Finding The Formula For Recovery
May. 30, 1991
NEW YORK (AP) _ If you bought a one-year certificate of deposit to yield 6.8 percent interest, the chances are exceedingly high that you would end with very little return, and conceivably even lose money.
This would be so because inflation would lower your true yield. Rising state and local taxes, not counted in inflation measurements, would be minuses too. Such things must be deducted to obtain the true yield.
In the first quarter of this year, for example, the annual inflation rate was 6.4 percent. That probably was an extreme figure, however, and not likely to be maintained for a year. But half that, 3.2 percent, seems reasonable.
After deducting for inflation, therefore, you would have a real yield of 3.6 percent. But, the federal government would tax you as if the entire 6.8 percent was a gain. Twenty-eight percent of 6.8 is about 1.8 percent.
That 1.8 percent or so must be deducted from your 3.6 percent, bringing you to 1.8 percent, a figure that could be lowered still when you work in your real personal inflation rate, including local and state tax increases.
That's still better than no return at all, or losing money, which would happen if you simply kept the money in a mattress. But it illustrates the tough time the country's money regulators have in getting the economy moving.
Low interest rates, it is conventionally stated, are an antidote to recession, sort of like giving a faint-hearted patient a whiff of oxygen or enriching the fuel mixture in an engine.
But the engine of recovery isn't a simple mechanism anymore. Unlike several decades ago, when lower interest rates could get things moving quickly, today's economy burns a more complex fuel.
In today's economy, says economist John Williams of American Business Econometrics, Ridgewood, N.J., so many people depend on interest income that lower rates may hurt rather than help the economy.
By his calculations, 15 percent of total income is now made up of interest income, compared with just 6 percent in the 1960s.
But that's only one of the problems that makes recovery, 1991 style, a more difficult trick than before. Taxes, for example, are high and probably rising, and that's a formula for slowing down rather than speeding up activity.
There are other factors, too, such as the existence of a global economy. Sluggish overseas economies are hindering the ability of American companies to work their way out of recession. For complex reasons, the dollar is rising.
When the dollar's value rises, as determined by what it can buy in international transactions, it means a more difficult time for American exporters. Exports had been a strong source of income for American firms.
Over the longer term, the problems are just as real. Alan Greenspan, the U.S. Federal Reserve chairman, says Americans must learn to save more money, thereby providing capital with which the country's production will grow.
But with inflation and taxes and lowered interest rates, the temptation to save isn't particularly strong. Moreover, disposable income is falling. And of course, there's debt everywhere - personal, business, government.
Lower interest rates make it easier to handle that debt, to be sure, but with so much of it, the incentive is to refinance at lower cost - rather than take on even more, such as to buy new cars or invest in new enterprises.
End Adv AMs Thursday, May 30