Business: Better-Buy-Now Mentality

Consumers are getting what they want and hoping to pay later

"We've bought everything we could get our hands on—buy it now and pay it back later with cheaper dollars." So says Walter Salvi, 36, a Boston public relations man. Like millions of other inflation-savvy consumers, Salvi, his wife and three children have caused wonder and befuddlement for the economics profession. Since interest rates are at their highest levels in a century, and the economy is by all accounts poised for its second slump in six years, experts have been predicting for months that people would soon start to cut back on spending and borrowing, and stash away more of their cash in the worry that hard times lie ahead. So much for fine economic theories.

With living costs locked in double digits for twelve consecutive months and no end to the spiral in sight, people are losing faith that inflation will ever come down. They are spending their paychecks as fast as they get them, cutting the nation's already low savings rate still further, pushing up credit, bloating the money supply, and generally intensifying the inflationary menace that they fear the most.

Not only has the staying power of the spree confounded and amazed economists, but it has also put off the widely predicted recession. Some economic reversal is probably necessary if the nation is to make even minimal progress in slowing inflation. Yet so long as consumer spending, which accounts for nearly two-thirds of the U.S.'s gross national product, stays strong, the economy is unlikely to ease down, and inflation is all but certain to remain oppressive.

The inflation outlook has grown bleaker, and the Carter Administration has prepared a budget-swelling 5.4% rise, above and beyond inflation, in defense spending for the fiscal year beginning in October. Largely because investors expect more inflation, Wall Street's trillion-dollar corporate a nd Government bond market last week took its biggest pummeling in years. Investors buy bonds to collect interest, but when the inflation rate is higher than the interest rate, the resale value of the bonds goes down. During the week, bond prices plunged through the floor, and interest rates rose to an unprecedented level of nearly 12% for U.S. Treasury bonds and more than 13% for Triple-A issues; many of those securities do not expire until well into the 21st century. The bond slump hurt not only substantial investors but also millions of members of pension plans and profit-sharing funds that hold bonds or other debt-related investments.

Because of inflation, real wages declined last year and average personal income from all sources was flat. So how much longer can consumers keep on spending and spending? None of the experts really knows, but all have been surprised by the American's insistence on maintaining his living standard and his ability to do so in the face of adversity.

More than simply spending what they earn, consumers are borrowing what they have not yet earned and spending that too. Their debt payments are rising, to an estimated 23.5% of disposable income in 1979, and probably will go higher this year. That, in turn, leaves them less to save. The nation's savings rate has plunged from a low 5.5% of income at the beginning of 1979 to a minuscule 3.3%.