Editorials
commonweal WHERE CREDIT IS NOT DUE ONE PROBLEM with inflation—part of what keeps it going—is that it makes socially beneficial behavior irrational. Some easy numbers make the point. Most of us...
...People who were scarcely aware of Treasury Bills a year or so ago are now watching interest rates closely and going for the best ones, whether as savers or buyers on credit...
...El Salvador may test who's running American foreign policy—the Jimmy Carter of 1976 or Henry Kissinger...
...ANOTHER NICARAGUA...
...The delayed compensation, simply because it was delayed, would have dampened inflation, and it might have worked...
...Better and better...
...Recently Walter Wriston, the Chairman of New York's Citibank, threatened to pull the bank's credit card operation out of New York—with a consequent loss of 2,000 jobs—if the 18 percent ceiling was not raised...
...The 10 percent return will be in dollars that have lost a much larger percentage of their value...
...They are making the kinds of economic calculations that would have seemed like too much trouble a few years ago...
...They are, after all, caught in a tightening squeeze between the rising cost of money and the 18 percent finance charge they are held to in states like New York...
...When the world pauses to mark the deeds of some Great Man, it is always advisable to remember the many little, and some not so little, individuals who paid for that greatness...
...It seems we have built a world in which stereo systems and refrigerators pay interest, and at a better rate than banks...
...That is how it works in New York, and where you live the figures are probably similar...
...This commitment appears to have been reinforced by a perverse reading of the "lesson of Iran," although it was a U.S...
...But like the work of Ho and Mao, Tito"s had a grim and shadowed side...
...We would like to see this rule applied to all credit card purchases of from $200 to $500, with a higher percentage down payment—say, 30 percent—above $500...
...Revolutions and nations are almost always born bloody, and only the absolute pacifist has a certain response to that fact...
...Finance charges would have to rise to an unlikely height before people would be convinced that they were worse than inflation...
...If, as is likely, the " 14 families" refuse to surrender power without a fight, what will Washington do...
...The delay in discretionary spending might also encourage saving, at least to a degree...
...Commonweal: 132...
...Banks, of course, are motivated to such price-rationing behavior simply by the need to preserve the profitability of their credit card business...
...One way of getting at this problem is to make consumer credit more expensive...
...Worse and worse, really...
...Of course, one month is a narrow base to project from...
...The sparks of reform were all but stamped out...
...threat to withdraw aid that kept the Salvadorean military leaders from installing an unmitigatedly reactionary regime...
...If we project January's rise in the Consumer Price Index to an annual rate it comes out somewhere over 18 percent...
...According to The Economist, San Salvador's archbishop has virtually "endorsed the idea of...
...This interest is otherwise known as inflation...
...Most of us are not General Motors, and these days that looks like a good thing, because if G.M...
...That's 18 percent on the first $500 and 12 percent on the second...
...This would introduce a needed element of delay into discretionary purchases and might help break the inflationary momentum that arises simply from inflationary expectations...
...We like better an idea suggested by Congressman Jim Wright of Texas, that credit purchases of cars and refrigerators should require a 25 percent cash down payment...
...And, to a degree^ the finance charges are hidden, not watched closely every month...
...There is pretty clear evidence that consumers are acting more rationally lately...
...The problem remains, however...
...FOOTNOTE ON TITO Marshal Tito led a resistance movement, made a revolution, forged a nation...
...The habit of saving will probably have to become established before it can be said to be the result of rationally motivated economic behavior...
...But would this reduce credit card spending enough to have an impact on inflation...
...Tito's positive achievements are outlined elsewhere in this issue...
...In the days to come, he will be compared with other revolutionary nation-makers of the century, with Ho Chi Minh, for instance, or Mao...
...But there is another, higher interest rate still to consider...
...The decline of saving in the United States, so rational from an individual point of view, has been very damaging to the general economy, drying up sources of investment and generally fueling inflation...
...an armed uprising, "though from other reports he still hopes for peaceful change...
...In fact, if you and enough other people make the rational choice about what to do with your money, your returns may be even higher...
...That much cheap borrowed money chasing goods and services could drive inflation to 20 percent and beyond...
...After taxes, depending on your bracket, you will make 6 to 12 percent (or 18 minus 12 to 6 percent), because the interest payments are tax deductible...
...No-Frost...
...The U.S...
...We think not...
...Most of us have in our pockets one or more credit cards that allow us to make $1,000 in purchases with an interest charge of about ISpercent...
...In fact, it could very likely be higher if enough people refuse to behave irrationally...
...Even where they might be, there is no gain in forgetting the suffering that was engendered...
...The required down payment on credit purchases would compel saving until economic motivation made such compulsion unnecessary, that is, until the happy day when saving was actually a way to get a leg up on inflation instead of falling further and further behind it...
...Or we might be able to get a cash advance and pay 12 percent on the whole thing...
...It could also be higher...
...A threat of a right-wing coup by the army high command, the assassination of El Salvador's Christian Democratic attorney general, and a warning that fifteen more Christian Democratic leaders were marked for death...
...An instance complementary to the one we have been discussing is the phenomenal growth of "money market funds," a higher yielding alternative to savings accounts that gives smaller investors a piece of the action in Treasury Bills and other short-term financial instruments that pay a rate of interest 14 March 1980: 131 closer to the ones they can get from their refrigerators...
...Rational behavior responds to simple arithmetic...
...Then you'll be making 10 to 14 percent—or 12 to 16 percent—on your G.E...
...Would it alter the rational calculation that it is better to buy now than later...
...The annual rate could be lower...
...And yet it pays more...
...has been giving both economic and military aid to El Salvador, a nation where under two percent of the population (the ' 14 families") own sixty percent of the land...
...This irrational, wounding effect for society as a whole arises from the rational behavior of its individual members...
...But mostly as buyers...
...goes to the Chase Manhattan Bank, that $1,000 (and you may add zeros at will) will cost them over 16 percent...
...We think one would be forced to admit, too, that General Motors thinks a bit harder and longer before it borrows that money...
...People who lament the absence of moderate forces for change in Central America ought to take another look at El Salvador...
...That bill would have guaranteed a tax deduction to compensate for the difference between the rate of inflation and a proposed moderate rate of increase in wages for workers...
...It is the rate we are charged for not incurring that $ 1,000, for postponing that rather large discretionary purchase...
...By no account can all the cases of Tito's use of arms, execution, and imprisonment be justified...
...If you make that credit card purchase now, you will be making 3 percent interest (or 18 minus 15 percent) on it before taxes...
...Furthermore, the charges are not even imposed for the first month or so, and free money has an implied interest payment to the consumer that is equal to the rate of inflation, currently about 18 percent a year...
...When middle-of-the-road Christian Democrats and Social Democrats joined with younger officers in a ruling junta last October to pave the way toward land reform and an end to political repression, what did they get...
...Such was the intended effect of the "income insurance" bill that failed in Congress a year ago...
...A restriction on consumer credit along the lines we have suggested might have the same effect one stage further down the path from the payroll to the merchant's cash register...
...For that reason and some others we needn't remind you of, it is a better risk than we are...
...The rest of us must go by cases...
Vol. 107 • March 1980 • No. 5
