Money churning has gauges gyrating

It's not just the stock market indexes that have been going wild in recent weeks. Economic numbers have changed dramatically, too. These numbers reflect the instability of the economy and belie the modest improvement suggested by the recently reported 1.7 percent annual-rate rise in fourth-quarter gross national product, the measure of the production of goods and services in the United States.

Huge gains - and huge losses - in the stock market can hardly be related to basic economic changes that occur over many months. Yet, other economic data have also been churning in short periods of time.

Commercial and industrial loans reported by large commercial banks rose by $12.66 billion the last week of December. If, for the sake of argument, one extended that over 12 months, that would be an annual rate of rise of 1,042 percent! That commercial and industrial loans flipped out can perhaps be explained by the efforts of those wanting to take advantage of the old tax code before 1986 ended.

Most of us remember how appalled everyone was at double-digit inflation, when the annual rate of rise in the consumer price index in 1979, '80, and '81 went over 10 percent. Can we even begin to comprehend a quadruple-digit rate of rise for loans at year-end, even if it is only a theoretical rise?

Another sign of volatility: In the last 10 days of December, domestic sales of domestic-made autos rose nearly 42 percent. But then, in the first 10 days of January, auto sales fell 60 percent. For the entire month, car sales were off 33 percent.

And finally: The Standard and Poor's 500-stock index fell 4.7 percent from early December to the end of the month as individuals sought to save on capital-gains taxes. In the first half of January, the S&P 500 rebounded with nearly a 10 percent gain. That's an annual rate of rise of more than 876 percent - triple-digit inflation.

Those who think of inflation only in relation to prices of goods and services would do well to note that inflation has been rampant in the stock market for a long, long time.

Which brings us to year-end phenomena other than those commercial and industrial loans. The creation of money is not, contrary to the views of many, the unique purview of the Federal Reserve.

Bank loans are a significant source of money. So, accompanying the increase in commercial and industrial loans was a 4.2 percent rise in the M-1 money supply from the last Monday in November to the last Monday in December. That's an annual rate of rise of more than 50 percent. Nor were commercial and industrial loans the only loans to surge. Real estate loans by large commercial banks jumped 1 percent in the last week of 1986 - with compounding, an annual rate of rise of 67 percent.

Commercial and industrial loans and the money supply all fell back sharply as January progressed, showing that the annualized rates might be little more than a mental exercise.

But they point to important problems with the economy. It seems clear from the volatile loan data that taking advantage of the tax considerations meant a big increase in outstanding debt.

Coming at a time when debt was already uncomfortably high, the new increases should have a depressing effect on future economic activity.

That the economy can be so extraordinarily volatile in response to special circumstances highlights its changing nature from a goods-producing economy to a making-money-from-money economy. Even the ups and downs in auto sales stem from a money-conscious public that almost instantly reacts to the promotional incentives of interest-rate cuts and price rebates.

It is the welter of financial and common-stock come-ons to make money out of the manipulation of money - ventures that have no relationship to goods-producing economic activity - that accounts for much of the market volatility. Even when all this activity is done legally, it is vulnerable to sudden major ups and downs.

Leonard Lempert is director of Statistical Indicator Associates in North Egremont, Mass.

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