Real interest rates -- investment yields minus inflation --have soared to "extreme" record levels in all major countries, following a pattern induced by American monetary policy, according to a new study published by Salomon Bros., New York investment bankers.
The financial house said that most industrial nations have been forced "to emulate" the Federal Reserve policy of concentrating on the control of money supply growth, which gives much less attention to the level of interest rates.
As a result, "This is the first occasion during the 1973-81 time span when real yields in all seven major economies have simultaneously been above their average levels for an extended period," the Salomon Bros. report said.
The high level of interest rates has been of major concern to European governments and is expected to be a major issue at the Ottawa economic summit, although European leaders say privately they do not foresee success in reversing Reagan policy or Federal Reserve procedures.
According to data amassed by Salomon Bros., the average level of government bond yields in West Germany, the United States, France, Japan, Britain, Canada, and Switzerland is 3 full percentage points above the 12-month increase in consumer prices. The biggest real interest rates were scored in West Germany (4.9 percent) and the United States (4.8 percent).
This pheonomenon is even more striking for short-term interest rates -- which, contrary to the normal pattern, now run higher than long-term rates in most countries. Thus, the average three-month Eurodeposit rates in the seven major currencies yield a 5.4 percent real interest rate, with an astonishing 10.3 percent in France, 9 percent in the United States and 7 percent in West Germany. The real short-term rate was low in Japan, but negative (one-half percent) only in Britain.
Reagan administration officials are sensitive to the charge that their policies are responsible for high American interest rates that have driven up rates elsewhere. In an interview in The Washington Post on Wednesday, Treasury Under Secretary Beryl Sprinkel, who agrees that current high "real" interest rates are unsustainable, said that the easy-money policies of past administrations are to blame for current high rates.
But the Salomon study says bluntly that "the current vogue for 'monetarist' policy control techniques [of which] the most prominent practitioner is, of course, the U.S. Federal Reserve," is the main factor in the recent record pattern of real interest rates everywhere.
In Europe, central banks "have been forced by the weakness of their current accounts and [weakness of their] currencies to emulate the Fed's tight policy stance," the report continued.
A Washington Post survey last weekend of the views of six of the seven Federal Reserve Board governors indicated a full awareness at the central bank that "monetarist" policies have pushed the real interest rate to a range of 5 percent to 6 percent, double the "normal" 3 percent level. Although some governors indicated a concern that if high rates continued for too long they would have an adverse effect on the economy, there was on sign of a policy change.
Nonetheless, complaints that interest rates are too high are heard on this side of the ocean as well as in Europe. Citicorp Chairman Walter Wriston observed last Sunday that interest rates are too high, with "a life of their own," not reflecting the underlying economic situation accurately, largely because the marketplace is "dominated by traders and there are no investors."
Wriston said that "the rate will come down when you and I and the rest of the American people believe that inflation is really in hand."
The Salomon Bros. study was careful to point out that although real interest rates may be a good guide to how tight money is or to the true interest burden on corporations, "They do not always give reliable buy/sell signals for the bond market."
But it added that if any major country can now achieve "a material reduction in inflation, the prevailing extreme level of real yields can provide the potential for a significant decline in nominal bond yields." The example cited: If inflation in West Germany drops from near 6 percent to 4 percent and real yields drop from 4.9 percent to 3.2 percent, there would be a potential decline in German bond yields of 3.3 full points (330 basis points).