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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 simultaneously.

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.”

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