The Borrowing Binge
The curse of inflation has other ugly ramifications.
For example, even though 16 percent of America's industrial capacity is standing idle, businessmen have been expanding their factories at a record rate. Why? In order to buy machines and materials now to beat expected price boosts and economize on scarce and increasingly more costly labor.
Prime interest rates have been raised to an unprecedented 8.5 percent — and still the borrowing continues.
What galls the government economists most in attempts to control inflation is that they completely misjudged consumers and businessmen. Both cashed in on present prosperity by buying now and paying later whatever the interest cost might be. Instead of high interest rates slowing down borrowing and buying, consumers find ways around this problem.
Americans are reducing the amount going into savings accounts. They are cashing savings bonds, and borrowing on insurance policies. Households, hard-pressed in the midst of plenty, find this the quickest means to offset swiftly rising prices and taxes.
Personal savings as a percent of disposable income dropped from 7.1 percent a year ago to 6.1 percent in the first three months of 1969. Savings and loan institutions had withdrawals in April of $520 million. Mutual savings banks lost deposits of $200 million in the same month.
High interest rates charged by banks and other lenders drive firms and individuals into borrowing on life insurance. Loans on policies have spurted so far this year from $400 million to $12 billion. The money is going into down payments on homes, cars and into business operations. The reason: Insurance companies generally are obligated to lend the legal loan value of a policy to the holder at specified rate ceilings. These rates are usually well below the best bank rates.
Insurance company officials are also concerned about the tendency of policyholders to let a policy lapse after they have borrowed on it rather than repay the loan!
And at the same time, government statistics reveal a swift growth of consumer debt. At the end of this year's first quarter, consumer debt outstanding totaled $112 billion. This represents an 11 percent increase from a year ago. Commented the Wall Street Journal: "Never before have so many Americans owed so much to so many."
Morris Rabinowitz, president of Financial Counselors in San Francisco, estimates that a good third of American families that use installment credit are on the brink of serious financial trouble. Since 65 percent of U.S. families use installment credit, that means one-fifth of all U.S. families are in financial hot water!
Personal bankruptcies — once rare — now outnumber corporate bankruptcies ten to one in the U.S.
All this is what happens when people become obsessed by "inflationary psychology" — the neat little phrase coined to explain the phenomenon of people borrowing to buy things they don't need now to escape higher prices later. This only feeds more money into an overheated economy, and drives prices up still higher.
Inflationary psychology has a strong grip on American minds. The job of bringing inflation under control is therefore proving, said Secretary of the Treasury David M. Kennedy, to be "much more difficult" than the Nixon administration expected.
The Price of Deflation
The longer inflation spirals upward the more drastic the medicine required to cure it.
The United States has experienced an unprecedented economic expansion — fueled largely by inflation — for 101 consecutive months.
Economic planners, proceeding from unproven "New Economics" theories have intervened at key points during this 8½-year period to keep the boom going. The economy simply has not been permitted so seek its own level, with occasional ups and downs.
The "patient" has been forced to grow FAT — but not healthy!
The nation has simply gotten accustomed to continued "growth." Americans, as a whole, have become so spoiled, that the merest hint of a business slowdown — yes, even a mild recession, which would be for the nation's good right now — causes fear and anxiety.
Despite inflation, despite growing debt, the average consumer is spending more than ever before. The reason is greed!
Consumers continue to spend because they don't want to take any back-steps in the standard of living.
At the very time Americans should be tightening their belts, halting unnecessary spending, salting away more money in savings accounts — we witness the tragic opposite.
Belt-tightening at all levels of government — national, state and local — is not in the offing, either. Not with the ever-increasing burdens of defense and welfare and social programs.
We also see a severe crisis of confidence dividing government and public. Neither seems to believe the other can do anything to stem inflation.
The government, so far, has been reluctant to take the drastic steps that may eventually be necessary to halt the spiral.
Officials are well aware of the fact that an economic slowdown means a rise in the unemployment rate — a political "hot potato."
