Travail that licked inflation is ignored, economist warns
THE world has turned from deflation to reflation. That's how economist Jerry L. Jordan interprets the results of last week's meeting of the Group of Five -- the major industrial nations.
Speaking of the severe slump the United States endured in 1981-82 to lower inflation, Dr. Jordan, senior vice-president of First Interstate Corporation, says: ``To an economist it is an incredible shame that we suffered all this and now blow it away.''
Despite this sacrifice, the leaders of the US, Britain, France, West Germany, and Japan have decided to step up the economic pace to escape their present political duress, Jordan maintains. He regards the New York meeting as a historic turning point for the world economy. Here's his argument:
The West's top leaders are in political trouble.
In the US, President Reagan faces protectionist pressure in Congress. The administration and Congress haven't managed to chop the budget deficit adequately. Major commercial banks face a considerable risk of default on their loans to less developed countries, on new office buildings in overbuilt city centers, and on some energy loans as a result of declining oil prices. The Federal Farm Credit System's 37 principal banks are seeking a multibillion-dollar bailout on their $74 billion in farm loans. Thrif ts are hoping for a similar government rescue.
Abroad, the political prospects of West German Chancellor Helmut Kohl have suffered from high unemployment and spy revelations. The French Socialists, hurt by a weak economy and foreign policy problems, are expected to lose next spring's parliamentary elections, putting President Franois Mitterrand in an awkward position. The British are becoming tired of Prime Minister Margaret Thatcher and high unemployment. Faced with a constant ``bashing'' because of their large current account surpluses and highly competitive exports, the Japanese are looking for a respite.
The leaders of all of these countries have found the disinflation process too painful and extended, Dr. Jordan figures. They hope for some relief by pushing the accelerator of their economies.
``They will never admit that reinflating is the inevitable consequence of the policies they are now adapting,'' he adds.
From a short-term political standpoint, more-rapid growth, even if it debases the currency, has some decided advantages.
It would weaken the dollar and boost commodity prices, thereby helping debtor nations service their massive loans. It would boost farmland prices, putting more equity behind farm loans. Mining companies would enjoy rising metal prices. The demand for oil should increase, helping OPEC stabilize the price of crude.
Moreover, inflation would ease the government's deficit problem, Jordan continues. Indexing the personal income tax system may have lost the government most of the benefits of bracket creep when inflation rises. But revenues from other taxes -- corporate, customs revenues, sales taxes, property taxes, excise taxes, and so on -- go up with inflation.
Inflation reduces the real value of the roughly $1.7 trillion of federal debt held by the public at fixed interest rates. A 10 percent inflation rate, for instance, slashes the purchasing power (or real repayment cost) of the debt by $160 billion a year.
Even though social security and some other government pensions are indexed, there is a lag of some 18 months before the inflation catch-up takes place. The government reaps the benefit of the pensioners' losses.
Overseas, a boom would at least for a while trim unemployment, boost profits, and generally raise morale and the political prospects of national leaders.
Whether the Europeans have actually decided to take measures to reflate, however, is not entirely clear. C. Fred Bergsten, president of the Institute for International Economics, regards such action as key to maintaining world economic growth. Jordan worries about the inflationary aspects of such a decision.
Because of the burst of money growth so far this year in the US, Dr. Jordan predicts a couple of quarters with a 7 percent annual growth rate, possibly starting in the last quarter of this year, before the pace slows somewhat again. That will be followed, though, by more inflation. He guesses a boost from a 4 to a 6 percent rate by this time next year.
One study, Jordan notes, calculates that the stronger dollar in recent years knocked as much as 3 percent from the US inflation rate. Other studies calculate 1 to 2 percent. A cheaper dollar will make the reverse true.
It could be that if inflation and the economy do step up, as Jordan predicts, the Fed will step on the monetary brakes. This would likely force the economy into another recession, say in late 1986 or '87. But it would at least eventually restrain inflation again.
Jordan's forecasts are not happy ones. ``I'm very depressed by it,'' he says.