Painful High Interest Is Deliberate Policy
On Tuesday the market was in full retreat with Treasuries declining ; around two points. Three factors put the skids to the market. Henry; Kaufman of Salomon Brothers gave a bearish "Catch 22Û speech on * the credit markets and economy in which he reiterated that current' fiscal and monetary policy would prohibit the economy from going ; anywhere soon. He reasoned that when the economy eased and interest rates would fall, there would be an increase in the demand for credit and a pickup in the economy. However, as the economy would-', improve, interest rates would rise again and choke off any extended . recovery. Kaufman referred to this scenario as the ÛÏsputter and spurt economy.Û</br></br>Federal funds, that rate at which banks lend their free reserves to each other, rose to 16 percent from 14.50 percent on Tuesday and this, too, hurt the markets. Finally, a better than expected retail sales Û¢Û¢ number showed that the consumer was not dead and consequently : there was still some life in the faltering economy.	-	-</br></br>With a declining economy the question may be asked, why do interest rates remain high? The main reason is that the Federal Reserve Board wants interest rates to remain high for various reasons. They are determined to curtail inflation, the real menace to our economy and the public at this time. The administration and the monetarists^ believe that the absolute main cause of inflation is the excessiyeC^ growth of the money supply. The money supply grows when commeiijS? cial banks extend credit. Therefore if the Fed limits the amount dr reserves that banks need to extend credit, eventually high interest rates will ration the availability of credit to borrowers, which in turn1' " limits the growth of the money supply.	/</br></br>In a capitalistic system economic growth is generated from savings^ ;;. In recent years, we have saved less and consumed more. This was a ,;; natural act on our part since the rate of inflation was higher than returns available on financial assets. Today the situation is revers<edJg| Inflation is around 9 percent while the returns on Treasuries are' Û¢ ? around 15 percent. There is a real incentive on the part of the public to own financial assets. The fact that the money market funds havq; 1 grown to $164 billion attests to the attraction of high interest rates ay ' an inducement to save.</br></br>An aside to the savings situation is the related problem of federal-, budget deficits. It is estimated that the savings by the public in 19$ 1 will be around $170 billion. With the Treasury having to borrow $80^, billion or more to finance the deficit, the remaining amount of savings Jj is left for the corporate, state and local governments and mortgage å£ borrowers. Further, if the economy picks up steam these private bor- * rowers will need more funds, which will conflict even more with the* Treasury for the limited pool of savings. The end result is high inter-* est rates.	**	*