THE CITY
Advice to Mr Healey
Nicholas Davenport
The optimism with which the Stock Exchange greeted the New Year – with the FT index breaking through to a new high of 385 – was an emotional rather than a rational affair. Everyone in the City is so relieved to think that canitalism is not dead but alive and faintly k, icking. A year ago, when the FT index was i46, a lot of people had given it up as moribund. A learned economist even wrote a disquisition in a rival weekly paper on its obsequies. Certainly a number of get-rich-quick financiers caught a mortal cold but that was all to the good and to be expected in a banking-cumProperty crisis. In passing I might mention that unlike some others Mr Slater is still a millionaire, having sold his Slater Walker shareholding for £460,000 and his Lubok shareholding for £750,000, although at the height of the boom he must have been worth ten times that amount. What has pleased the City this New Year is to think that not only capitalism is not dead but that socialism, wearing its old nationalisation clothes, is in tatters. The Chrysler affair proved that a socialist government can no longer finance, manage or run any more nationalisation, although the pathetically deluded directors of the National Oil Corporation are Pretending that it can. What is more, the Workers are beginning to realise this truth. The fact that they accepted the Chrysler comedown without a strike or a sit-in undoubtedly contributed to the market's New Year cheerfulness.
Whether the Chancellor's optimism also beined the market is more doubtful. In a New Year message printed on the front page of the Financiai Times Mr Healey said that this could .be the year in which the prolonged decline in British manufacturing industry will be stemmed and reversed. Politically he could not have said otherwise. There are now multiplying Signs, he added, that the recession may have bottomed out in Britain as in other industrial untries. He seems to be taking his cue from f,le Economist, which continues to blare out in tttir most irritating way "Cheer up, a boom is on
Way." I wish these professional economists "Tuld stop telling us how to avoid the mistakes
the last boom until there are clearer signs Mat the next one is on its way. With the u'icreasing doubts now being thrown at the American recovery and with the still mounting unemployment in this and some other countries it will be time enough to counsel us about how to handle the next boom when we see more signs of it appearing. What the Chancellor did say which the Market found reassuring came at the end of his rnessage. The Government, he said, must make sure that there is room in the economy for the increase in exports and investment. beY have therefore pledged themselves to Prevent any significant increase in public e4enditure programmes after this year and to ensure that the public sector borrowing
requirement will fall steadily as a proportion of the national income. This, as he admitted, was a hard decision for a Labour government to make, seeing that its strident left is always pressing it to extend the public sector and "the social wage." The City has taken heart at Mr Healey's obvious swing to the right and has assumed – rightly or wrongly – that he is powerful enough to swing the prime minister to the right as well.
The continuance of the bull market will therefore depend on whether Mr Healey is successful in containing public expenditure and reducing the borrowing requirement. That point is, of course, vital for the gilt-edged market, for, if it takes a rosy view of it, it will really start booming and will carry the equity market upon its back. It is already in a bullish mood. It has been cheered by another 1/4 per cent cut in the Minimum Lending Rate, bringing it down to 11 per cent from the 12 per cent rate early in October. Cheaper money is now in vogue. The short-term money market is awash with funds. Companies are now liquid enough for immediate purposes and money is flowing into the Treasury from us decent, law-abiding citizens in this tax-gathering season. Next week the Treasury bill issue will be only £200 million against the recent £300 million and £450 million in the autumn. If Mr Healey has any financial sense he will now concentrate on making money still cheaper, not only to encourage business investment, but to lessen inflation and reduce the borrowing requirement. The result of his issuing so many 'tap' stocks with high coupons up to 101/2 per cent and 111/2 per cent in the 'shorts' and up to 131/4 per cent in the 'longs' has been to put up the cost of the debt service so much that it now represents nearly half the present borrowing requirement!
I admit that Mr Healey has been successful in selling a large amount of gilt-edged stock to the non-bank public, that is, to us savers and the big savings institutions, which has enabled him so far to avoid monetary inflation. In the first quarter of the financial year he sold a littleunder £400 million and in the second quarter £810 million (Bank of England net figures). In the third quarter he has sold £600 million of Treasury 111/2 per cent 1981 and a good proportion of the-C600 million short and £750 million long 'taps'. (The £750 million long lap' has now been exhausted.) Let us say that in the financial year 1975-76 he will be able to sell as much as £4,000 million of stock to all of us savers and savings institutions – it is still not even half the borrowing requirement. Another worrying fact for the Chancellor is that the proportion of short-term debt to long-term has been increasing in the last two years and that if he issues short 'taps' with high coupons they monetise themselves through the interest payments very quickly. This yearhe has to pay off £2,400 million of maturing debt and in the next five years £11,362 million. If only
he could get some of the holders of this short-term debt to convert into a long-term debt his worries might disappear. Why not offer a long-term low coupon indexed bond at a substantial discount? It would be a rage — and some measure of compensation to those cheated patriots who subscribed to 21/2 per cent `Daltons' at par and now quoted at 17% per cent.
As an older man, and with more experience of the money market, I can offer a word of advice to Mr Healey. First, as the encouragement of savings is all-important if he is to avoid monetary inflation, let him remove the tax penalty imposed on investment income and postpone the wealth tax ad infinitum. A government which wants to encourage savings and penalises the saver is simply devoid of common sense. Second, if he would bring down the price level and encourage business investment he must, bring down the rate of interest further and get his EEC partners to join in a concerted drive for cheaper money, even if it involves more capital controls. A socialist government which endows the money-lenders with the greatest interest bonanza of all time must be stark raving mad. Is Mr Healey prepared to go down in history as the great moneylenders' friend?
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