The people, on the other hand, apparently have lost confidence in their elected officials to solve the dilemma. Hence the "every man for himself" attitude. "Why save? The money will only depreciate. Why tighten my belt? Nobody else will!" So goes the unfortunate reasoning.
Human Nature on Display
Self-centered human nature goes into full play in a runaway economy.
A couple of examples will suffice.
In the middle of May, George Romney, U.S. Secretary of Housing and Urban Development had an experience he probably won't forget for a long time.
Addressing a building trades union conference in Washington, Romney was first cheered by the 3,000 delegates when he reviewed the recent fat wage settlements in the construction industry.
But when he urged building workers to increase their productivity he was greeted with a loud chorus of boos and catcalls. And when he advised the unionists to end other restrictive practices that have contributed to an astronomical rise in building costs — more boos, more jeers.
Do you recall the story of a few British secretaries who over a year ago volunteered an extra unpaid hour a day on their jobs for the good of their country?
Britain had at that time recently experienced the devaluation of the pound.
A few thousand patriotic Britons applauded. But the overwhelming majority reaction, including that of most trade union officials, was one of contempt, disdain or disinterest!
What has happened to our peoples?
Belt Tightening That Worked
Today the West German mark is regarded as the world's most solid currency. According to New York's Journal of Commerce, "The Germans . . . are pretty close to ruling the roost in international finance."
But it wouldn't be this way if Bonn hadn't acted quickly on an internal financial crisis that began four years ago.
In 1965, the West German "economic miracle" was beginning to get out of hand. A serious inflationary spiral had set in — roughly in the same scope as affecting the United States today.
Wages were soaring 10 percent a year, twice as fast as worker productivity. Prices were rising at a rate of 4 to 5 percent.
The German Federal Government was forced to step in. It curbed credit, made money more expensive — much as Washington is trying to do now. Government spending was also curtailed.
But the big key was the attitude of the German citizens themselves! They stopped buying so much, forcing business to slow down production and expansion.
Labor unions, moreover, cooperated with the government program. They voluntarily scaled down all wage-increase requests.
Result? A minor — but necessary business slowdown in 1967. Unemployment was held within tolerable limits.
West Germany has long since rebounded from the 1967 slump. It has reached its greatest economic heights since then. Factories are humming, profits soaring — another 4 to 5 billion dollar trade surplus is expected this year — and jobs are plentiful, with about five jobs available for every German wanting work.
It pays to fight inflation! How Bad Can Inflation Get?
It's a shame that Americans and Britons do not have the morbid fear of inflation that older Germans have.
In the great German inflation after defeat in World War I the circulation of paper Marks reached astronomical figures. By the end of 1923 such an ordinary matter as the sending of a local letter cost 100,000,000,000 marks in postage!
It got so bad in parts of Germany that some laborers were paid twice a day and given time off from work to shop — all in order to keep abreast of streaking prices.
Inflation can get a lot worse!
The Solution for YOU
We are not so naive to believe that an article like this is going to change the course of a whole nation.
But our readers need to be apprised of the facts. There is no need for you to obey the "sheep instinct" and drift toward financial ruin. Why follow the crowd by drawing down your savings, going head-over-heels into debt, buying things you don't need?
Now, more than ever, is the time to be different!
In all likelihood, many reading this article are already suffering from financial distress. After all, "the average American family is about three months from bankruptcy." (Vance Packard, in his book, The Waste Makers)
What you need at this time is to understand basic principles of living that the average person has no comprehension of — and for which he is paying a severe penalty. These generally ignored but nevertheless fundamental laws are found probably on your own bookshelf — but you perhaps never took notice of them.
The booklet The Seven Laws of Success explains these laws — explains what success really is. Few people know. Success is infinitely more than a swimming pool, double ovens, three cars in the garage — mere acquisition of material goods.
Why don't you give it a try and find out what abundant living can be like. There is absolutely no reason for inflation to leave you in financial ruin.