THE ECONOMY
Uncle Sam wants to pass the parcel
JOCK BRUCE-GARDYNE
C We need some help.' That was the message, directed primarily to Bonn, from US Treasury Secretary James Baker last week, and it was no doubt repeated on Wednesday by Federal Reserve Chairman Volcker in his address to Congress, as this edition of the Spectator went to press. Admittedly, like Mr Baker, Mr Volcker will also have called upon Congress — yet again — to do something about the US budget deficit. But now that Congress has been sharply told by the US Supreme Court that it cannot simply shrug off its constitutional responsibilities by putting the Budget deficit on automatic pilot neith- er the Treasury nor the Fed can have high hopes of help from that quarter. So it's really up to the Germans: in Mr Baker's estimation the US has 'carried, to a large degree, the world economy . . . we would like to see some help from over there.'
It is a plaintive cry, and understandable. For after more than nine months of skilfully-orchestrated dollar devaluation and interest rate disarmament the Amer- ican trade deficit remains as mountainous as ever, and the howls of pain from the manufacturing base at the erosion of its markets by competition from Japan and Germany (and such newly industrialised countries as Brazil and South Korea) as loud. Across the farm-belt indebtedness is said to be approaching the point where widespread bankruptcies will become in- evitable. Optimism that the oil price will bounce back into the teens in time to save oil-related bank loans from default is fad- ing. And as if to hammer home that message Bank-America has become the first major 'financial centre' bank to enter the Fed's intensive care ward, in substan- tial part because of the scale of its exposure to oil-related lending.
So Fritz joins the wily Orientals in the doghouse where conspicuous consumption should take place, but doesn't. Six months ago the Japanese were the prime targets for lectures about the selfishiness of their Spartan lifestyles. If Americans require air-conditioning, a two-car garage and a swimming pool to look their neighbours in the eye, why should the Japanese lifestyle lag so intolerably far behind? The Japanese bow politely before such patronising in- terference in their domestic affairs. 'The Japanese Government will impress upon Japanese producers and users,' it announced this week, 'they need aggres- sively to take advantage of increased mar- ket access opportunities in Japan for fore- ign companies which wish to improve their actual sales and performance.' Never mind the quality, in other words, just feel the width — and buy American.
Nor is this just the verbiage that it sounds. For behind it lies an agreement the first of its kind — effectively to cartelise the global market for semi- conductors between American and Japanese producers. The aim is to earmark 20 per cent of the Japanese domestic market for US chip manufacturers within five years. Meanwhile a number of speci- fied Japanese semi-conductors are to be monitored to make sure that they are not sold to the American market at less than `fair value' — whatever that may be; and also, more standard components for Amer- ican industry. The two governments have added a cheerful codicil to the effect that they don't want their gentlemen's agree- ment to have side effects on third markets. Consumers in third markets can take com- fort in the thought that, like the Duke of Wellington, if you believe that you'll be- lieve anything.
Sharing out the chips is one thing. Cutting interest rates and boosting fiscal deficits is quite another. Neither Dr Pohl of the German Bundesbank nor his Japanese counterpart is minded to take hints from Uncle Sam about the joys of `supply side economics': and considering where they have taken the Americans, you cannot altogether blame them.
So it looks as though the cries for help from Washington will continue to get a fairly dusty answer, and Mr Volcker and Fed will continue to turn their backs upon the accelerating growth of domestic money, and go on chipping away at Amer- ican interest rates. It is not a prospect which many find pleasing. The Germans and the Japanese complain bitterly that it obliges them to choose between matching American interest rate disarmament when in their considered judgment their home- grown credit conditions are already quite sufficiently lax for comfort, and watching their currencies rise against the dollar to the anguish of their internationally-trading businesses. More generally the air is thick with warnings, from those whose motto is `find out what the foreign exchange mar- kets are doing, and tell them to stop', that the dollar will plunge to levels at which exports to the US will grind to a halt and the European Community will finally run out of cash to pay for dumping surplus foodstuffs.
Amidst all this righteous indignation, our own Chancellor has been notably silent. Time was, not so long ago, when he was well to the front of the chorus deman- ding that the Americans should take a grip upon their budget deficit: and there he was at the Tokyo summit, perhaps the least bit incongruously, calling for a medium term financial strategy for the planet. Could it be that the latest turn of events really suits him rather well?
For consider. If the Germans and the Japanese were to do their duty by taking the heat off the dollar, it is not too difficult to spot the currency most likely to become the scapegoat of the season. What with plunging oil prices threatening the Treas- ury's revenue calculations and our balance of payments, the next election beginning to cast its shadow and our unit labour costs obstinately rising, the pound could be in trouble. As it is it slides against the deutschemark, but holds its own against the dollar. Since our imports are still predominantly priced in dollars, whereas our exports are much more influenced by the exchange rate against the continental currencies, there could be a lot worse holes for us to find ourselves in. It's true that expectations of further reductions in our interest rates continue to be disappointed. But that, too, has its compensations. It may leave scope, with luck, for cuts in the autumn to help get British Gas away (and it looks as though that particular flotation is going to need all the help it can find).
For, apart from the inherent difficulty of selling Sir Denis Rooke's personality to prospective shareholders, stock markets around the globe, from Wall Street to Tokyo, seem to have convinced themselves that the party's over, for the moment at any rate. But after the hectic pace of the past couple of years some correction was surely overdue anyway. As a wise old bird from HM Treasury commented to me the other day, the likelihood must be that over time American impatience to lower in- terest rates and the dollar will set off the next price spiral. But that's still over the horizon: and besides, as I suggested to him (and he agreed) even that would surely be preferable to a spread of cartels and protectionism.
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