The Economy: Corset for a Fat Lady

The U.S. economy has been expanding so rapidly that Arthur Okun, chairman of the President's Council of Economic Advisers, last week had to reach a long way for a suitably descriptive simile. He settled for "a fat lady munching candy." Said Okun: "Nobody can promise her a lovely figure overnight if she stops nibbling, but the more she overindulges the more serious the risks become."

The risks that were worrying Okun—inflation at home and a threatened dollar abroad—last week prompted the Federal Reserve Board to give the nation its third dose in five months of some painful economic medicine: higher interest rates. The Reserve Board voted unanimously to raise its discount rate from 5% to 51%. That increase in the amount the Fed's district banks charge for borrowed funds applied initially to loans to member banks from the Federal Reserve banks of New York, Philadelphia and Minneapolis. The other nine reserve banks were expected to take similar action quickly.

Twin Perils. Few bankers expected another boost so soon. And the Fed's surprise move amounts to a monetary corset for the fattening economy. "We are in the midst of the worst financial crisis since 1931," said Reserve Board Chairman William McChesney Martin. The nation, he maintained, faces "uncontrollable inflation" or an "uncontrollable recession" because of an "intolerable balance of payments deficit side by side with a budget deficit."

To avert those twin perils, said the globally respected central banker, the U.S. must cut its budget deficit in the fiscal year starting July 1 from a prospective $20 billion to less than $8 billion. Achieving such a reduction would require not only prompt enactment of the Administration-backed 10% income-tax surcharge but budget cuts at least as large as anything Congress has proposed. Moreover, said Martin, he has already told President Johnson that unless the U.S. slashes its balance of payments deficit, that problem will inexorably lead to a world devaluation of currencies. "This would not be the end of the world," he added, though he prophesied that it would cause tremendous damage to the U.S. as a world power. "To a certain extent," he said, "we have been living in a fool's paradise."

Vanishing Surplus. Martin barely hinted at another reason for the Reserve Board's new tightening of the monetary brakes. So far this year, the traditional surplus of American exports over imports has melted to "virtually no surplus at all." According to insiders who have seen preliminary estimates, the first-quarter trade figures due to be announced this week are so discouraging that they might even have started another run on the dollar had the Fed not acted when it did.