Sky-high US interest rates cause jolts at home and abroad
Soaring US interest rates, like a swirling tropical storm, scatter their effects far and wide, from a booming dollar overseas to plunging financial markets at home.
Inflation, meanwhile, bubbles upward again in the wake of rising food and housing costs. July's consumer price index (CPI) jumped 15.2 percent at an annual rate.
This price explosion, especially in the supermarket, will grab both headlines and consumers' attention. But the longer-range problem is the stubborn refusal of interest rates to retreat from their near-historic highs.
A businessman pays 20 percent or more to borrow money of his company. Would-be homeowners are staggered by 17 percent mortgage rates. Banks pay investors 16 to 18 percent or even higher to attract deposits.
Anxious White House officials insist that interest rates will start down soon. Other analysts are not so sure. Some say rates may climb even higher.
They cite a number of things, centering on uncertainty about the future, that keep interest rates pegged high:
* The US Treasury will be forced to borrow more heavily than expected in the months ahead to finance budget deficits that appear to be climbing.
Congressional experts say that the fiscal 1982 budget shortfall -- which President Reagan insists can be held to $42.5 billion -- may end up $15 billion or so higher.
* Paul A. Volcker, the redoubtable chairman of the Federal Reserve Board, says the Fed will not relax its reins and let the money supply grow more swiftly.
His determination, no doubt, is increased by evidence -- most recently the July CPI -- that inflationary fires are far from out in the United States.
Fed governors believe that control of the money supply is essential to curb inflation, at least until the nation's new tax and buget cuts have time to take effect.
* This means, from the standpoint of bankers and other lenders, that there will be a continuing scramble for money in the years ahead. So they lend at high interest rates, to protect themselves against an uncertain future.
If high interest rates are here to stay for some time, what are the consequences?
-- Abroad, the dollar soars in value against other major currencies, as overseas investors dump their own money in favor of dollars to invest at 15 to 20 percent returns.
-- The value of gold drops when confidence in the dollar is high.
-- At Home, US stock and bond markets take a beating, as domestic investors pull out in favor of sky-high returns on short-term money market certificates and other high-interest investments.
-- Governments spending inevitably climbs when interest rates turn out to be higher than the White House and Congress calculate when shaping federal budgets. Government, in other words, must pay more to borrow money with which to pay its bills.
If inflation also is higher than expected, the spending problem is compounded. Outlays for many programs, including social security, are tied to the consumer price index.
-- Business stagnates, as weaker companies postpone expansion and production plans and consumers back away from usurious interest rates.
Especially hard-hit are sales of housing and automobiles, both of which require a family to lock itself into high interest charges over a period of years.
In the April-June quarter of 1981, the gross national product (GNP), or total output of goods and services, shrank by 2.4 percent, after a robust 8.6 percent climb in the first quarter of the year.
Meanwhile, consumer spending -- which accounts for two-thirds of GNP -- remains brisker than the above outline of economic conditions might indicate. In part, analysts believe, this stems from an increasing number of two-income families.
Government reports on real spendable earnings -- or what a family has left after taxes and inflation -- are based on a once-typical family of four, with one earner. Families in that situation indeed have lost ground against the combined effects of higher prices and higher taxes.
A majorty of women now work, resulting in the combined income of husband and wife often overtaking inflation and taxes and leaving the family better off -- at least in income -- than before.
Also, says Charles L. Schultze, a Brookings Institution senior fellow, "We may have overestimated the sensitivity of people to high interest rates."
Consumers appear to adjust to higher rates, especially where revolving credit -- credit cards and monthly charge accounts -- are concerned. These have to do with things a family needs for immediate consumption, such as clothes, shoes, school supplies, and household goods.