Economic Report of the President

housing. Borrowing by the nonfinancial business sector also declinedduring the first three quarters of 1982. However, the easing of creditconditions in late summer encouraged an expansion in net corporatebond issues; the funds raised were used in part to pay off short-termdebt.Combined borrowing of State and local governments and the FederalGovernment rose approximately 60 percent in the first threequarters of 1982 from 1981 levels, as the growth of tax receiptsslowed sharply relative to expenditures. For fiscal 1982, U.S. Treasuryborrowing totaled $135.0 billion, of which $23.4 billion was usedfor making direct loans. Federally guaranteed loans declined sharplyfrom 1981 levels, but borrowing by federally sponsored enterprisessurged. Total Federal and federally assisted borrowing climbed to48.9 percent of the funds raised in U.S. credit markets, surpassingthe previous peacetime peak of 41 percent reached in 1976.INTEREST RATESAs shown in Chart 6-1, interest rates rose in the first part of 1982but began to, decline sharply in the summer. The decline in interestrates partly reflected diminishing inflationary expectations that tendto be built into nominal interest rates.The yield on 3-month Treasury bills, which had averaged justunder 11 percent late in 1981, held in the 12 to 13 percent rangeuntil mid-1982 and then fell to less than 8 percent in the closingmonths of the year. The prime rate charged by commercial banksbegan the year at 15% percent, climbed to 17 percent in February,and then in July began a steady fall to 11^ percent by December.The corporate Aaa bond rate, which peaked at 1534 percent in February,fell below 12 percent by November.The expected real after-tax interest rate is the correct measure ofthe cost of credit to borrowers and lenders. It is approximately equalto the after-tax nominal interest rate less the anticipated rate of inflation.For example, with a 12 percent nominal interest rate, the aftertaxcost of credit to a borrower in the 30 percent marginal tax bracketis 8.4 percent. If a 5 percent inflation rate is anticipated, the expectedreal after-tax cost of credit is 3.2 percent.Because the tax brackets of borrowers differ widely and the expectedrate of inflation cannot be observed directly, the realized realpretax interest rate—-approximated by the nominal interest rate lessthe actual rate of inflation—is a more convenient measure of the costof credit. The nominal 3-month Treasury bill rate and the correspondingrealized real pretax rate are shown in Chart 6-5 for theperiod since 1955. The real pretax Treasury bill rate was abnormallylow in 1972-73 and 1976-77, tending to increase aggregate demand.137