Looking at 11%
Economists and the rest of us try to assess what the half-a-point rise in banks' prime lending rate portends for the US economy. There simply is no agreement, because the issue is so complex.
Monday's increase from 10.5 percent to 11 percent in the rate banks charge their biggest customers could be just a momentary increase in interest rates which are not going to go much higher in the foreseeable future. Or it could be the start of a steady rise in interest rates that could pinch or even choke off the now strong economic recovery. You can get evidence and argument either way.
The big question is: Can the lending markets continue to absorb fairly easily the large amounts of money the federal government is borrowing every three months to finance the national deficit, now estimated at close to $200 billion a year? (Uncle Sam is expected to borrow $48 billion in the third quarter of this year, and $65 billion in the fourth - record high figures.)
If there is enough money available to lend these sums, then interest rates likely will not rise, and the recovery will not be affected substantially. This is indeed a possibility.
But if the government winds up competing for this money with private industry , which may decide it wants to borrow money to make needed capital investments, then by the law of supply and demand interest rates would be forced upward due to the insufficient supply of borrowable money. If that were to happen the recovery would be seriously slowed or even stopped, with both individuals and businesses increasingly finding the cost of borrowing money prohibitive. Conventional wisdom, so to speak, leans to this view - but conventional wisdom often has been wrong.
Already there is understandable concern that interest rates cannot go much higher without causing problems. As one example, for the past six weeks home mortgage rates have risen, and nationally now stand at 13.73 percent; if they were to remain long at 14 percent or rise above it the home building boom likely would reach a standstill. This also would cause a slowdown in industries which in part depend on home construction - heavy appliances, furniture, carpeting, and other major furnishings.
Late last month Federal Reserve Board chairman Paul Volcker told a Senate subcommittee that government and private industry borrowing efforts already were beginning to compete for funds.
In any case the present situation once again points out how unwise it is for the national deficit to be so high. If Congress and the administration were to get together they still could affect some decrease in that deficit, which would ease the possibility of an economic crunch. Unfortunately it is not realistic to expect too much action along these lines with an election little more than a year away.
But Congress could decrease some social programs, or institute a means test as a prerequisite for receiving medicare funds. Redundant and expensive military weapons programs, such as the B1 bomber and MX, at least could be delayed a year , in the military appropriations bill yet to come before Congress. A cap could be put on the federal farm support program. And the Defense Department could monitor new weapons to see that American industry substantially improves their quality; Army Chief of Staff, Gen. John A. Wickham, Jr., made clear this week how serious is the quality problem.