With increasing numbers of economists predicting a recession in the United States for 1979 (a mild one, they hope), it might be good to examine how well the U.S. economy has fared since the last slowdown about three and-a-half years ago.

The answer: not well at all. The relative prosperity Americans have enjoyed has been largely a false one, fueled by an unprecedented explosion of indebtedness. Total debt in the U.S., public (governmental) and private, has in this short period of time zoomed up 42% from around $2.5 trillion to $3.9 trillion!

The October 16 issue of Business Week devoted special emphasis to this critical development in a cover article titled, "The New Debt Economy." It said:

"The debt economy, which flourished from 1968 through 1974, ended abruptly when the worst recession in four decades forced the U.S. to go slower in adding to what was then a $2.5 trillion tower of debt. Since those dark days — when the tower escaped toppling only by the thinnest of margins — the accepted wisdom has been that four years of prosperity have put an end to excessive borrowing, eliminated the peril of widespread defaults in the U.S. and abroad, and restored the world's financial system to good health.

"Nothing could be further from the truth. Since late 1975 the U.S. has created a new debt economy, a credit explosion so wild and so eccentric that it dwarfs even the borrowing binge of the early 1970s."

Business Week goes on to show that in the past three plus years of the "new debt economy" corporate debt has risen 36% to slightly more than $1 trillion, while state and local government debt has increased 33% to $295 billion. "More ominous," to use the words of the editors of Business Week is the fact that, over the same period, consumer installment debt has soared 49% to $300 billion, residential mortgage debt has zoomed up 54% to $750 billion, and the borrowing of the U.S. government, including the Treasury and related agencies, is up 47% to $825 billion.

"What is so worrisome," this analysis continues, "is that the biggest borrowers now are consumers whose ability to repay has been stretched razor-thin, and the federal government whose borrowing is the most inflationary of all. And now business is joining in again, borrowing heaps of short-term money" instead of raising funds in the equity (stock) markets.

The economy is so overheated, that any remedy administered will produce serious reactions, sooner or later. If the Federal Reserve Board tightens credit further, it could result in a recession as bad as, or worse than that of 1974. Certainly insolvency rates will be higher. But should the "Fed" not tighten the reigns and permit debt to expand at its current record-breaking rate, it will merely postpone the day of reckoning while inflation continues to soar. The latter, do-nothing-now course, says one banker, is akin to "someone drinking more to postpone a hangover."

Clearly, the debt-ridden public, while complaining about the 9 to 10% inflation rate (about 12% on food and other frequently purchased necessities) is "betting" on more of the same. It simply can't afford to get off the debt merry-go-round. Americans are gambling that there will be no recession and increase in unemployment; rather, that personal income and corporate earnings will continue to rise year by year and that the government's monetary and fiscal policies will be expansionary enough for the 44-month long bullish economy to continue.

Many economists thought that the higher interest rates of the past few weeks would cool things off a bit. The fact that it hasn't only shows how deeply both the debt philosophy and inflationary psychology have become entrenched in the American economy. Adds Business Week:

"What has happened is that the debt-inflation spiral has become a fact of life for both lenders and takers of money. Nowhere is this inflationary psychology more firmly imbedded than in the household consumer debt sector.... Many sophisticated consumers pay very little attention to the level of interest rates. Indeed, by stretching out low monthly payments as long as possible, they know that cheaper dollars will make interest rates largely irrelevant. Thus auto loans used to be for three years, went to four years as car prices soared, and some lenders are now making car loans for five years."

The feeling that many consumers have is that it is better to borrow now, regardless of the interest rate charged, rather than save cheapening dollars to buy the same item later when the cost will have gone up. This pernicious thinking, says Business Week, represents a "dramatic shift in consumer thinking."

This mentality, among other things, is bound to make a failure of President Carter's anti-inflation program, which program whitewashes the major cause of inflation anyway — the massive yearly chunks of federal deficit spending, even in "good times."

Perhaps consumers will retrench a bit soon — which in itself would precipitate a slowdown. Nevertheless, the consensus is that the debt-inflation cycle will continue, even if business turns sour in 1979. Says one economist, "The only time that debt will go down is when the economy crashes, a recession or a depression."

— Gene H. Hogberg, News Bureau

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Pastor General's ReportNovember 15, 1978Vol 2 No. 42