High Treasury borrowing may slow recovery
The White House midyear budget review, released last week, was an instant box office flop.
But while Democrats, economists, and even some administration officials lined up to criticize the forecast as overly optimistic, many other economy-watchers were focused on a more foreboding prediction: the Treasury Department's July 28 announcement of record-breaking government borrowing.
The budget review is designed for political show, say these analysts. But, more seriously, the borrowing figures raise fears of a credit crunch.
''The (financial markets) are going to get flooded with Treasury debt,'' worries David Jones, a vice-president of the bond house Aubrey Lanston.
The midyear budget review seemed doomed to a poor reception. Its rosy predictions were widely leaked to the press, and were reportedly one reason that Murray Weidenbaum, chairman of the Council of Economic Advisors, announced his resignation July 20.
As expected, the budget update predicts a deficit of $115 billion in 1983, declining to $92.6 billion in 1984 and $73.6 billion in 1985.
The gross national product is predicted to expand at a robust 4.4 percent next year, and 4 percent in 1984.
The interest rate on 91-day Treasury bills is seen dropping to 10.7 percent in 1983, falling further to 8.8 percent the year after. Inflation, as measured by the GNP deflator, declines from 7 percent in 1983 to 6.3 percent in 1984.
At a background briefing, a senior budget official, far from vigorously defending the forecast, said, ''I do think it's reasonable.''
The White House, said the official, had simply adopted the economic assumptions of Congress' budget resolution, to provide ''continuity'' in the budget process.
He admitted the deficit would probably be higher than predicted, but claimed it wouldn't soar to the $140 billion range predicted by the Congressional Budget Office.
The official said the economy is in a ''twilight zone'' between recession and recovery that makes accurate forecasting difficult.
Many private forecasters were less than charitable about the budget update.
''Why are they saying these things? They know they won't be believed,'' says Otto Eckstein, economist with Data Resources Inc. (DRI) and economic adviser to President Lyndon B. Johnson.
DRI predicts GNP will rise 2.9 percent in 1983, as opposed to the administration's 4.4 percent figure. David Jones of Aubrey Lanston predicts 1983 will see no more than a 3 percent hike in GNP.
Wall Street analysts believe the midyear review is a political document aimed at Congress and the voters, and will have little effect on the nation's troubled financial markets.
''The money markets have their own figures. They know what the real outlook for the budget is,'' says Eckstein.
So many on Wall Street simply ignored the administration's forecast as irrelevant, and turned their attention to the US Treasury, which last week announced it must raise $50.5 billion in fresh cash by September 30, and another billion total would be the most money Treasury has ever raised in a six month period, according to Assistant Treasury Secretary Beryl Sprinkel.
The effect of this borrowing on interest rates will be a crucial factor in the size and speed of an economic recovery.
Both Sprinkel and Federal Reserve Chairman Paul Volcker testified last week that the US can borrow that much money without causing an upward thrust in interest rates or further flattening the economy.
Others aren't so sure. Salomon Bros. economist Henry Kaufman - known for a relatively pessimistic view on interest rates - says still-strong business loan demand and government borrowing are headed for a collision.
''The market is not capable of accommodating these needs without higher interest rates,'' writes Kaufman in a Salomon Bros. report.
However, interest rates are currently falling, giving the economy ''a little bit of leeway,'' according to David Jones of Aubrey Lanston.
On Friday the Federal Reserve Bank lowered its discount rate - the rate it charges on loans to member banks - to 11 percent. Most major banks, following along, cut their prime rate to 15 1/2 percent.
But the Treasury begins its massive revenue-raising actions this week, bringing in about $6.7 billion in new money. The question then becomes: will rates continue to fall, even in the face of historically high government borrowing?