Ups and downs of Carter plan
A striking anomally of President Carter's anti-inflation program is the brisk approval recorded by foreign financiers, while the New York stock market reacted dismally.Skip to next paragraph
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Though foreign and domestic investors appear to be responding differently to the President's package, in fact both groups assess it "as an effective and tough program," says Brookings Institution expert Lawrence B. Krause.
"If you don't think [economic] recovery is coming for 18 months or so," Mr. Krause said, "and that interest rates are going up, then stocks in the short run are unattractive."
Hence the initial sharp sell-off on Wall Street, with the key Dow industrial average plunging 23.04 points March 17, to close at 788.65. Foreigners, by contrast, see fresh bloom on the dollar, if interest rates -- which already have strengthened the US currency overseas -- move still higher.
Thus the dollar gained against major foreign currencies as money managers bought dollars to reap advantages from future interest rates.
Already, those rates are moving up, with some large US banks raising their prime -- the rate charged their best corporate customers -- to a record-high 19 percent.
Recent weeks have seen a leapfrogging upward of interest rates, as banks and other lending institutions strive to keep ahead of the interest rates they themselves must pay to borrow funds.
The Federal Reserve Bank, for example, now charges large US banks 16 percent interest on money borrowed from the central banking system.
Gold, predictably, dropped sharply in value, as investors plucked up courage in the future of the dollar, which -- unlike gold -- pays interest.
FRom the investor's point of view, Mr. Krause said, gold must at least keep up in value with inflation, since the precious metal pays no interest.
It is very hard, said the Brookings economist, for gold to stand still. It moves up or down, as attitudes change toward other forms of investment.
Putting all this together, investors -- foreign and American -- apparently foresee recession coming and, for the time being, higher interest rates stemming from the program Mr. Carter has launched.
These conclusions flow from that part of the program which, through the Federal Reserve Board, aims at curbing the extension of credit, both to corporations and individuals.
Credit-tightening will squeeze many Americans, who face curbs on their accustomed easy use of credit cards.
The aim of these restrictions is to break the inflationary psychology, which has impelled many families to dip into savings and borrow to the hilt, to beat constantly rising prices.
Through another part of the President's program. American also face higher prices at the gasoline pump, at least 10 cents a gallon.
Nor will families experience tax relief, according to Mr. Carter, at least until the fiscal 1981 budget is balanced. Even then, according to current White House and congressional thinking, any tax cuts may be weighted toward business, with the aim of fostering investment in job-creating plants and equipment.
All this is described by Mr. Carter as "strong medicine, bitter medicine," the "first real belt-tightening since World War II."
This gives pause to elected officials, rom local to federal level, because the message of the President's program is clear:
Voters who put these officials into office, and who will cast ballots again in November, will gets less government largess, if Congress indeed balances the 1981 budget by trimming revenue sharing and social programs.
Legislators on Capitol Hill now ask themselves:
Since, by general agreement of economists, balancing the budget by itself will do little to reduce inflation, is it worth the political risk?
Democratic congressional leaders insist that the deficit will be erased. Sen. Edmund S. Muskie (D) of Maine, chairman of the senate Budget Committee, "guaranteed" that his committee will recommend a balanced budget for fiscal 1981 , beginning Oct. 1.
So far, however, the President has disclosed few details of what programs he intends to ask Congress to cut. Real pressure on lawmakers will mount, when budget-trimming becomes specific.
Republicans in Congress, meanwhile, are putting together a counter anti-inflation package, which may feature tax cuts, including incentives to business.