page 14). Unable to raise cash by selling bonds, businesses have been turning to short-term bank loans. That is very expensive; the bank prime rate rose twice more just last week, by a total of three-quarters of a point, to as high as 18½%.

Borrowing short-term money to finance long-term needs is not only expensive but inherently risky because the loans must continually be renewed at high rates. Financial experts fear that many small and even some big corporations, unable to continue borrowing, will go bankrupt. Their demise in turn may shake some thinly capitalized banks that will be stuck with "problem" loans. Says Don Jacobs, dean of the Graduate School of Management at Northwestern University: "We are headed for a paralysis of the financial markets. We will see red ink throughout the financial industry. It could be a disaster. For the first time in my life I am really concerned."

Red ink already is a reality in parts of the auto and housing industries. Sales of U.S.-made cars have dropped 15% below a year earlier since the new model-year began in October. Automakers have slashed production 30%