THE SECRETARY of the Treasury, Donald T. Regan, went to New York last week to confront the financial crowd in its lair. "Why don't you believe?" he asked one audience in exasperation. The high interest rates, he suggested, are owed to an irrational pyschology generated by misplaced fears that federal deficits will make borrowing more difficult in the future. That's all wrong, he argued, because the administration's program is going to encourage people to save enormous amounts of money. There will be enough savings, according to the secretary, to accommodate everybody who wants to borrow. But meanwhile Wall Street has spooked Congress with all its keening and wailing over the deficits.
Mr. Regan might as well have spared himself the trouble of the trip. This week the interest rates twitched upward again, and the formidable Henry Kaufman of Salomon Brothers came down here to tell the House Budget Committee what was wrong with Mr. Regan's savings argument. Deficits have to be financed out of savings, and Mr. Kaufman sees no indication that savings will rise as fast as the federal deficits over the next several years. It could happen only if there were a boom in business investment to push the economy. But Mr. Kaufman finds it hard to think that there will be an investment boom when interest rates are unusually high and, because of the recession, utilization of existing industrial capacity is low. That's why Mr. Kaufman doesn't believe.
He's hardly alone. It's difficult to find anybody who sees much chance of the strong recovery that the administration keeps predicting for the latter half of the year. Business activity will pick up sometime in late spring, presumably, and it will get a further boost from the income tax cut in July. But an income tax cut also means a sharp increase in the federal deficit, and the Treasury's need to borrow. That's the point at which the loose budget policy collides again with the tight money policy, once more forcing up interest rates. If neither policy is changed, it is quite possible that the economy will be slowing down, rather than speeding up, through the autumn ahead.
Why did interest rates move up this week? Because people in the markets expect them to move up next summer, and there's a bit of anticipatory pushing and shoving going on. People keep saying that the rates are beyond explanation, and perhaps that's true in terms of rigorous analysis. But they become less inexplicable if you remember that the financial markets are now dominated by people who, in the 1970s, lost a lot of money--their own money, their companies' money, their clients' money--by underestimating future rises in inflation and interest rates. Whatever mistakes they may make this year, they don't intend to make that one again.