Monetary Man Vs. Fiscal Flash

Monetary Man vs. Fiscal Flash

Some 20 years ago, when I first got into this business of trying to explain business and economics to people, I borrowed a page from the comic books to do the job.

Monetary Man met Fiscal Flash in a battle over the U.S. economy, beset at that time by rising prices, interest rates in the high double digits and an economy that didn't seem to be performing as it had in the past. Stagflation was the word coined for it - an economy going nowhere, with inflation to boot.

I'm not sure who my comic-book heroes would be these days. I can think of villains. Doctor Deficit? Or perhaps The Incredible Shrinking Man - the story line there would be that as he shrinks, expectations shrink with him. Heros? Monetary Man is still around, pushing and pulling at interest rates.

Maybe it's not a time for larger-than-life comic-book heroes and villains. The economy is scary enough as it is. Or maybe it is just too confusing.

-- Unemployment is low, but layoffs continue. More people than ever before are working, yet they worry more about keeping their jobs.

-- Credit-card debt continues to mount. Every month the total increases by a few million more dollars. It passed the $1 trillion mark a few months ago. So far, consumers are managing the debt, largely because interest rates are lower than they have been for some time. But the debt also represents an overhang on the economy that could come crashing down some day.

-- Inflation is low, but the Federal Reserve still is worried. There is growing evidence that the Fed has a policy goal of not just low inflation but no inflation. That may be hard to achieve.

-- Labor costs are rising and labor shortages are beginning to appear. That could push wages even higher as companies bid for workers, but it does not seem to be happening. Why? We live in a global economy these days. When things get too tight, there is excess capacity in Japan or Germany or Mexico to take up the slack.

Indeed, while workers and consumers are feeling pinched, corporations are earning record profits. Company after company, from banks to software makers, has been posting huge bottom-line gains. What gives? First of all, there is the debt.

The United States has been rolling in debt. Got high on it, grew fat on it, danced in the moonlight on it. All sectors participated - via corporate junk bonds, federal deficit spending, household credit cards. Everybody played and, now, everybody pays.

U.S. consumers, for example, are now paying about 17 percent of their disposable income in debt service. That's down from the peak of 18.2 percent hit in early 1991 but still above the average of the past 30 years of 15.6 percent.

Then there's the federal government. The deficit has been cut through some tough decisions by President Clinton and Congress. But interest on the debt still exceeds spending on national defense.

And this is a low-interest-rate environment. Think what would happen if rates were to go up.

So what's the Fed going to do?

The Open Market Committee of the Federal Reserve meets Tuesday to discuss short-term interest rates.

Alan Greenspan, Fed chairman, will try to decide whether to boost rates slightly or leave interest rates where they are for now. The betting is that the Fed will raise rates slightly.

Why?There are signs that inflation is increasing, although more gradually than would be common at this stage of a recovery. Remember, the recovery has been a long one by historical standards.

One reason to worry about inflation goes by the initials NAIRU (non-accelerating inflation rate of unemployment). As unemployment drops, it reaches a point where trying to push it lower increases the chance for inflation.

Economists figure that the "full employment" rate for the U.S. is about 5.9 percent. With the unemployment rate already below that figure, the chances of wage inflation is mounting.

Another reason for expecting the Fed to act soon is the similarity between this period and two other periods in our economic history.

DRI/McGraw Hill, an economic-forecasting firm, noted that in the 1960s and 1980s, the Fed had engineered a soft landing for the economy. But after "growth recessions" in 1966 and 1986, the economy was allowed to run just a bit too hot. The unemployment rate remained below that NAIRU rate and inflation gradually accelerated.

Waiting too long to slow the economy, the Fed was forced to raise interest rates too sharply, thus pushing the economy into recession.

DRI said the Fed is likely to raise interest rates, but when is not entirely clear. "Chairman Greenspan has been a gradualist," the forecasters said. "We do not expect him to move more aggressively at the start of a tightening process."

The Newsletter column by Stephen H. Dunphy appears Tuesday to Friday in the Business Section of The Times. His Economic Memo runs in the Sunday Business Section. To send items, write to The Newsletter, Stephen H. Dunphy, The Seattle Times, P.O. Box 70, Seattle, WA 98111. Phone: 464-2365. Fax: 382-8879. E-mail: sdun-new@seatimes.com.