IX. Inflation's Balance Sheet: The Liabilities

Now, the national income is a somewhat less than reliible "aggregate." The data ... about the components entering into such aggregates as national income, volume of production, savings and investment, etc., are pure "guesstimates," subject to arbi trary manipulation. The methods to substitute what amounts to "very wild guesses" in the place of factual knowledge are known to the statisticians as "interpolating between benchmarks, extrapolating from benchmarks, blowing up sample data, using imputed weights, inserting trends, applying booster factors .... " According to out84 INFLATION'S BALANCE SHEET: THE LIABILITIES standing British statisticians, "The result (of forecasts based on national iFlcome statistics) looks about as scien tific as Alice's celebrated attempt to play croquet by hitting a live hedgehog with a flamingo."l For the sake of argument, let us accept the con cept, vague and hazy as it is, at face value. The gross national income's rate of progress since 1950 has been unusual, averaging some 5 per cent a year in dollars of depreciating purchasing power.

Translated into "real" income by eliminating the price-inflation factor, this means a rise of abou t 3.2 per cent annually, which is roughly the same average that obtained in the thirty-four-year pe riod 1880-1914, under stable money, through several booms, crises, and depressions. Did we need the stimuli of managed money, unbalanced budgets, creeping price inflation, huge arma ments, fantastic price props, a cornucopia of do mestic and foreign subsidies, and a multitude of I bureaucratic interventions-all of which involves a great deal of waste and corruption-to accom plish what we have done before without such shots-in-the-arm? That is not all. What matters is the per capita growth rather than the total growth. Per capita, given the rapid rise of population, the real na tional income rises by little more than 1 per cent a year. Even of this modest increase, a large portion produces no economIC values. About 85 AN INFLATION PRIMER one-fourth of the increase originates in ~ilitary expenditures, governmental stockpiles of unsal able commodities, "unproductive" services of bureaucrats, and the like. The true (per capita) growth of goods and services available for the satisfaction of the consumer or for additions to the nation's productive capacity may be three fourths of 1 per cent per annum, or less, far be low the comparable late nineteenth-century rec ord. In fact, it is well below the record of the period 1920-28, a period of stable prices and of a comparatively slow rate of population growth.

For illustration: in 1958, the average American family's income is supposed to have "risen" by $20, or one-third of 1 per cent, this before taxes. Such is the much-advertised growth of our na tional income, the asset side of creeping inflation's balance sheet. The liability side is being ignored, deliberately. THE LIABILITY SIDE There is a price to be paid for an artificially engineered growth. For one thing, with every 1 per cent increase of the national income, our debts, net after elimination of duplications, grow by 1.7 per cent. This they did in the 1920's, too. This "growth" is spectacular, indeed, as shown in the table on the facing page. Between 1950 and 1958, the net nonfederal debt of the American people has risen five times 86 INFLATION'S BALANCE SHEET: THE LIABILITIES faster than during the corresponding eight years of the lusty 1920's. True, in the current period the dollar's purchasing power has been cut se verely, while it was stable in the previous one.

Even if the figures are corrected accordingly, the rise in the current boom has been proceeding at a rate almost treble that in the previous great prosperity. Note that in the 1920's the net governmental debt remained stable; the federal government liquidated (repaid!) as ·much as the state and local authorities borrowed. ~n the 1950's, both went into the red. For everyone-dollar increase of the total net debt in the twenties, we added seven dollars in the fifties. "NET" DEBT OUTSTANDING (in Billions of Dollars) End of Governmental Private Year State and Cor-Indi- Total Federal * local porate vidual t 1921 ...... $ 23.1 $ 6.5 $ 57.0 $ 49.2 $135.8 1925 ...•.. 20.3 10.0 72.7 59.6 162.6 1929 ...... 16.5 13.2 88.9 72.3 190.9 1940 ...... 44.8 16.5 75.6 53.0 189.9 1946 . ~ .... 229.7 13.6 93.5 60.6 397.4 1950 ...... 218.7 20.7 142.1 109.2 490.7 1954 ...... 230.2 33.4 177.5 165.4 606.5 1958 ...... 232.7 50.9 255.7 240.4 779.7 1959 ...... 243.2 55.6 281.7 265.8 846.4 Change: 1921-29 ... - 6.6 + 6.4 + 31.9 + 23.1 + 55.1 1929-40 ... + 28.3 + 3.3 - 13.3 - 19.3 - 1.0 1940-59 ... +198.4 +39.1 +206.1 +212.8 +656.5 *The tTue federal debt is about $40 billion larger than the "net"

