28 SEPTEMBER 1985, Page 22

THE ECONOMY

The fearless five talk down the dollar

JOCK BRUCE-GARDYNE

Mr Martin Feldstein, we are told, was unimpressed. 'For the avoidance of doubt,' as the lawyers say, I should explain that the Mr Martin Feldstein I have in mind is the ex-chairman of President Reagan's Council of Economic Advisers; and that what he was unimpressed by was the outcome of the dramatic high-profile gathering of the `Group of Five' in Washington last weekend. And who can blame him?

For it was an odd affair, was it not? `G5', as it is known to its intimates, may not be quite the .:trt of club whose members usually attend in funny hats, false beards and bogus noses. But it doesn't exactly advertise its gatherings in neon lights either. Yet here we had a public summons to our Chancellor and his siblings from Paris, Bonn and Tokyo to drop everything and catch the first transatlantic flight avail- able, bringing with them as many attendant pressmen as could be found to fill their aircraft, for a trip which was to culminate in an open briefing from all the great gentlemen to announce the outcome of their deliberations. An outcome summed up in the magisterial pronouncement of Mr Paul Volcker that it is high time that 'currency values reflect fundamentals'.

To which Mr Feldstein replied `Aw shucks', or words to that effect. To be precise: 'Can you bring five people into a room and significantly lower the value of the dollar? You really can't'. But is he right? The first reaction of the exchange markets would have done credit to the Brigade of Guards. They executed an about-turn and sold their dollars at the word of command, in perfect formation.

For how long — and, contrariwise, how far? For as Mr Feldstein properly implied, the 'fundamentals' have not changed. That familiar bogeyman the US budget deficit is still with us. And must needs be paid for. If the financial markets continue to do as they've been told and sell their dollars, why then, President Reagan will be short of lenders. Does he then thump up US interest rates to attract them back again? If he does Nigel Lawson and his colleagues might be forgiven for concluding that their journey last weekend was hardly neces- sary. The dollar would presumably resume its sway. On the other hand if the White House lacks lenders from around the globe Mr Volcker is going to have to `monetise' the US deficit: in other words, resort to the printing presses. But if that is what he's seen to be about the exchange markets will not march out of dollars as instructed by

the Group of Five. They will double.

Mr Baker, the US Treasury Secretary who acted as the angel for last weekend's theatricals, would presumably reply that this line of reasoning misses the purpose of the entertainment. It was staged for a domestic audience: the US Congress. Con- gress comes back from its holidays hell- bent on protection. Since the Japanese are not minded to declare open house for US farm surpluses, and the Brazilians and the Europeans will persist in pumping iron or more precisely steel — towards the US soft underbelly, the only thing to do is to round up five assorted finance ministers and 'significantly lower the value of the dollar'. From which the assembled Con- gressmen are expected to deduce that relief is just around the corner: that one day soon, without recourse to tariffs or to quotas, Japanese computers and Brazilian shoes will cease to steal their constituents' customers because the yen and the cruzeiro will rise to price them from the market.

It looks like rather a long shot. All the more so in a week when Boeing thought it had clinched a deal to give away a clutch of 757s to the Indians, each one equipped with a silver salver for every individual traveller, only to find its bid trumped by the Airbus consortium throwing in golden tea-sets. So let us take such comfort as we may from the administration's pledge to `resist protectionist pressure'. The fact that President Reagan ultimately shrank from vetoing sanctions against South Africa and settled for a compromise instead doesn't prove that he'll meet Congress halfway on protection, after all. It just looks that way.

We must not forget, however, that there was another item on the Group of Five's agenda last weekend (even if not much was said about it). This was that other golden oldie, Third World indebtedness. The Americans had come up with a wizard scheme to have the World Bank guarantee new loans to the Southern hemisphere from the commercial banks. Not much was said about it since it found few takers.

Unlike most of the propositions adv- anced hitherto to 'institutionalise' the hangover from the bank lending spree to sovereign borrowers in the 1970s, this one has a superficial plausibility. The usual line has been to have the IMF (or the World Bank, according to taste) guarantee ex- isting loans, while at the same time punishing the commercial banks for their foolhardiness in making them. Thereafter the commercial banks — so we were asked to believe — would make fresh loans and invite fresh punishment. A likely story. But if the World Bank were to underwrite new lending to the Third World while leaving existing loans to rumble on, the commercial banks might well be tempted. Taking a percentage from dubious custom- ers with someone else to pick up the risk sounds like a bank manager's dream.

Yet the lack of enthusiasm displayed by Mr Baker's guests last weekend was under- standable. Third World borrowings are not the only ones which lie heavily on bankers' stomachs just now. What about all those loans contracted to US banks against ex- pectations of a $50 price this year for oil? What about loans to the US farm belt? Come to that, what about all those fancy `off-balance-sheet' lending activities which the central bankers are currently so con- cerned about? If the World Bank were to underwrite new credit for sovereign bor- rowers in Latin America, why not these other items? Above all, who would under- write the World Bank?

Two years ago — not long before he was given his cards at the Council of Economic Advisers for telling home truths once too often — Mr Feldstein passed through London. And when, we asked him, was the White House going to get to grips with its budget deficit? His reply was less than wholly reassuring. Not, he thought, until the Senators and Congressmen were under siege from local businessmen protesting at the loss of markets to the over-mighty dollar. But it was anyone's guess, he warned, whether the administration would tackle the disease — the deficit — or end up putting sticking plaster on the symp- toms.

It still is, just about. But unless someone — and that must mean the Japanese and/or the European Community—comes swiftly to Mr Reagan's aid with drastic action to reduce the barriers to US exports, the protectionists in Congress must prove irresistible. And their example would be widely followed. It'll take more than five people in a room to halt that contagion.