Interest rates, deficits: the dilemmas persist

High interest rates and the expectation of worse to come continue to send tremors through Wall Street and depress the US economy.

Experts agree that soaring interest rates last year were a prime cause of the current recession, which still appears to be deepening across the economy. So deep is the downturn, in fact, that short-term interest rates recently have dropped, reflecting shrinking private demand for credit.

To some extent this is good news for consumers, who may find it possible to borrow money at rates lower than a few months ago. But rates must decline further, say most analysts, before the housing and auto industries can generate enough activity to pull out of their slump.

Money managers, meanwhile, who look beyond this year to 1983, express great concern at the enormous size of government deficits piling up.

''Facing a $100 billion deficit this year,'' said a high government official, ''$150 billion next year, and perhaps $200 billion beyond that, there is no way interest rates can come down. They are going up.''

This view is disputed by top Reagan administration officials. US Treasury Secretary Donald T. Regan is the latest to deny that deficits will top $100 billion in the years just ahead. The administration, says Mr. Regan, is ready to consider selective tax increases for 1983 and 1984 to help haul down the looming budget shortfalls. President Reagan now faces a virtually solid phalanx of top advisers, telling him that tax increases must be added to budget cuts to keep red ink from drowning his economic program.

Elsewhere in the government -- as well as outside -- many experts continue to predict that deficits will soar above $100 billion, bringing higher interest rates in their train.

Famed Wall Street economist Henry Kaufman says that interest rates by the end of this year may be close to their 1981 highs. He foresees a collision between the huge borrowing needs of the US Treasury -- perhaps as high as $120 billion this year alone - and a pickup in demand for money by the private sector, when economic recovery begins.

In 1981, according to the Federal Reserve Board, US government agencies soaked up nearly 80 percent of the entire pool of savings generated by individual Americans. With even heavier Treasury borrowing due this year, many experts believe competition for the nation's limited supply of savings will drive interest rates up.

To determine total US government borrowings, says Alice M. Rivlin, director of the Congressional Budget Office (CBO), one adds about $20 billion to the budget deficit figure. The $20 billion represents borrowing by government agencies, chiefly through the Federal Financing Bank, to pay for off-budget activities.

A senior Federal Reserve Board official, while conceding that interest rates almost certainly will climb when recovery is in full swing, discounted some of Mr. Kaufman's pessimism. This Fed official says that rates such as the prime -- the rate charged by banks to their best corporate customers -- may not reach their 1981 highs.

A true understanding of the impact of interest rates on consumers and the economy, he said, requires a distinction to be made between nominal and real interest rates.

Nominal rates, he said, might not go as high as they did last year, but real interest rates could be just as lofty as before.

A nominal interest rate is the amount lenders charge consumers for a loan. A new car purchaser, for example, who buys an automobile on time may obligate himself to pay 20 percent interest on a four-year loan.

From the lender's point of view, the real interest rate is much lower. It is the difference between whatever inflation rate the lender anticipates over the life of the loan and the ''nominal'' charge of 20 percent. If the lender estimates that inflation will average 10 percent yearly, his real rate of interest -- or return on his loan to the car buyer -- is 10 percent.

As inflation sinks, the nominal rate of interest also should decline. But the real rate of interest may not. For example, with inflation running at 11.5 percent, a prime lending rate of 21.5 percent (last year's high) means a real interest rate of 10 percent. If inflation declines to 6 percent, a prime rate of 16 percent - while nominally 5.5 percent lower than last year's high - remains a 10 percent real return on money loaned.

To the borrowing consumers, the lower nominal rate spells improvement. Borrowing by individuals is likely to expand as nominal rates sink. But business borrowers, looking down the road at the real cost of money in relation to inflation, may hold back, so long as real interest rates stay high.

Thus the Federal Reserve Board official, while believing that nominal rates will be lower than they were in 1981, says that real rates could be high enough by 1983 to choke off economic recovery.

Reagan administration officials deny this. Treasury Secretary Regan believes that ''half of the personal income tax cuts will be saved.'' Other experts say that the amount of savings will be smaller than Regan believes.