figure. See Chapter X. tlnc1udes noncorporate enterprises. 87 AN INFLATION PRIMER The major portion of the funds to finance the inflation of the personal debt-a credit expansion that fans the fire under the price level-stems from the banks and the savings associations. By the end of 1958 they carried, between them, over 60 per cent of the outstanding mortgage loans on one-to four-family homes. Directly and by in direction, the commercial banks also provide the bulk of installment credit (up to three years), this on top of a growing volume of business term loans (up to ten years!) and "slow" loans to busi ness, plus substantial holdings of medium-and long-term corporate and municipal bonds. The obvious hazards involved in overloaning them selves and in impairing the liquidity of the earn ing assets seem to be ignored by a new generation of bankers. This new generation does not re member the depression and is being sold, just like the fathers were thirty-odd years ago, on the idea that there never will be another.

BORROWING A LIVING STANDARD Presently, the most rapidly rising component of the credit structure is the "individual" debt of nonfarm households and unincorporated busi nesses. This debt grows a great deal faster than the personal disposable income after deduction of direct taxes, as shown in the next table. In 1959, the net addition to the outstanding personal debt alone (mortgages on one-to four88 INFLATION'S BALANCE SHEET: THE LIABILITIES family nonfarm residential buildings plus con sumer loans) was $19.4 billion, a record. Install ment credit ·is currently expanding at the annual rate .0£ $5.5 billion, or 9 per cent, also a record. As consumers, we are ~re-empting expected future income. Evidently, our per-"capita consumption could not improve even at the modest annual rate the statistics show if it were not bolstered by purchases on credit that will limit our future con sumption. But for the time being, such purchases permit a standard of living above the level of earnIngs.

How long this process of piling up debts in excess of incomes-and ahead of the rate at which liquid savings are built up-can continue,. no one knows. But no one in his right senses would dare to assert that it can go on indefinitely, or without serious interruption. Every minor interruption means a recession; a major one spells depression. Thus, instabiility is being built into a supposedly depression-proof economy. Disposable Net Individual Personal and Noncorporate End of Income Gain, Debt Gain, Year (billions) % (billions) % 1950 ........ $207.7 $108.9 1951 ........ 227.5 10 119.8 9 1952 ........ 238.7 5 135.6 12 1953 ........ 252.5 7 150.4 10 1954 ........ 256.9 2 165.4 9 1955 ........ 274.4 7 190.2 13 1956 ........ 292.9 6 207.5 8 1957 ........ 307.9 5 221.9 6 1958 ........ 316.5 3 239.7 7 1959 ........ 334.6 5 265.1 10 89 AN INFLATION PRIMER At that, the comparison of total disposable in come with the total of personal debt does not give the right picture. The one is accruing to the population as a whole; the other is owed by a section of the population only-surely not by mil lionaires. According to a recent Federal Reserve Board survey, 32 per cent of all "spending units"

(families) had no debt at all; of the indebted 68 per cent, two-fifths were obligated both ways, by consumer loans as well as by mortgages. The eco nomic visionaries who dream of eternal prosper ity, or of perpetual creeping inflation which is the same mirage, derive satisfaction from the fact that not all families are burdened with personal debts. In reality, this is very ominous. It means that, for a majority, the annual increase of the debt is outpacing the annual growth of disposable income. What will be the proportion, say, five or ten years hence, if the inflation "creeps" that long? The debt obsession, induced by the excessive money supply and nurtured by an inflationary psychology, produces paradoxical phenomena. In 1959, personal debt creation proceeded apace de spite the steel strike. After three months without visible income, the credit of the striking steel workers seemed better than ever. In Gary, the local businesses offered the steelworkers almost everything, from socks and pants to furniture and videos-at no down payment. Just take the goods 90 INFLATION'S BALANCE SHEET: THE LIABILITIES and sign a piece of paper; the paper was eligible as collateral for a bank loan. The disproportion between current production and current con sumption is highlighted by this example of un employed labor maintaining its spending habits in anticipation of a wage increase. But it would take decades for any increase to make up for the wages lost during the strike, let alone the install ments on the new debts, with 10 per cent annual interest charge in the "bargain."

