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Giant International Harvester Co., hurt by slumping sales and high interest costs of its own, has lost $800 million in the past two fiscal years and almost $300 million more in the first quarter of fiscal 1982. The company announced last week that it would sell its 50% interest in a profitable Japanese company, a move that some analysts interpreted as a desperate measure to raise cash.
The prospects that interest rates will soon come down, and stay down, are dubious at best. Some financial experts do look for further declines. Leif Olsen, head of the economic policy committee of Citibank, believes that the recession will soon dry up corporate demand for credit, relieving the borrowing pressure. Secretary of the Treasury Donald Regan argues that the second stage of the Reagan tax cuts, a 10% slash in income tax rates taking effect July 1, will prompt much more savings by individuals, thereby increasing the supply of lendable funds and relieving pressure on interest in yet another way.
Perhaps so, but powerful forces other than tight money alone will be working to keep interest rates high, no matter what Volcker does. In large part, the jump in interest rates over the past few years represents a belated catchup by the price of money with the rise of all other prices since the mid-1960s. Through years of high inflation, many interest rates—on mortgages, consumer loans, bank savings deposits—were held down by federal or state controls. Most of these controls have been dismantled.
Interest rates have now caught up with inflation, and with a vengeance. With inflation dropping, the "real" return on many loans—the amount by which the interest rate exceeds the expected rate of inflation, thus representing a genuine gain to the lender—averages around 8%. That figure amazes many financiers: it is just about double what had been considered the historic real return.
The trend, of course, is benefiting many people. The same consumer who pays high interest on a mortgage or auto loan may well be collecting high interest on a certificate of deposit or an investment in a money market mutual fund. Those who can avoid borrowing and have dollars to lend are reaping a bonanza.
For all that, the extraordinary rise in real return would seem to leave room for a drop in rates that would help many more people than it would hurt. Yet it would be most unwise to bet on such a chancy prospect. For one thing, uncertainties over the size of the federal deficit are themselves acting as a prop against steep rate declines. Adding "off-budget" financing by federal credit agencies to the stated deficit, the Federal Government borrows about 35% of all the lendable funds in the country. Henry Kaufman, chief economist of the investment banking firm of Salomon Bros., predicts that as a rising deficit bumps up against the borrowing demands of businesses and individuals, "the downward trend of interest rates will probably reverse before midyear, and in the second half, long-term rates will once again threaten their peaks of 1981." Worse, there are widespread fears that the actual deficit will soar beyond Reagan's projections of $98.6 billion this fiscal year and $91.5 billion in fiscal 1983. Alice Rivlin, Congressional Budget Office director, last week revealed grim new