Profiting from High Rates

While the Reagan Administration and Wall Street are lamenting high interest rates, many Americans have come to like them. The small investor who was boasting in the mid-'60s about his killing in the stock market or in the late '70s about his big earnings from real estate is now telling everyone within earshot about the yield on his money-market fund. Last week he was bragging that the money he took out of a savings bank, where it was earning 5.5% interest, was paying a 17% return.

Likewise, corporate treasurers once accused of being too timid to make major long-term spending decisions, such as approving a costly new plant, have become heroes. That factory might have made a healthy profit after a few years, but the jumbo bank certificate of deposit that he bought for $100,000 immediately earns nearly 18%.

Companies with large amounts of cash on hand, including Seagram and Bendix, have also been benefiting. High interest rates have depressed the price of certain energy stocks like Conoco. As a result, the cash-rich firms can buy the undervalued ones at a fraction of their true worth.

Anyone with enough reckless courage to play the financial futures markets could earn high profits. Activity at this market in Chicago has more than doubled in the past two years. Faced with the risk of even higher interest rates, banks and pension funds have been forced to hedge with financial futures, which are contracts to buy Government securities or foreign currencies at some later date. The speculators are betting that interest rates will go higher rather than lower. If the cost of money goes up, they sell their futures contracts for a good earning. For instance, an investor who in June put up a $2,400 deposit on a $100,000 Treasury bond future due in December of this year could have liquidated his position last week and made an impressive profit of about $12,000.

The payoff from those stunning interest rates, though, is often only an inflationary illusion. Over the past two centuries, the real interest rate in the U.S. has been fairly consistent at about 3%. Anything more than that has just offset the current level of inflation. A return of 17% from a money-market fund is obviously better than 5.25% from a bank, but if the inflation rate is also 17%, the depositor is not really that far ahead. With inflation now at about 11%, a yield of 17% is clearly a good deal.

Today's high rates would not have been welcomed by anyone a few years ago, when the legal ceiling on interest the average saver could earn was the meager 5.5% paid on a passbook account at a savings and loan association or a mutual savings bank. The level is established by the Government. But financiers have been very creative in developing new high-yield deposits. Starting next month, for example, the new All Savers Certificate that was approved by Congress last summer will pay 12.61% tax-free for up to $1,000 in interest for an individual or $2,000 for a couple.

J. Charles Partee, a governor of the Federal Reserve Board, which is usually cast as the villain of high interest rates, says that those pushing for costly credit are not nearly as vocal as farmers, homebuilders and others demanding cheap money. Even the strongest advocates of tight money, including many businessmen and conservative economists, are not arguing for high interest rates in order to make a profit. They simply realize that while the high cost of borrowing will slow business at first, it will eventually beat down price explosions. Inflation to an economy is like cocaine to a drug addict. Rising prices feel fine for a while, but ultimately they destroy business. If temporarily high interest rates succeed in breaking the momentum of inflation, then the big winner will be the U.S. economy as a whole.

This file is automatically generated by a robot program, so viewer discretion is required.