The wild gyrations in the markets last Thursday raised fears in the minds of some analysts of a general financial collapse far more spectacular than that of Nelson Bunker Hunt's silver bubble.
Several economists blames the Federal Reserve's tight monetary policy for precipitating a crisis. Brokerage houses were rumored to be in troule. Carter administration officials were supposed to be huddling to devise rescue plans for a crumbling financial system.
The fears proved groundless as the tempest ran it course in 24 hours.
The stock market climbed strongly on Friday. Bond prices rose even on Thursday as investors dumping commodity contracts and stocks plowed the proceeds back into the safest haven of all, government securities, and the rally continued Friday. And gold and silver prices bounced back somewhat.
As the dust settled, it seemed the turoil would have limited effect on the economy, and any it did have would be positive, in the opinion of several economists.
Hunt's losses were an unescapable reminder for speculators that they can take a drubbing in a given situation, no matter how great their assets may be. As an object lesson in the pitfalls of speculation, it would be hard to improve on last week's events. For an administration hoping for a break in the inflationary psychology that has gripped the nation, the lesson could not have come at a better time.
Consumer prices have risen at an 18 percent annual rate for two months in a row and are up more than 14 percent in the last 12 months. Intrest rates rise to new highs each week -- the prime lending rate for banks went to 19 1/2 percent Friday. And there are growing signs the economy is about to drop into the long-awaited recesion as consumers slow their buying and home building comes to a screeching halt.
Any good news would be sorely welcomed at the White House these days.
In fact, Hunt's disaster only underscored what has been happening to metals for weeks. The speculative binge in metals actually began unwinding in January, well before the latest moves by President Carter to balance next year's federal budget and by the Federal Reserve to ration credit with new controls on consumer borrowing and voluntary restraints on bank lending.
While most attention was focussed on the drop in silver prices from $50 an ounce to $10.80, and in gold from $825 to 463, copper prices also wer plummeting as the prospects for actual demand for the metal dimmed in the face of the growing likeihood a recession is imminent. The copper price drop, fro a peak of about $1.40 a pound to only about 95 cents at week's end, is greater tan occured in te 1975 recession, Brooking Institution economist George Perry noted.
The prospect of a recession, however, has done little to cool inflation. Although it's hard to say for sure, consumer prices probably rose about as much in March as they did in January and February, estimates economist Alan Greenspan. Retail food prices, which declined over the first two months of the year, climbed about one percent this month, he said. Gasoline prices, on the other hand, rose almost as much as in February, and mortagage intrest rates continued to go up, too.
April's rate might be a bit smaller because gasoline prices will be rising less rapidly until May when the impact of President Carter's fee on imported oil begins boosting them about 10 cents a gallon.
By summer, if not sooner, virtually every economic forecaster expect the economy to be firmly in the grips of a recession. Of course, they have been expecting the same thing for more than a year now, but with the latest tightening of monetary policy and the push for a balanced budget, they fully believe they will be right this time.
"The impace of the new measures will be to hold down aggregate demand, reduce the risks of accelerating inflation, and raise the probablilty of recession," economists Otto Eckstein and Robert Gough of Data Resources Inc. said. "The DRI forecast remains one of mild recession followed by abnormally weak recovery . . . The principal risk to the current forecast is . . . a finance-induced deep recession."
Greenspan expects the economic decline to begin in the second quater and continue through the year. He sees the beginning now of some "real weakness in consumer markets . . . Sales are pretty shabby" already, he said.
As yet, there is no evidence of any weakness in business investment spending. "Until we get that, it is hard to make a case for anything more than a mild recession, "Greenspan said.
Even a mild recession will push up unemployment, something that may be happening already. The number of people claiming unemployment benefits "clearly is beginning to rise," Greenspand continued. "That may be the signal" the downturn is begining he said.
The DRI forecasts the unemployment rate will average 6.5 percent in the second quarter, up from February's 6 percent level, and will average 7.6 percent during 1981. Chase Econometrics, another forcasting firm, believes it will be a full percentage point higher than that.
But if there is a general uniformity of the recession forecast -- Michael Evans of Evans Economincs, as usual at odds with other economists, has called off his recession prediction -- the expectations of the impact it will have on inflation vary widely.
Greenspan, for instance, thinks consumer prices could be rising at a single-digit rate by fall.
Eckstein and Gough are far more gloomy. They predict the CPI will peak at an 18.3 percent rate in the second quarter. But for the longer term, "Higher interest rates, the continued pass-through of high energy costs, and the new gasoline tax will result in double-digit comsumer-price inflation through 1982," they said.
As the effects of the latest round of oil price increases by the Organization of Petroleum Exporting Contries begin to diminish, inflation rates will drop unless there is a marked acceleration in the size of wage increases as well as continued decline in productivity, Greenspan said. Big increases in pay coupoled with a drop in output for each hour worked would boost sharply the labor cost of each unit of goods and services produced, and could keep inflation rates above 10 percent.
But Greenspan pointed out that in a recession other forces are at work, too. Businessmen may not be able to pass on the higher labor costs without losing sales to their competitors, and accept a lower profit margin rather than have that happen.
It is exactly that sort of world the Carter administration has been trying to create: a large enough recession to create significant doubt in the minds of investors and business executives that inflation will protect them from bad decisions, whetherthey involve speculation in silver or copper or simply granting pay increases a firm cannot afford.
The chances now seem overwhelming that the drains on consumer buying power resulting from higher energy costs, higher taxes and fewer employment opportunities, and the pinch on business from sky-high intrest rates and direct restraints on lending soon will make that world a reality.