THE ECONOMY
The boy stood on the burning deck
JOCK BRUCE-GARDYNE
As I was saying three weeks ago in these columns, it's an ill wind. From Mr Nigel Lawson's viewpoint 'the fire hoses' powered by the crash of '87 have been `trained on just that sector where the risk was most evident, thus removing any con- cern about a resurgence of inflation'.
Getting down to brass tacks, his autumn statement predicted that the rate of UK price inflation will in fact rise modestly next year, to an annual rate of 41/2 per cent by the end of 1988. That's enough to clip the value of the pounds in our pockets in half in 16 years. But after the hyper- inflationary 1970s it hardly ranks as a peccadillo. Certainly not enough to stand in the way of weekly cuts in interest rates as far as the eye can see.
And after all, why not? As we disco- vered back in 1980, the first reaction to evidence of reductions in the rate of interest, and the prospect of more just around the corner, is liable to be an eagerness abroad as well as at home to buy gifts, in the confident expectation that they will go up in value. So when the Treasury cuts interest rates to stop the pound from rising, it does precisely that. Eventually, of course, it dawns upon the punters — and in particular those from overseas — that the return they're getting on their money no longer compensates them for the inflation and exchange rate risks they are accepting. So they skedaddle, and the pound goes flip until the Treasury takes fright and shoves the rate of interest up again. Which was just where I came in; to the Treasury, I mean, in October 1981.
To which the Chancellor would un- doubtedly reply 'be your age'. In October 1981 the great bull market had six long years to run. Now we are peering around amidst the dust and rubble of the greatest crash for 60 years. It's a different world.
As the late Lord Reith used to remark when proferred unpalatable advice, 'I hear ye!' To be fair to the Chancellor, he was careful to emphasise in last Sunday's televi- sion sermon that the uncertainties and margins of error attached to all forecasts just now are unusually wide. And with Stock Markets still tumbling giddily, the danger of a major recession is bound to seem greater than the hazard of revived inflation.
Even so, Mr Lawson seemed to be offering a number of hostages to fortune in his television talk last Sunday. He can hardly be blamed for expressing confi- dence in the readiness of the elderly gentleman in the White House to take his finger out and cut his budget deficit back to size. The rest of us may be sceptical about Ronald Reagan's ability to recall where he put the missing digit. The Chancellor, having gone perhaps marginally over the top at the Mansion House four days before with his demands that Washington should get a move on, needed to redress the balance. But the implications of his repea- ted promises to 'ensure that the British economy goes on growing' need thinking through. They must mark at least a poten- tial change in priorities.
`Potential', because we all have a duty to believe in a bumper Advent stocking of spending cuts and tax increases out of Washington, at least until it doesn't mater- ialise. Then the Group of Seven can gather, thump each other on the back, (When it does materialise, I mean) link their currencies and arms together, and slash interest rates all round. And demo- cracy can resume its reign — together with bridge,and women, and champagne.
Yet even the cock-eyed optimists amongst us would concede the possibility that it will not happen. Divorce — or at least a 'trial separation' — between the erstwhile partners in the 'Louvre accord', which was supposed to bind the currencies of the Superior Seven in close harmony, must then be on the cards. For the US Treasury Secretary James Baker reckons that propping up the dollar with the aid of US interest rate hikes would seriously damage the health of his pal George Bush's campaign for the Presidency in '88. While Governor Pohl of the German Bundes- bank reckons that propping up the Amer- ican exchange rate with the aid of German purchases of unwanted dollars would seriously damage the health of German monetary policy.
So what does our Nigel do then? Prior to his appearance on the Matthew Parris Show last Sunday it was proper to assume that he would ask for custody of the UK economy to be given to the deutschemark. Has he not, after all, indulged in what might be called a 'leg over' relationship with the DM currency club for months: a relationship which only the well-known inhibitions of his next door neighbour in Downing Street denied benefit of clergy?
Yet all this talk about the sanctity of growth must suggest at least an agonizing reappraisal. A soupcon of the perfide albions, ditching the Continent in favour of good old Uncle Sam when the going gets rough. Maybe Mr Lawson didn't mean it that way. Certainly his message to the Financial Times two days later contained renewed expressions of undying love for the Euro currency system.
So we are left in right confusion. But if the Sunday appearance was the real Law- son, then we are into what the Foreign Office likes to call a different ball-game. We jettisoned rough trade monetarism three years ago. Since then we've had slinky-soft exchange rate monetarism. Now we're embarked on FT-index mone- tarism: 80 points off Footsie by lunchtime is worth half a point off base rates in the afternoon; 160 points off Footsie is worth a whole point.
We Cassandras should not rush to judg- ment. Mr Lawson's shop management has so far been dramatically successful: far more successful than our amateurish sooth- saying would have deemed possible. If the Stock Market crash proceeds uncorrected to the point at which demand in the 'real economy' contracts severely, and we enter on the vicious vortex of depression, then the position which he has seemingly adopted may stand out in retrospect as a good deed — albeit a forlorn one — in a naughty world. Nevertheless at the mo- ment of going to press, with the indications that the US authorities would rather watch their accumulating debts erode in real value through depreciation of the dollar than risk the electoral hazards involved in halting and reversing the accumulation, theirs does not look like a strategy to emulate.
The Americans are in a position, thanks to the sheer scale of their economy, to confront the Germans and the Japanese with a cruel choice. Either they can watch their exports priced out of the US market by the depreciation of the dollar. Or they can risk the implications for domestic inflation of open-ended intervention buying of dollars in the exchange markets. That is America's privilege. We have no such power and influence. We can pay the going rate required to induce our trading partners to lend us their cash and keep the pound in station. Or we can watch it slide. In which case those firehoses must, we hope, have done a mighty drenching.
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