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There are indications that the mentality of spend and spend could turn the most widely anticipated recession in U.S. history into nothing more noteworthy than a soggy, sideways shuffle. Last week the Commerce Department reported that housing starts, while still down some 26% from 1978 levels, rose in December by a modest .3% from the month earlier. Personal income nudged ahead 1.1% last month to an annual rate of about $2 trillion. Figures for the final three months of 1979 showed the gross national product inching forward by a 1.4% annual rate instead of falling, as many economists had earlier predicted. Says Economist Otto Eckstein: "There is a real chance that private demand will simply refuse to weaken. Fear of inflation could easily keep consumers borrowing more and more money, and that would keep both spending and inflation high."
More inflationary stimulus could come from big new jolts of defense spending, as well as from perhaps $3 billion in unanticipated federal outlays to pay for the embargoed Soviet grain exports. Says Economist Walter Heller: "The military buildup alone could shorten and moderate the recession. It could hold interest rates up higher for a longer period of time, cause inflation to come down more slowly, and finally, force the Administration to postpone a tax cut."
Tactically, there is little that the U.S., or any government, can do to damp down the inflation-fanning gold rush. In its ill-starred effort to slow the rise in prices through monthly gold auctions during most of 1979, the Administration simply chipped away at its bullion reserves, thus reducing the stockpile at hand to rush to the dollar's defense in a time of monetary crisis. This merely encouraged gold's price to rise more rapidly. Says a top official of the European Economic Community: "Frankly, we have all been a little aghast at the foolishness of the U.S.'s unilateral gold sales."
Yet last week, when Treasury Secretary William Miller declared that no more auctions would be undertaken while the market remained so unsettled, gold traders instantly concluded that the Administration was now willing to see bullion prices rise freely to higher levels; so traders bought still more gold. The Soviet Union, a leading seller of gold to pay for imports of everything from American grain to Western European high technology, last year cut its gold sales from 500 tons to less than 250, enjoying the glittering rise in the value of its reserves in the process. Like oil exporters, the Soviets have discovered that leaving a precious commodity in the ground rather than exporting it simply helps drive up the price. Remarked one cynical Frankfurt banker in a bitter jest: "Maybe the Soviets have held back from selling because they knew they would get a better price after attacking Afghanistan."
Anything that rockets in price as breathtakingly as gold has done could as easily, and abruptly, plunge through the floor. Even a single bit of encouraging news about the Iranian or Afghan crises could start a decline that could bloody the speculators. At week's end there were tentative signs that a sell-off might be in the making. On Wall Street, canny investors were already short-selling shares of stock in gold-and silver-mining companies. Those investors are betting that metals prices will melt. There are, after all, two kinds of panic: to acquire —and to escape.