But even if these data were precisely right, which they are not, we fear that it

would be misinterpreted.

And, this is a point which bears directly on your quest for policies to promote capital expansion and capital formation.

A growth in bank credit or loans are often taken as hopeful signs of increased capital spending.

Such a credit growth can finance capital spending and is necessary for capital spending -- but this is not always the case.

An alternative reason for increased borrowing in very plainly a cash shortage.

survive, forced to borrow because of falling income. Some in the South and

Southwest are, however, borrowing for hedge-buying expensive home building.

Increasing numbers of small businesses are now borrowing simply to survive, forced to borrow because of falling income due to the inflation cost squeeze.

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 small

all of whom have been stung by falling income and by the competition

of the over-extended shopping malls --- added to buy inflation.

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 (HMS) 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.

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.

jobs.

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

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.

Basically it is because conditions under our knee jerk monetary policy changes have never allowed the first or consumer-led 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. house

... faulty monetary policy which excludes any understanding of people first create 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 consumer-inspired 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 encouagement.

ing and thereby killed each consumer-inspired spending recovery to delay capital

spending.

So we can be reminded, what was going on from 1966 through 1974, -

reproduce this chart from Sindlinger data.

...

we

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