STRATEGY SPLITTING AT THE SEAMS

The international banking community is gathering in Washington this week to prepare for the annual meetings of the International Monetary Fund and the World Bank. However, the principal topics of discussion won't be on the official agenda.

Whatever the world's finance ministers and central bankers say in public, their real concerns are likely to be different. Economic policy in the United States is at an impasse. Easy money has run amok. The deadlock over the federal budget policy has not been broken.The White House has renewed its perennial claim that the federal deficit will decline sharply next year, but this assertion rests on an improbable projection of economic growth in 1987. Major U.S. financial institutions are teetering on the edge of insolvency. World financial markets may face a dollar crisis that could involve a sudden, sharp decline in the value of the dollar and a similar jump in U.S. interest rates.

Numerous factors lie behind these problems. Under the Reagan administration, the U.S. economy has begun (1) to consume far more than it is producing and (2) to pay for these goods by borrowing abroad or by selling the nation's capital assets to overseas investors.

In part, this is because Mr. Reagan has been unwilling to impose the taxes required to pay for the government services, which the American people want to consume. Eventually, U.S. living standards will have to be curtailed if the United States is to service its overseas debts. Meanwhile, easy money has been the only option open to the White House to keep the economy going and the Republicans in control of the Senate.

Secretary of the Treasury James A. Baker, III has been using devaluation of the dollar as a crude battering ram to force easy money on reluctant central bankers both at home and abroad. In one sense, the administration has

succeeded. With the exception of Germany and Japan, the world is reflating. According to the IMF, the world money supply rose at an annual rate of 27.8 percent in the fourth quarter of 1985, up from 12.8 percent in 1982.

But this should prove to be a pyrrhic victory. Already, Washington's strategy is coming apart at the seams. Over the last few weeks, the stock market has suffered a stunning reverse. Bond prices have fallen despite the Fed's heroic efforts to inject a record amount of liquidity into the credit markets. Because of Mr. Baker's own efforts to talk down the dollar, the overseas value of the currency has plunged.

Mr. Baker's most recent attempt to frighten foreign exchange traders into reducing their quotes for the dollar provides an excellent example of the political tensions that are likely to be just beneath the surface at the upcoming IMF meeting.

This is the background: For months, Washington has been hammering away at Bonn and Tokyo to pump up their money supplies to provide fuel for more rapid economic growth. The Germans and the Japanese have resisted this

pressure - largely on the basis that over time it would more likely reignite inflation than produce sustained real economic expansion.

Mr. Baker is plainly losing patience with his junior partners overseas. The dollar would have to fall further, he said in a statement the other day, ''unless there are additional measures to promote higher growth abroad." The administration "would prefer not to rely on exchange rate adjustment alone to remedy trade imbalances, but clearly the current U.S. trade deficit cannot be allowed to continue."

In response, the dollar suffered one of its largest declines on record, and in the process dragged down stock and bond prices as well. The Treasury Secretary was clearly aiming the bulk of his fire abroad. But he also had a domestic target - Fed Chairman Paul A. Volcker. The Fed has been the chief agent of Mr. Baker's reflationary efforts. Lately, however, its officials have become visibly concerned that perhaps they may have overdone things a bit in pouring record amounts of liquidity into the financial marketplace.

By setting de facto targets for the dollar in the exchange markets, Mr. Baker has maneuvered the Fed into a tight corner. So long as further devaluation is Treasury policy, Fed officials will have no choice but to keep on pushing reserves into the banks to hold down interest rates. Otherwise, Mr. Volcker might find himself in direct opposition to the White House, which could quickly lead to pressures for his resignation.

The IMF observed in its 1986 Annual Report recently that "the slow- down in the industrial countries, particularly the United States, was sharper than expected, world trade was sluggish, protectionist pressures intensified, real primary commodity prices declined steeply and the developing countries experienced a setback in their efforts to achieve growth."

That depressing pattern was simply a foretaste, and a modest one at that, of what would be likely to happen if the administration's policy of reflation were to backfire and send the economy back into recession.

For the full story: Log In, Register for Free or Subscribe