Nothing wrong with buying homes on credit, with ever less down payments needed and ever more interest charged for stretched-out periods, the dreamers argue (in waking hours). The fam ilies merely pay for mortgages, plus upkeep and tax, what they would otherwise have paid for rent. Maybe so, in some cases, but for a majority, it takes an irresponsible optimism to ignore the pitfalls. Construction cost per dwelling unit tends to decrease with the number of dwellings under one roof, and so does the rent. Home ownership may be desirable for many reasons, but it can be a serious opstacle t the worker-owner's mobility and earning power or to his ability to adapt him self to changing co ditions. Again, the probl m is not so much the present size of the home-m rtgage debt; the problem is where do we go f am here? Can people afford, and how much lo ger can they afford, to mort gage themselves at he annual rate of $10 billion 91 AN INFLATION PRIMER to $15 billion far in advance of the growth of their incomes? What of the creditors, if anything should go wrong? Nothing to worry about, take the word of N. H. Jacoby, a former member of the President's Council of Economic Advisors: While home mortgage and consumer debt has quintupled since 1946, we must recall that family incomes, assets, and equities in homes have grown proportionately. Sixty per cent of American families live in homes they own, and half of these homes are free of mortgage debt. Moreover, nearly 40 per cent of all home mortgage loans are VA guaranteed or FHA-insured-55 billion of the 114 billion outstanding. With currently low default and delinquency ratios on mortgage debt, there appears to be no danger in this quarter. [Italics ours.]-Commercial and Financial Chronicle~ October 8, 1959.

There is "no danger" of future defaults because there are no defaults now, while the money is pouring out of the banking system and confidence (in coming inflation) is unshaken. Such irresist ible logic is typical of the economic tranquilizers produced by thinking in "aggregates." Of course, the "aggregate" volume of mortgages may never go in default, but the story may be different for those mortgages incurred at high cost in purchas ing speculatively overvalued properties. 2 As it is, banks and savings institutions rarely find the names of their home-mortgage debtors on the ledgers of. their savings accounts. The ultimate tranquilizer is: falling back on Uncle Sam. He insures or guarantees, as just 92 INFLATION'S BALANCE SHEET: THE LIABILITIES quoted, $55 billion of $144 billion outstanding home-mortgage loans. That still leaves $90 bil lion unprotected, even if the U.S. Treasury, hope lessly entangled in its debt problems, should be able to take care of additional billions worth of bonds with which to satisfy the mortgage creditors.

These additional bonds would be either thrown on an overloaded capital market or monetized by the banks. By that time, a "new" kind of creeping inflation may be under way, one accom panied by stagnation. Of course, the American economy has grown "larger" and richer in a generation's lifetime; it can take (swallow?) more ~ebts. But it has not grown three times larger; it did not even double in productive capacity. Still less can its further growth keep up with the accelerating growth of the debt. Needless to say, crises and panics do not require that all debtors go bankrupt. The bankruptcy of a modest fraction does it. At present, far more than a modest fraction of consumers is better than knee-deep in debts,S and going ever deeper. "Grow,th" of this kind surely may raise living standards now; just as surely, someone's living standards may have to suffer later. Indeed, auster ity-restraint in consumption-is what some in flationists advocate already.

Fortunately, the market forces, if permitted to operate, tend to bring about an automatic correc93 AN INFLATION PRIMER tion of the borrowing and spending excesses. The expansion of personal loans is a significant factor in tightening the banks' lending capacity and rais ing the interest rates. This puts a damper on the supply of credit, provided the Federal Reserve goes slowly with its anticyclical medicaments to rehabilitate the organized recklessness. Business corporations and local authorities con tribute their share to the debt inflation. Between 1930 and 1959, the short-term debt of nonfinancial corporations other than railroads has quadrupled, and their long-term debt has more than trebled. Probably some 15 per cent of the latter is due annually. Interest charges did not rise propor tionately, thanks to lower rates and to the tax deductibility feature; but the profit margin per sales dollar declined, too, in the 1950's, and the tax collector takes 52 per cent of the net. So, the debt burden of corporations) relative to their net (after taxes), has greatly increased and their expan sion potential has been curtailed, to say nothing of the impending threat of illiquidity.

