The U.S. economy is "lurching towards a national economic emergency" and there is "nothing in income, fiscal, or monetary policies to suggest a way out," Henry Kaufman, an influential Wall Street economist declared yesterday.
His remarks, made in Los Angeles to an American Bankers Association conference, helped trigger a broad decline in bond prices and added impetus to tumbling stock prices as well.
Kaufman, a partner in Salomon Brothers, a major investment banking firm, has long been known for his gloomy view of U.S. economic prospects, but yesterday's speech was extraoridinary even for Kaufman. He is highly regarded in financial circles, however, and his analyses on occasion can affect market movements, particularly for bonds.
"I have concluded that we are in a quagmire from which it will be hard to extricate ourselves without substantial risks and pain," he said. "As an American, I am aghast at how much our country has faltered. The United States is now besieged by domestic and international challenges that threaten to weaken further our institutions and undermine our economic performance even more."
Kaufman was sharply critical of the Federal Reserve's monetary policy and had even harsher words for the 1980 and 1981 budgets proposed last month by President Carter. Fed policy as been overly generous at a time of soaring inflation, he said, and "for the fiscal year ending September 1980 . . . total federal outlays will increase by 15 percent, a rate of increase surpassed only once (in 1967) in the past 25 years."
As a first step to correct all this, Kaufman urged the administration to declare "a national emergency to deal with inflation and energy."
"The declaration should spell out our dilemma, a series of emergency measures to limit the drift toward economic disarray, and a set of fundamental measures that will keep us on a stable track in the longer run," he explained.
Kaufman's preferred emergency measures, according to a prepared text made available here, include:
A "sharp slowing in the growth of non-defense expenditures," which are budgeted to rise 16 percent this year and 8.4 percent next year, to no more than 6 percent to 7 percent a year "for the time being."
Direct limitation of the creation of domestic credit by cutting the growth of bank credit and imposing capital-to-asset or liability ratios for all major financial institutions.
Tighter and "more definitive standards" for private short-term open market financing, along with limits on the issuance of debt by various federally backed credit agencies.
Limiting the role of the dollar in international finance, especially if the United States steps up its global military commitments, possibly even restricting access abroad to the U.S. dollar.
Creation of a "national commission for the revitalization of America" to formulate a series of steps to enchance technological growth, improved cooperation between business, labor and government, improvement in the U.S. trade position, lighter regulatory burdens, and other measures "that will get us out of our current productivity entrapment."
A temporary wage and price freeze or a "simple mandatory controls program" that would be "of some marginal transitional help toward a better economy."
The source of the American economic problems, as Kaufman sees it, has been the willingness of the government to accommodate inflationary pressures with monetary policies while at the same time adding to the demand on real resources through excessive federal spending.
Kaufman predicted credit markets would be severely strained in 1980 even if there is a mild recession. As a result, neither householdes nor businesses, confronted with continued high inflation, will be able to rebuild their depeleted financial assets. Therefore, he said, any recovery next year will be limited.
With no break in inflation likely, in his opinion, Kaufman foresees a bleak future for the bond market. To attract investors, he said, "the minimum requirement would be a sharply positively sloped yield curve," or more simply put, higher long-term interest rates.