Stop panicking over inflation; why liberals should hate Volcker and Greenspan and love low interest rates.

• Author: Roberts, Paul Craig
• Position: Paul Volcker, Alan Greenspan - Includes related article

Paul Craig Roberts holds the William E Simon chair at the Center for Strategic & International Studies in Washington, D.C

Why liberals should hate Volcker and Greenspan and love low interest rates

Just the facts, ma'am.

The 1980s has been a period of low inflation, yet the fear of inflation has grown, leading savvy business-folk of moderate means, and those of great fortunes to their demise.

Take the Hunt brothers of Texas, whose sloppy guesstimates about the rate of inflation cost them $4 billion. Back in 1979, driven by an almost apocalyptic fear of inflation, the Hunts placed their faith in silver. They were convinced that inflation would roar unabated, making all paper money worthless. They were equally certain that the value of precious metals would soar. So they began to hoard silver, storing it in vaults around the world with the vision of rising Phoenix-like from the impending destruction of the dollar. They even envisioned themselves issuing their own silver-backed bonds once inflation ravaged the world's currencies.

Unfortunately for diem, but fortunately for the rest of us, the dollar didn't sink to the value of the proverbial continental. Inflation cooled, and like so many other prices, the cost of silver actually tumbled, falling from $34 an ounce in February 1980 to just $11 the next month. Today, it is $5.80.

Despite the immortal failure of the Hunts, hundreds of thousands of investors continued to manage their money as if inflation were preordained. They leveraged themselves with debt, secure in the conviction that inflation, which allows a debtor to pay off his creditor in cheaper dollars, would make them winners. Farmers were KOed as the average value of farm land fell by half, from $1,053 per acre in 1979 to $564 in 1988 (in constant dollars). hi Grapesof-Wrath fashion, the farm-credit system collapsed, and the sight of a farmer auctioning off his tractor and his memories became commonplace. To stem the destruction, direct government payments to farmers soared 1,300 percent from $1.3 billion in 1980 to $17 billion in 1987.

The unexpected collapse in the price of farmiland, energy, and precious metals, together with the Fed's high interest policy, helped push the country's savings and loans into bankruptcy. There are many villains in the S&L crisis, but one that is rarely fingered is the fear of inflation. The S&Ls had shoveled loans out the door-convinced that asset values could only rise. Today, of course, their enormous miscalculation could cost us more than $100 billion.

The point here is that the fear of inflation has consequences as real as inflation itself. These days those fears have found their focus: Alan Greenspan, chairman of the Federal Reserve Bank. It seems that every day there are new calls for him and the Board of Governors to raise interest rates, even though the rates rose a full 3 percentage points last year. In late February, The Washington Post expressed doubt whether Greenspan "has done enough" by raising rates; Robert Samuelson of Newsweek has sounded the alarm for higher rates in three columns. (On April 12, his column in the Post was headlined "The Case For a Recession.") And Greenspan seems to be heeding the call. He's already indicated that he's inclined to tighten the reins-a move that could throw people out of work, crush more businesses, and revive all the horrible scenes of the early eighties, when the recession (hard as it may be to remember for those who have prospered) ruined many lives.

(Of course, high interest rates do cheer some, especially people with a lot of cash stashed in money market funds and, perhaps, foreigners who buy our Treasury bills. As a percentage of total budget outlays, net interest paid by the federal government rose to 14 percent in 1988 from 7.7 percent in 1978. In 1964, it stood at 6.9 percent. In 1987, interest payments on the debt totaled $139 billion, a sum almost identical to the budget deficit.)

It's become conventional wisdom that higher interest is just the dose of castor oil the economy needs. A recession now, so the thinking goes, will prevent inflation later. But suppose these latest fears of inflation are exaggerated, just as they were for the farmer who borrowed himself into bankruptcy, or for Bunker Hunt. If that were the case, then high interest rates would be more like poison than chemotherapy. Obviously, we need to be mindful of inflation, but a look at some of the scares of recent years will be enough to make one very...