The Specter of Inflation Haunts the Investor Class

The rivets are rattling, steam is escaping from the boilers,

and the arrows on the dials are jiggling while the warning lights blink and

electric horns sound. An end-of-an-era craziness has been in the air for

months. Tales of carelessness, stupidity, sloppiness and extravagance fill the

papers. Money is leaking over the decks.

It ain’t just the

Clintons who’ve been doing strange cartwheels. Last fall, astonished investors

learned that Marc Weill, the manager of a $113 billion investment portfolio for

Citigroup, one of the largest financial and banking conglomerates in the world,

had a cocaine problem. Apparently he’d been acting erratically for months

before his father, Citigroup chairman Sanford I. Weill, sacked him.

Another sign of the crazy, end-of-boom, anything-goes-and-nuts-to-you

atmosphere is the blossoming of hedge-fund frauds. (A hedge fund is another one

of those Wall Street “products” that promise investors they will make money

regardless of which direction the stock market is moving.) As with many another

fin de boom, money is cheap and

there’s plenty of it to toss around. How cheap it is can be measured by

inflation numbers. They are up.

The reporting on the cost-of-living index is always a little

daffy, as the bad news is watered down by emphasizing the difference between

“core” inflation (computers and Mercedes), which stays flat, and the movement

in the prices of energy and food, which leap upward. Jumps in inflation numbers

are also ameliorated by treating them as one-time occurrences, like meteors

you’ll never live to see again. Such reporting is baffling to people who don’t

send their maids to the supermarket and who fill up their own gas tanks.

If you pay your own bills, you know what inflation is.

Inflation, by definition, is a rise in the average level of all prices, since

the idea of calculating inflation is to keep track of the purchasing power of

the dollar. The purchasing power of the dollar omitting food and electricity

makes no sense. What does a number thus derived denote? Zippo.

When inflation is acknowledged, the television people blame

it on the Ay-rabs. Yet it is natural gas, virtually all of which comes from the

wells in the lower 48, that has led the surge in energy prices. It’s not jumps

in the price of gas or oil that cause inflation, it’s the other way around:

Inflation pushes prices up.

The last great inflationary fever in the United States

wasn’t broken when the Arabs lowered their prices. The fever broke when Paul

Volcker took over as Fed chairman and, on Oct. 6, 1979, turned the money faucet

off with one twist of the wrist in what came to be called the “Saturday Night

Special.” When the money was cut off, interest rates went flying through the

ceiling and the stock market swooned, but the inflation that was lowering the

standard of living and destroying the savings of the nation’s working people

was brought to a jarring stop.

The man with the power to give us inflation or not is the

chairman of the Federal Reserve Board. In the years since 1987, when Alan

Greenspan was installed as chairman, news of the consumer-price index has been

announced with the joyful comment that, for one more month, inflation has

“stayed tame” or is “under control” or remains “contained,” as though it were a

tiger in the bush. Still, Mr. Greenspan has never had a year when he shot the

tiger dead.

You have to go back to Dwight Eisenhower’s time, when

William McChesney Martin was the Fed chairman, to find a period of zero

inflation. In actuality, the dollar under Mr. Greenspan has lost a third of its

purchasing power. Whether or not you’ll accept that as tamed inflation will

depend on how many dollars you have, in what form you have them and how quickly

they’re flowing into your bank account. High or low or just right, inflation is

a matter of personal opinion.

How strange that the dollar should lose so much of its value

during the time it has been entrusted to Mr. Greenspan, who is-judging from his

public utterances, at least-hip to the threat of inflation. In the world Mr.

Greenspan comes from, the state of the stock market is everybody’s

preoccupation. On Wall Street, they believe that it says in the Code of

Hammurabi that the stock market only flourishes when interest rates are low,

and it is carved in the same stone that it is the responsibility of the Fed

chairman to get interest rates low and keep them there.

Regardless of what it

says on the clay tablets, however, low interest rates do not invariably

correlate with an ebullient stock market. Japan, for example, has had interest

rates at or near zero for some years now, and it has been anything but a tonic

to the Tokyo markets. Nevertheless, you can’t underestimate the part that pure,

purblind, take-it-on-faith dogma plays in business. Business people are wedded

to the idea that low interest rates and prosperity go together. And, to some

extent, the tenacity of their convictions probably makes it so.

Sometimes the Fed chairman (as yet, we have not had a woman

in the job) can get the rates down with ease, but sometimes he can’t. To make

interest rates go down, the Fed must make money more plentiful-but if money is

more plentiful, inflation may rear up from the tar pits of the economy where,

unseen, it takes its fitful rest. The classic definition of inflation is too

many dollars chasing after too few goods and services. Hence, pumping money

into the economy to lower interest rates may raise the inflation rate


These last few years, Mr. Greenspan has been able to wriggle

his way around this set of contradictions for a variety of reasons, not the

least of which has been the amazing fecundity of the nation’s businesses, which

have been giving forth goods and services so voluminously that they have been

able to match the dollars chasing them. But now that’s changing. What seemed

like the endless growth of business is slacking off, and as more of Mr.

Greenspan’s dollars join the chase after goods and services, the chances of

higher inflationary rates increase.

What will Mr. Greenspan

do? He may only have unpleasant choices to pick from. Since the Saturday Night Special,

a great change has taken place: The savings of the nation’s middle class have

been coaxed out of the savings banks and lured into the stock market. One

misstep by Mr. Greenspan, and the retirement funds and the college money of

millions could suffer a painful drop.

So Mr. Greenspan has no choice but to water down the dollar,

if that’s what it takes to protect the market. But a weakened, adulterated

dollar is not going to please the foreigners who have been financing our public

and private debt these many years. They are going to sell the stocks and bonds

they bought in lieu of our paying for all our imported cars and television

sets, and then what’s going to happen?

Maybe the sun will still shine. In these last years, Mr.

Greenspan has become the Dollar God, the God of Harvests and Prosperity for our

leading business and political people. They believe that he sits in his little

room somewhere in the darkness, the thousands of ever-changing numbers on his

monitors blinking out at him. They have him studying the numbers; they imagine

his hands moving slowly to the keyboard; and they picture his fingers carefully

typing out the words: ” The Good Times Are

Still Here .” The Specter of Inflation Haunts the Investor Class