That this process is not fraught with, very serious hazards can be believed only by those who have taken out a patent on eternal prosperity, a world in which debts are o,ved to one's own "pockeL" "PEOPLE'S CAPITALISM" Specious fruits grow on the tree of creeping 94 INFLATION'S BALANCE SHEET: THE LIABILITIES inflation. One of them is being hailed as "people's capitalism," meaning the fantastic proliferation of stockholders in and out of investment trusts. In vestment trusts play the market with billions of dollars, most of it put up by people who have no business risking their modest savings in ventures of which they know nothing. It is the lusty 1920's allover again, with the same ruthless techniques in exploiting ignorance and greed .and the same breed of "financiers" pocketing untold fortunes. The latter plead perfect innocence, of course. What's wrong with getting rich? Nothing, pro vided the deal is not unfairly "loaded" and the customer does not get hurt when the day of "reckoning" (in sensible price-earning ratios) arises. A chief source of the anticapitalistic senti ment of the 1930's, to which we owe the New Deal and the welfare state, was exactly the same "in nocent" practice. When millions of people lose their money on gambling, on which they were sold as if it were legitimate business, they turn against the whole system that supplied the gambling chances, and th~ money cranks have a heyday.

This is differ4nt from the 1920's, the salesmen of sloth assure U$. Then, people gambled on borI . rowed money; then the market fell, they were wiped out. NotI1ing of the sort is threatening now when all they m}ght lose in a crash (which never, never will happqn again) is their own savings (as if that w~uld bake them feel much better). 95 AN INFLATION PRIMER Margin requirements, reduced from 90 to 70 per cent, virtually prohibit speculative excesses. Look at the figures of brokers' loans: they are a mere fraction of what they were in 1929, compared with the dollar volume of stock-exchange transactions then and now. Moreover, the public cannot be deceived any more, thanks to strict controls by the Securities and Exchange Commission, several na tional and fifty state agencies, and the stock ex_changes themselves. Most of this belongs in the category of "eye wash." The authorities may check palpable fraud but have no power over intangible, possibly bona fide, mal-persuasion. A vast volume of shares, quoted on the over-the-counter market, are not even subject to margin requirements. As for the margin borrower, he gives written assurance to the banker that he is not using the credit for pur..

chasing or holding securities, but there is no con trol, no effective penalty on circumventing the law. And-debt subterfuges are being concocted. The worker at the bench and the farmer in the barn are being parleyed into signing up for ten years or longer on fixed-sum annual plans to purchase investment-trust certificates. They can cancel the plan, but the cost of doing so is prohibitive. In all but name, the buyer incurs a debt that is not regis tered in the statistics of debts. Easy money "eases" the moral fiber of society. 96 INFLATION'S BALANCE SHEET: THE LIABILITIES When government housekeeping is oblivious of the rules of economy, private households are strongly tempted to follow the same pattern. When acquiring wealth becomes a matter of gambling and politicking, as it does in the infla tion morass, real values are likely to suffer. Wit ness the proliferation of criminality, embezzle ment, and tax evasion, symptoms of the disease that has its prime roots in monetary and fiscal policies. The··drawn-out depreciation of the cur rency's purchasing power cannot fail to affect standards other than the monetary alone.

Inflation, and the spirit which nourishes it and accepts it, is merely the monetary aspect of th<:t general decay of law and of respect for law. It requires np special astuteness to realize that the vanishing respect fot property is very inti mately related to the numbing of re~pect for the integrity of money and its value. In fact, laxity about property and laxity about money are very closely bound up to gether; in both cases what is firm, durable, earned, se cured, and designed for continuity gives place to what is fragile, fugitive, fleeting, unsure, and ephemeral. And that is not the kind of foundation on which the free society can long remain standing.-Professor Wilhelm Roepke, Geneva, Switzerland. 1. From this writer's book, Managed Money at the Cross roads (Notre Dame, Ind.: University of Notre Dame Press, 1958), pp. 136-7. 2. Too often, twenty-and thirty-year mortgages finance homes that may have to be rebuilt in fifteen years.

3. According to a 1960 Federal Reserve survey, "Close to 20% of all spending units were devoting 20% or more of their disposable income to installment payments." But a good deal of the "disposable" income is not disposable at all. 97 X THE BURDEN OF THE NATIONAL DEBT IS IT A BURDEN ON THE NATION? It is not, provided it is being held domestically, proclaimed President Franklin D. Roosevelt. "One pocket owes it to the other." (Debt owed to foreigners is considered as belonging in another chapter.) Since the public debt is no debt in the common meaning of the term, it need not be and virtually never has been repaid, according to the managed-money and creeping-inflation advocates. We should learn to live with the mammoth debt and accept the alleged necessity of its further growth. Let us go on accumulating budget deficits whenever "needed." Consider the size of the pile as irrelevant. As a Harvard professor announced it not long ago: it makes no difference whether the federal debt is $300 billion [nine zeros] or $300 trillion [twelve zeros]. Why, far from being a national liability in a meaningful sense, it might be considered as a wealth-creating asset. How could one enjoy all the "blessings" of currency ..