Word: inflationâ
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...cost of imported oil. Today they form a $600 billion money mountain in Europe as well as in the Caribbean and other offshore tax havens, where they have escaped the control of the Federal Reserve. In the past, when the Fed tried to curb the pace of business?and inflation???by limiting the supply of money, banks were able to circumvent this tightening by obtaining Eurodollars. The 8% reserve requirement will discourage this by making that money more costly for the banks to borrow, since they cannot lend it all to their customers...
Economists, proud and powerful in the 1960s, now look like Napoleon's generals decamping from Moscow. Their past prescriptions ?tax tinkering and Government deficit spending to prop up demand, wage and price guidelines to hold down inflation???have been as helpful as snake oil. "Things just do not work now as they used to," says former Federal Reserve Chairman Arthur Burns, and who can contradict him? The U.S. economy, bloated and immobilized, has been turned topsy-turvy...
...Adviser Alfred Kahn and Chief Presidential Economist Charles Schultze. Sensing that a surge of inflation is in the making, they take the position that money policy should be tightened to produce a mild slowdown. The alternative, they fear, is too fast economic growth that would lead to even worse inflation???and then a sharp recession later on. Private economists as ideologically diverse as Conservative Alan Greenspan and Liberal Arthur Okun, both members of TIME'S Board of Economists, support the case for tighter money. Says Greenspan: "A recession is unavoidable. The sooner we have it, the better off the economy...
...investment and R. and D., in particular, will go on harming productivity well into the '80s. But the effort must be started. A long period of sluggish productivity would mean an era of slow growth, little or no rise in living standards, persistent unemployment and high inflation???just like the '70s, only worse...
...does avoid recession, it will be a close call. Real gross national product?output of goods and services, discounted for inflation???is rising about 4% this year. The Administration's 1979 target is 3%, a rate that would keep inflation from getting worse but might not be enough to prevent unemployment from rising above its October level of 5.8% (down slightly from 6% in September). Privately, however, Administration officials indicate that they would accept a growth rate of 2%, which would certainly mean more unemployment, even though the U.S. would probably not technically be in a recession...