The money muddle
Nicholas Davenport
So the 10 per cent barrier has been broken. At the moment of Writing War Loan is yielding 10.3 per cent, and " Daltons " 10,4 per cent at 24. (How rightly proud my friend was When he issued them at 100 in 1947!) If the Chancellor had played his budget cards more skilfully this disastrous slump in the gilt-edged market need never have happened. What on earth induced Mr Barber to announce two gigantic " tap " stocks at this particular moment — £1,000 million of Convertible Treasury 9 per cent 1980 at 995 and £400 million of Treasury 3 per cent 1979 at 75 — seeing that there are already two " tap " stocks on issue, namely £850 million of Treasury 61 per cent 1977 (selling at 891i) and £600 mililon of Treasury 95 per cent 1999 (selling at 951)? We all know that a " sustained effort " is required to sell more gilt-edged stock to the non-bank public in view of the .enlarged borrowing requirement but why pour a cascade of cold water on the effort out of two new taps? And Why use the word " sustained " Which is suggestive of a continuing rise in the rate of interest? A Labour Chancellor Of the Exohequer might be forgiven for not understanding the psychology of the market in government stocks, for he may have had no previous experience of holding or managing money, but for a former tax lawyer to use language calculated to Provoke a bear raid in " gilts " is unpardonable.
The bears have been scarifying the market with talk of the Magnitude of the borrowing requirement — £4,423 million. They seem to suggest that all this has to come out of our personal savings, which last Year were of the order of £5,400 million, if we have to avoid the Printing press. This, of course, is nonsense. Consider what happened to the previous year's borrowing requirement which Mr Barber estimated in April 1972 at £3,358 million. It turned out to be £500 million less. About £1,600 million was financed through the EEF by a running down of foreign exchange reserves and £1,200 million of stock was sold to the non-bank public. The same sort of thing could happen in this financial year. Another flight from sterling might well finance another £1,600 million.
And £800 million of this new borrowing requirement represents merely the once-for-all change in the timing of tax receipts and payments arising out ' of the new system of indirect taxation. It just happens that there will be a temporary interruption of the flow of revenue from indirect taxes as a result of the new arangement for collecting VAT. Another £580 million of the borrowing requirement is accounted for by loans to private industry and maturing debt of public industry. So what the call on our savings really amounts to is something around £3,000 million. It would not have frightened the gilt-edged market if Mr Barber had played the whole thing down instead of up.
What made matters worse was that this unnecessary budget fright coincided with a money shortage. It was possible last week to place money "in the street" on a 7 day basis at 1 1 per cent. This was largely due to a miscalculation on the part of the Bank of , England who called for the last lot of special deposits from the clearing banks at the wrong moment. Faced with customer withdrawals for tax collection purposes and demands for bridging finance from property development companies the banks were caught short and had to raise their base lending rates to 95 per cent. The Bank of England pretended not to notice and kept its minimum lending rate at 8i per cent.
Naturally this dearer money muddle has driven the building societies to desperation. The tide of withdrawals has been rising steadily with the increase of money rates " in the street" and now Mr Barber has added to it by offering tempting new rates for Savings with a new 85 per cent five year bond having a tax-free bonus on maturity of 3 per cent. He has also raised the income tax liability on interest from £21 to £40 and the permitted holding of the decimal issue of National Savings Certificates from £1,000 to £1,500. These enticements must draw a lot of people away from building society deposits. To stem the tide of withdrawals the building society managers now want to raise the current rate to their investors from 5.6 per cent tax paid (equivalent to 8 per cent gross) to 6.3 per cent (equivalent to 9 per cent gross). And at their meeting this week they will press for raising the mortgage lending rate to home buyers from 85 per cent to 95 per cent. So goes on the macabre play of dialectical inflationism. Thesis — dearer money to damp down demand — antithesis bigger claims for higher pay from the civil servants, clerks and workers, caught in the money squeeze to help pay for dearer mortgages. And so on — until we get an explosion instead of a synthesis.
The Government must really wake up to the fact that their stubborn refusal to curb moneylending charges is making their counter-inflation proposals not only unfair but counter-productive. It is adding to the inflation. It i salways an inflationary as well as a retrograde step to give unlimited freedom to moneylenders, for their increasing charges enter into the cost of everything.
It is also lamentable that Mr Barber did nothing to curb the inflationary activities of the property dealing companies which have been buying up blocks of London flats, telling the short-leaseholders that they must pay double for services or get out, offering them the option to buy at ten to twelve times the old value and in general making life intolerable for the retired and not-well-off tenants. These ruthless property " developers " are conducting a property racket which has become a public scandal. Yet the Government does nothing to curb the power of these vultures because it believes in freedom for banks, finance houses and money-lenders in general.
To come back to the borrow ing requirement the Chancellor should have no difficulty in financing the real sum by tapping the savings available. Apart from the " small savings " which he is skilfully enticing he has opened, up a new facility for company savings which could be of great importance. From April 1 companies will be able to open accounts at the Inland Revenue offices into which they can deposit surplus funds. If these funds are subsequently applied to the payment of the company's " mainstream " corporation tax liability the interest credited on them will be the average Treasury bill rate (now 8.2 per cent) for the period of the deposit plus a bonus of 25 per cent a year. (If the funds are withdrawn the bonus will not be payable.) This is a very attractive haven for surplus funds. If the industrial unrest goes on much longer companies will be piling up a huge amount of idle money. The irony of it is that a lot of companies will be unable to earn 10i per cent on their invested assets if labour productivity declines. It will pay them to shut up shop and live on the Treasury as comfortably as some of the unemployed.
I notice that both the Economist and the Financial Times take the view that although the 10 per cent barrier has been broken yields in the gilt-edged market — contrary to the expectations of the bears are unlikely to roar away to 12 per cent. Indeed ,they think that the market is not far off its bottom. If this proves to be the case the managers of the life and pension funds, who now control nearly £2,000 million a year of our personal savings, will not be slow to step up their holdings of Government stocks.
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