Why stock markets dip: lure of high interest

When stock prices tumble worldwide, something more is at work than the dire "blue Monday" prediction of investment adviser Joseph Granville. From New York to Tokyo and points in between, equities are losing billions of dollars in value as investors abandon stocks for higher, faster returns.

The London stock exchange, for example, lost $8 billion in trading Monday, Sept. 28, raising its losses over the past week to more than $23 billion.

The Tokyo exchange suffered its worst one-day loss on record and markets dropped also in Toronto, Paris, Hong Kong, and Sydney, Australia. Wall Street, by contrast, rejected Mr. Granville's forecast of a major stock price collapse.

Nonetheless, the basic economic factors -- centering on high interest rates -- that have dragged down markets worldwide continue to cloud the future.

To a major extent each market -- whether Wall Street, London, Tokyo, or Hong Kong -- looks inward to what is happening to its own domestic economy.

"In addition," says international economist Lawrence B. Krause, "there is a certain amount of cross-frontier looking," especially by portfolio managers whose holdings are diversified worldwide.

"When stock prices go down in a given market," says Mr. Krause, a senior fellow at the Brookings Institution, "portfolio managers look for another place to park their money."

Increasingly around the world investment money is flowing out of stocks into various kinds of money-market instruments, paying high interest over a short investment period.

The root problem, analysts agree, is high interest rates, beginning with the United States but spreading to Europe, Japan, and other industrial nations.

"The advantage of borrowing money is goind down," said Mr. Krause, "and the advantage of lending is going up."

Lenders, in other words, can make money by lending at 20 percent or higher. Businessmen, farmers, and families often cannot afford to pay a couple of points above prime, which now stands at 19.5 percent.

Many small businesses in the US are closing their doors, including auto dealers, construction companies, and real estate firms. Others pull in their horns, let some workers go, and hope to ride out the storm.

This means slower economic activity, which foretells a poor growth and profits record for many companies traded on Wall Street. "So," Krause says, "there is a price adjustments in equities."

Stocks decline in value until the market reaches a new floor, based on the collective judgment of investors about the future of the economy.

The enormous size of the US economy and the worldwide use of the dollar as a reserve currency complicate problems of adjustment for other powers.

Indeed, many European leaders blame Washington's tight money policy -- shared jointly by the White House and the Federal Reserve Board -- for part of their anguish.

High US interest rates make the dollar attractive to overseas investors. To protect their own currencies and to minimize the outflow of capital, foreign central banks raise their domestic interest rates.

This stifles investment and adds to the burden of unemployment, already running roughly at 8 percent in Western Europe, lower in a few countries, higher in others.

Foreign governments want their businessmen to speed up investment to create new jobs, especially for restless young people, flooding onto the labor market faster than jobs are avaiable.

But European businessmen find themselves in the same bind as their American counterparts -- unable to borrow money at rates that seem usurious.