Clues from the Past: Philip Fisher

Prior to 1932 there would have been serious question from the responsible leadership as to there was any moral justification or even political wisdom in deliberately running a huge deficit in order to buttress ailing segments of business. Now conventional wisdom has changed. If business should really turn down, they would not hesitate to lower taxes or make whatever other deficit-producing moves necessary to restore prosperity and eliminate unemployment.

Deficits of this type would produce further inflation in much the same way that the deficits resulting fom wartime expenditures produced the major price spirals of the postwar period. This means that when a depression does occur it is apt to be shorter than some of the great depressions of the past. It is almost bound to be followed by enough further inflation to produce the type of general price rise that in the past has helped certain industries and hurt others.

It seems to me that if this whole inflation mechanism is studied carefully it becomes clear that major inflationary spurts arise out of wholesale expansions of credit, which in turn results from large government deficits greatly enlarging the monetary base of the credit system. The huge deficit incurred in winning World War II laid such a base.

It is almost certain that a depression will produce further major inflation; the extreme difficulty of determining when in such a disturbing period bonds should be sold makes me believe that securities of this type are, in our complex economy primarily suited for institutions who have dollar obligations to offset against them or to individuals with short-term objectives. They do not provide for sufficient gain to the long-term investor to offset this probability of further depreciation in purchasing power.