Business: Better-Buy-Now Mentality

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Tens of billions of dollars more in consumer spending are streaming into the economy as a result of the very thing that the Federal Reserve Board had hoped would slow spending: high interest rates. As short-term rates have climbed higher and higher, savers have switched in overwhelming numbers from low-interest bank savings accounts to the ultra-high-yielding money market funds managed by big investment firms. In the past twelve months, the funds' assets leaped from $11 billion to $45 billion; and the funds' customers are spending their high interest payments. Until now, the Fed has not even counted the funds' assets in any of its various measurements of the nation's money supply, but last week it belatedly began doing so.

To prevent banks and savings and loan institutions from being drained dry of deposits, federal regulators have authorized banks to offer affluent customers six-month time deposit accounts, for a minimum of $10,000, at interest rates competitive with the money market funds. The result: depositors have been pulling their money out of the 5% accounts, putting it right back into the six-month accounts, and automatically at least doubling their interest earnings. This has increased the payout costs of the banks and forced them not only to lend out money at higher rates but also to find means of luring more and more borrowers. One popular tactic: increasing the attractiveness of a high-interest loan for, say, a car or home improvement, by stretching out the permissible payback time from perhaps three years to four.

Most economists are gamely sticking by their forecasts that consumers will begin retrenching soon. Says Gary Wenglowski, chief economist of the Goldman >Sachs investment firm: "We think that 1980 will end up being a somewhat weaker consumer year than 1979. There will certainly be no collapse, but consumer spending is likely to be down by about 1% in the fourth quarter of this year as compared with the fourth quarter of 1979." One sign that Wenglowski may be right came last week when the Federal Reserve released installment credit figures for December. During 1979 as a whole, such credit grew at a brisk 13% clip, but in December the increase eased to a 6% annual rate.

A small but increasing number of officials and economists are calling for a quick fix that would make everything worse: wage and price controls. Besides Senator Edward Kennedy, former Administration Inflation Fighter Barry Bosworth and Brookings Institution President Bruce MacLaury have now reluctantly endorsed mandatory controls. Any such program would create distortions throughout the economy and bring about shortages of many goods, yet would not inhibit the price rises for food and energy, and ultimately would have to be scrapped anyway. Then the prices that had been artificially held down would explode.

If consumer spending slows, the appeal of wage and price controls will diminish. But if the nation's shopping spree continues much longer, there is no telling what dangers lie ahead.