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In fact, our data suggest that any actual increase in demand for credit is actually resulting from a drying up liquidity.

Chief among these borrowers is the farmer, the small businessman, the smail retailer --- all of whom have been stung by falling income and by the competition of the over-extended shopping malls - added to buy inflation.

Visit any center U.S. city -- big or small -- and count the increasing numbers of vacant stores. A vacant store is a business quit.

And put the 2 of every 3 U.S. consumers among this group, inflation squeeze group, where most consumers are borrowing either for hedge-buying to beat inflation, or to pay unexpected bills.

We are submitting to you under separate cover a special issue of Sindlinger's Economic Service which documents the slippage of incomes among consumers and how this is dragging the entire economy.

And within this disturbing situation is the main reason that we have yet to enjoy that long-awaited capital spending boom.

It is generally agreed that each economic recovery (after wrong monetary policy makes a recession) comes in two stages when the rebound is in a typical V shape.

... The consumer moves first. He regains confidence

through expectations of greater Household Money Supply (HM$) and an optimistic view of job security.

This allows the consumer to loosen up and begin spending in a way that will absorb excess supplies that have been produced by business from wrong monetary policy which created the recession in the first place.

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--

Once most of the excess has been absorbed we are ready for the second stage which is an outgrowth of capital spending to enlarge productive capacity for meeting the consumer's demand.

Capital spending has a highly beneficial effect

the money

expended on it serving to further stoke the economy in the first place, the jobs and incomes it ultimately provides keeping the expansionary pace going over the longer term.

In the final analysis, the most important long-term effect is the creation of new jobs.

For the new jobs mean places for new entrants in the labor force, and they provide incomes that can be recycled into the economy to expand capital formation.

Why hasn't this second stage taken place in 1977?

Why has it been so long overdue? --- continually hoped for --so elusive in coming?

Basically it is because conditions under our knee jerk monetary policy changes have never allowed the first or consumerled stage to reach its optimum point.

A principal reason is inflation which has:

1) continued to cut into the availability of disposable funds for U.S. households and

2) instilled fear into people forcing those who can into a record rate of savings instead of spending, i.e., hoarding capital.

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Remember

--

the economy really works like this ...

.. faulty monetary policy which excludes any understanding of people first creates a man-made recession.

--

... first stage of any recovery from recessions comes from the consumer sector

... then the capital spending sector takes over.

--

But for the past three years the Fed kills off the consumer sector from completing its job --- and has never given the capital spending sector a chance to start its function.

Here is where the Fed's last three annual spring-summer exercises in explosive fire fighting under the guise of interest rate futility have been damaging by aborting each consumerinspired recovery.

In each of the past three years as the Fed raised interest rates, the consumer was gaining confidence and beginning to spend while some of his/her inflationary fears were subsiding.

It was a torturous process at best and needed every bit of encouragement.

--

Instead, the Fed raised interest rates with an error to abort consumer spending and thereby kill each consumer-inspired sponding recovery to delay capital spending.

--

So we can be reminded what was going on from 1966 through 1974 we reproduce this chart from Sindlinger

data.

when the Russians shot off Sputnik to start the U.S. on a spending tores for serope with guns and butter, and inflation made a dent in the high HMS levels in mid-yea -making jobs.

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The Fed refuels inflation

--

the cost of money on some mystic theory that you control inflation by falsely making the cost of money go up.

The facts are raising the cost of the price of money affects people as inflation reintensifies the consumers grow fearful again, spending slow down and fear savings resume and the economy is aborted capital spending is

--

growth
postponed.