THE ECONOMY
Mr Lawson sighs with relief as the dollar heads south
K BRUCE-GARDYNE JOC
Mr Alan Greenspan, Uncle Sam's Central Banker, has been described as a 'Keynesian monetarist'. This seems to mean that he likes to use monetary policy for the purpose of 'fine tuning', which is a little like using the handbrake rather than the footbrake to regulate the speed of a car. Rather tough on the tyres.
Having set his targets for US monetary growth on taking office a year ago, he has watched them consistently undershoot. A more conventional monetarist would pre- sumably have read this evidence as point- ing to a degree of excessive tightness. Mr Greenspan, however, has been more im- pressed, hitherto, by the strength of infla- tionary pressures in the US, and has continued to resist the increasingly plain- tive calls, from White House and Treasury alike, for relaxation of US interest rates. The dollar has headed in the direction of becoming a scarce currency, soaring to levels calculated to threaten the continued correction of the US trade deficit, and causing considerable embarrassment to America's big trading partners.
Now at last Mr Greenspan has signalled second thoughts, telling Congress that 'signs of softness in the US economy have shown up. . . such softness conceivably could cumulate and deepen, resulting in a substantial downturn in activity.... What we seek to avoid is an unnecessary and destructive recession.' Our own Mr Law- son might be tempted to reply, 'And you think you have problems.' But the financial markets, ever ready to make two and two add up to five, have concluded that the brake is off, and started to scuttle out of dollars almost as fast as they were scuttling into them six weeks ago.
The trouble with all this — as our own Chancellor is learning the hard way (if he needed to learn in the first place) — is that monetary policy is peculiarly unsuited to techniques of fine tuning, the tinkering with demand so beloved by Keynes's post- war disciples and so scathingly dismissed by the true-believing monetarists. If, as seems quite possible, Mr Greenspan has overdone the interest rate physic in recent months, it may already be too late to avert a US recession in 1990, to which Mr Greenspan, on past form, could be ex- pected to react with increasingly impatient monetary relaxation.
Hence the financial markets' loss of enthusiasm for the dollar in the past couple of weeks is perfectly logical. Who would want to stay around with US rates of interest plummeting?
Mr Lawson, now confirmed in his posi- tion following Mrs Thatcher's clean sweep, must be sighing with relief. Although he clearly believed that our 14 per cent base rate was quite enough to be going on with, the pound remained extremely vulnerable to the strength of the dollar. But with the dollar heading south the stock market reckons that the risk of a further hike in the cost of borrowed money has receded.
Indeed the Chancellor could be facing problems of a different sort before he is much older (that is unless the June trade returns, due after this issue of The Specta- tor gets to the printers, turn out to be exceptionally horrible: normal wickedness is probably discounted). He never misses an opportunity to tell us that our interest rates will stay as high for as long. . . etc. If the pound is, for the time being at least, out of trouble, then a coupon double that available in alternative lock-up safes for other people's savings is liable to look alluring 'while stocks last'. I don't think we should rule out the possibility that sterling may pick up some of the loose change running out of US Treasury bonds. After all, Japan is obviously heading for a period of greater political uncertainty, of the sort that overseas investors do not like; and it would not be surprising if London were to pick up some of the shake-out from that source as well.
Then so much the better, it might be thought. Instead of constantly finding ourselves caught between the rock of even dearer money and the hard place of a tumbling exchange rate, we should once more enjoy the almost forgotten luxury of choosing between an appreciating pound and a rising exchange rate. I suspect Mr Lawson would not relish the prospect as much as, in the eyes of all right-thinking persons, he should. Cheaper money looks increasingly inappropriate for as iar ahead as we can see, with consumer credit still bounding along and 'narrow money' continuing to show no inclination to come back within its target range — not to mention the run-away behaviour of wage settlements even before the autumn wage round has properly begun.
Admittedly an appreciation in the fore- ign value of the pound would seem much more appropriate — if we were to have that option, since this remains the most effective restraint on the current eagerness of managements to give themselves and all who work for them high, wide and hand- some increments. But as I think I learned all those years ago in the Treasury, it is easier said than done to resist a fall (or a rise) in interest rates upon which the financial markets have set their hearts, at any rate for an indefinite length of time.
Unless, of course, you 'take the plunge' and join up with the deutschmark, I can hear the chorus singing. On the contrary. If the dollar is in for a period of weakness then signing on with the European club would deprive us of any choice. We should have to cut the cost of borrowed money to keep us in station.
Which brings us to Mr Major. The Chancellor presumably knows where the new Foreign Secretary stands on the EMS, since he has been his partner in the Treasury. So far as I am aware Mr Major himself has never offered an opinion. Undoubtedly the FO will expect him to absorb his new department's enthusiasm for membership — and no department in Whitehall has a better track record of persuading its political bosses to accept its own priorities. In truth it probably makes but little difference whether, in this inst- ance, he does or no. Indeed it could perhaps be argued that Sir Geoffrey Howe's long-standing dedication to EMS membership was not only a prime reason for his eviction in the re-shuffle, but also a contributory ingredient in the Prime Minis- ter's fierce resistance to the whole idea. In this administration no cause is lost until it is espoused by the diplomatic service. In any case Mr Lawson is quite capable of looking after himself, thank you very much, and his own enthusiasm for currency management seems, for the time being, to have cooled.
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