Is the US economy heading for a classic credit crunch -- the type of crunch marked by a prolonged period of high interest rates, a slowing economy, and rising demand for funds from cash-short corporations? The type of crunch that makes both large- and small-business people cry "Uncle" to the Federal Reserve Board?
Wall Street economists seem sharply divided over this question.
One group of economists maintains that credit demands remain strong and interest rates have yet to peak; still another band of economists claim the worst is over and interest rates will soon start to slide.
Arnold Moskowitz, first vice-president at Dena Witter Reynolds Inc., sides with those who believe the worst is yet to come. Mr. Moskowitz, in a recent research bulletin to his firm's clients, says, "We feel that within the next several weeks short rates will also surpass their May highs as heated corporate credit demands continue to clash with a restrictive monetary policy stance."
He paints a dreary picture of corporations faced with falling sales, rising inventories, and worsening corporate cash flow. Even now, corporations, staring at record long-term interest rates, are funding capital projects with short-term bank borrowings. This pent-up demand for long-term funds will push bond rates even higher, with rates cresting in the early fall. A heavy borrowing package by the Treasury in October will signal the peak.
On the other side of the interest rate fence is Dr. frank Mastrapasqua, an economist with Smtih Barney, Harris Upham & Co. He says corporate demand for funds has begun to slacken, the inflation rate is beginning to decelerate, and a recession is starting to chill the economy. If all these trends continue, he says, interest rates should decline. Thus, Smith Barney is advising its clients that the time is ripe to stock up on long-term bonds -- to obtain record yields while they last.
The powerful voice of Henry Kaufman, general partner of Salomon Brothers, is warning his clients of hard times ahead, however, with the possibility of a credit crunch in the battered municipal bond markets. In his latest report, entitled "The Crowding of the Municipal Market," Mr. Kaufman says: "National policy, now comprising stimulative federal budgets and a firm monetary posture, intensifies the struggle for available credit. It pits states and municipalities squarely against the economy's most powerful borrowers: the US government and large business corporations." Against this competition, Kaufman concludes, state and local government cannot win.
Wall Street isn't alone in its worries about the possibility of a credit crunch. When Congress returns from its August recess, Sen. John Melcher (D) of Montana will start pushing SJ104, legislation that would ask President Reagan to consult immediately with the chairman of the Federal Reserve Board, Paul A. Volcker. According to Wayne Mehl, an aide to the senator, the bill would ask the President to discuss with Mr. Volcker the activities of the Federal Open Market Committee, the level of the federal discount rate, and current reserve requirements.
"This is a moderate step," Mr. Mehl says, "rather than legislating what interest rates ought to be." He points out that when President Carter wanted the Fed to ease interest rates and talked to Volcker, "he got the message."
Until now, most of Congress's attention has been on the budget and the President's tax cuts. But senator Melcher's office is certain that when the legislators return from their home districts, their constituents will have given them an earful on interest rates.
The senator's office figures the President has 60 to 90 days to act before serious economic problems start to develop. "If the President is not careful," Mehl says, "his program will never get off the ground, particularly if everyone is going out of business."
A casualty of war?
High interest rates have torpedoed plans to float a $15 million municipal bond issue to turn the aircraft carrier Intrepid into a museum. According to the underwriter, Herbert J. Sims, the issue has been dry-docked until rates come down again. The underwriters had sold about half the issue before the current interest rate crunch came.
Last week investors in New Zealand Petroleum Company were shocked to see their holdings plummet from 6 7/8 per share to 2 3/4 in one day. Although no news announcements were made about the company, traders reported that rumors were circulating that the company had drilled a dry hole in waters off New Zealand.
According to Diamond Shamrock, the principal partner in the well, the rumors are true. The Mikonui No. 1 well, off the west coast of New Zealand's South Island, was plugged after reaching 1,841 meters (6,075 feet). According to one source close to the company, New Zealand Petroleum, with its 13 percent interest in the well, had high hopes for the hole. But the dry hole didn't actually cost the New Zealand company any money, since its expense interest in the well was carried by the other partners, Diamond Shamrock and Champlin Petroleum.
Reflecting investor concern about interest rates and the economy, the stock market continued to slide last week. For the week, the Dow Jones industrial average fell 16.36 points, closing at 920.57. Volume was relatively low. Cities Service, the subject of takeover rumors, was actively traded. Pan Am, also on the most-active list, announced it had sold its Intercontinental Hotels chain to grand Metropolitan ltd. of London for $500 million. Pan Am is in a cash squeeze at the moment.