Masonry Magazine October 1972 Page. 19
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INTEREST RATES SEEM CERTAIN TO RISE THIS FALL and on into 1973. The expansion in business activity continues to proceed at a brisk pace-adding further to already solid private credit demands. And government demands for credit to finance the big Federal deficit-will be huge, too. The Federal Reserve will also be adding lift to rates as it tightens money steadily.
The interest rate rise will be concentrated in short-term money costs. Loan rates to business will have to go higher as banks pay more for their money. And bond and mortgage rates would not be immune from upward pressure, either.
THE INTEREST RATE RISE IS ALREADY UNDER WAY, after considerable delay. Until August, there had been a remarkable six months of stability in rates. Money costs had held to a narrow range a fraction of a percentage point in large part because of the Treasury's ability to put off heavy borrowing. But the stability in interest rates came to an abrupt end around mid-August. Treasury bill rates surged upward and other short-term rates edged up, too. Banks, faced with paying higher rates, quickly hiked the prime lending rate.
ALL SECTORS OF THE QUICKENING ECONOMY ARE GENERATING credit demands. Retail sales have been very brisk all year and seem to be gaining strength. Big-ticket items have led the advance, showing growing consumer confidence; each down payment can prompt several times its own volume in new borrowing. Investments by business seem certain to improve as this fall moves along; spending by industry for new plant and equipment is picking up again now after falling below government and private forecasts in the second quarter. And inventory-building appears finally to be proceeding at more rapid rates.
Volume of total credit has been increasing at a 13%-a-year rate during the first three quarters. The strength has been most clearly apparent in consumer and real estate lending. Bank loans to business rose at a 7% annual rate in January-June of 1972. But business loans have been even stronger over the past several months. The giant corporations aren't big borrowers yet; they're loaded with money. But many small and medium-sized companies are borrowing for working capital. The growth in business loans seems to be approaching the 10% to 15%-a-year range. That's the level the economists associate with a classical, cyclical boom in the demands for credit.
THE FEDERAL GOVERNMENT WILL BE A SUBSTANTIAL BORROWER this quarter. The Treasury is currently raising $9 to $10 billion during this quarter, to finance the budget deficit that will reach $25 billion-probably go higher. Actually, Uncle Sam will even be a steady borrower in the first half of 1973.
Treasury borrowing will be hitting at the same time as private credit demand. These calls for credit will be enough, in themselves, to move interest rates higher.
RATES WILL ALSO FEEL PRESSURE FROM THE FEDERAL RESERVE in months ahead. The monetary authorities are moving, one step at a time, to tighten credit. They want to gear business growth to a pace sustainable for the longer-term and thus head off the possibility of a resurgence of inflation during 1973.
THE FEDERAL RESERVE MUST MOVE SLOWLY toward a tighter credit policy. It does not want to choke off the business rise before unemployment is cut. The authorities already have taken some steps to stem credit availability. They decided not to accommodate all demands for money that are developing. But the Fed will probably move again this fall-and take more steps later.
Achieving more sustainable economic growth has to mean higher short rates certainly a hike in the prime rate before year-end. But economists are split on how much rise there must be in long-term yields. Some feel that short-term rates can rise while the long remain steady. But other analysts insist that long rates must rise as short-term costs move higher.
CONGRESS WILL BEGIN THE CONSIDERATION OF TAX REFORM early next year. While it is still too soon to forecast the exact form of any final measure, some tentative judgments can be drawn on areas that will get close serutiny. Taxation of capital gains may well be tightened by the Congress next year. Ways and Means Committee Chairman Mills says he favors capital gains reform. One scheme would lengthen the holding period to qualify for such treatment. Now, an asset must be held for six months for profits to enjoy lower rates.
New definitions and reclassification will be pressed for capital gains. The gain on the sale of a family business might be treated more favorably than the gain on property purchased with the expectation of a large, quick profit. Support is also growing for elimination of liberalized depreciation adopted by the Nixon Administration in 1971.
THE PRESIDENT IS TURNING COOL TO THE IDEA of a value-added tax in '73. The plan was to use this concept to supplement state-local property taxes. But vocal opposition from a variety of groups seems to have killed the plan. Such a tax would be levied at every stage of manufacture and distribution. To many hostile analysts, (Continued on page 27)