ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Friday, July 5, 1996 TAG: 9607080015
SECTION: BUSINESS PAGE: A-5 EDITION: METRO
DATELINE: NEW YORK
TYPE: ANALYSIS
SOURCE: JOHN CUNNIFF ASSOCIATED PRESS
It seems that all of America's retailers, many of its economists, most of its equity investors and certain political candidates are hoping consumers will soon go on a spending spree.
Such an event, it is supposed, will help sell cars, avoid recession, boost stocks and elect officials who like to claim they have something to do with the longest of all post-war expansions.
But wait a minute or two: Have they really thought this through?
If the consumer does indeed decide to have more fun at the malls, showrooms and the nation's expensive recreational meccas, it will likely have to be done on credit. Incomes aren't rising much these days.
Already, millions of Americans live beyond their means, as indicated by:
* Their tendency to assume new debt faster than they pay off old debt;
* Credit card delinquencies, which hit a 15-year high in the first quarter.
At this stage, a spending surge in the absence of broad income gains is likely to add to the uncollectibles of lenders, which in March rose to 5 percent of payments due, a six-year high. Higher figures could mean chaos.
Worse, a spending surge could mean higher interest rates, since the No.1 priority of the Federal Reserve is to keep the economy from overheating, which it tries to do by making borrowing costlier. It could mean bankruptcies.
And soon thereafter, if events were to proceed as in the past, the economy might be fighting recession - and retailers and investors might experience still another example of unintended economic consequences.
There is no proof this will happen, but it is more than just the other side of the story. Big as it is, the economy is a fragile instrument. It requires a deft touch to keep tuned and free of those awful sour notes.
A similar perplexing situation exists with capital gains and the stock market. A popular contention is that a capital gains tax cut would free up billions of dollars of equity (and taxes) now trapped in the market.
Lower the tax, it is said, and owners will be inclined to sell, take their gains and reinvest.
That's the theory. But what happens to all those stocks that have run up in price during the current bull market? These are the underpinnings of the popular averages, almost all of which are now near their record highs.
What happens? Well, what happens when there are more sellers than buyers? Stocks drop.
It might not happen; the shares redeemed might merely provide cash for reinvestment in the market. Logically, however, a plunge could occur, since many billions are tied up.
Many of those big-gain stocks are held by folk approaching retirement, and therefore in need of cash and wanting lower-risk securities such as bonds.
The moral, if there is one, is that you can't fiddle with the economy and expect it to produce the precise notes you want. It's just too complex and too fragile - and innately cantankerous, too.
LENGTH: Medium: 61 linesby CNB