Money, Money, Money in the US, Japan, and Germany

FOUR weeks ago the nation's money supply began, as economist Leif Olsen puts it, "to explode."

This must be a great relief to Federal Reserve policymakers. With an election ahead and the economy dawdling, they have been under intense political pressure from the Bush administration and Congress to reduce interest rates and create more money.

The surge in new money enabled Fed chairman Alan Greenspan, in testimony to Congress Wednesday, to reiterate his view that the Fed has reduced interest rates enough to generate a modest economic revival. No further drop in rates can be expected unless that recovery fails to materialize, he said. On Tuesday, though, the Fed did reduce reserve requirements for checking deposits, freeing several hundred million dollars for banks to lend.

In Japan and Germany, central bankers are also being pushed to stimulate their economies with easier money.

Germany is in a recession. National output has declined for the past three quarters. Dr. Martin Hufner, chief economist, Bayerischen Vereinsbank, sees only 1 to 1.5 percent growth in what was West Germany this year. He doesn't exclude a real recession in 1993 if the world economy remains sluggish.

Japan, by its standards, is also in a slump. Its Economic Planning Agency figures national output will have grown only a real 3.7 percent in the fiscal year ending March 31, and 3.5 percent next fiscal year. Other economists are less cheerful. Japanese industrial production, they note, fell at an annual rate of 3.6 percent in the fourth quarter of 1991.

Sam Nakagama, a Wall Street economist, says recessions in Japan and Germany will forestall a "brisk rebound" in the United States.

In his testimony, Mr. Greenspan forecast growth in the US economy of between 1.75 and 2.5 percent from the fourth quarter of 1991 to the fourth quarter of 1992, a slow pace for the start of a recovery.

But Mr. Olsen, a former Citibank chief economist and now a money manager, expects a pickup in the pace of economic activity in the second quarter of this year. That, he says, will be the result of faster growth of monetary aggregates. Bank reserves have been growing at about a 20 percent annual rate in the last three months, he notes; the basic money supply (M1 - currency, plus checkable deposits) at around a 14 percent rate in the same months; and M2, which includes M1 plus some savings and small denomi nation time deposits, at a 22.7 percent rate in the last five weeks.

Some of this new money, says Olsen, has gone into the stock market, pushing prices up sharply. One calculation finds a $1.1 trillion increase in share values in the last 12 months. That extra wealth will eventually encourage more spending on goods and services, Olsen notes.

Allen Meltzer, an economist at Carnegie-Mellon University, says the Fed has been adding too much money to the economy. The slow growth in M2 (until recent weeks) doesn't bother him. It is because holders of small deposits, such as certificates of deposit (CDs), have been discouraged by low interest rates from renewing them, he explains. The money is being held instead in interest-paying checkable deposits (part of M1). When interest rates rise again, the money will probably flow back into CDs.

To many, the "Ms" may seem arcane. But those numbers are watched keenly by White House economists, Treasury officials, and even by some in Congress. Rep. Stephen Neal (D) of North Carolina, chairman of the House Banking Committee, told Greenspan that the Fed "can and should act to boost money growth somewhat this year" in order to achieve "a decent economic recovery."

Concerned about such political pressure, Dr. Meltzer would like to see the Fed even more politically independent. He speaks admiringly of Germany's Bundesbank, which boldly raised interest rates in December to fight inflation despite a decline in industrial output.