The economy
Down with markets!
Jock Bruce-Gardyne
The great thing about fashion is that it usually goes full circle. No one in his right mind throws out a suit just because the cut of the lapel has become demode. The mini-skirt will be back one day. So — a more daring affirmation, this — will the pound. So will free-floating exchange rates.
'What's that?' I hear you say: 'But floating exchange rates are what we've got, haven't we?' Indeed we have. But they have ceased altogether to be smart.
Time was, a dozen years ago, when the only right-thinking person known to me who shared my secret addiction to 'fixed' exchange rates was Harold Lever — he even admitted to his vice in public. (See Harold Lever's article of last week, 'The real sterling problem'.) Admittedly I don't think our motives were quite the same. One felt that what Lord Lever (as he wasn't then) really liked about 'fixed' exchange rates was that they were glued together with massive international lend- ing, his pleasure in a life on tick being surpassed only by that of Lord Stockton. For my part what I liked about them was more or less the opposite: that they quite regularly called a halt to the propensity of British governments to clip our currency. My fear was that if that string were once untuned — if the public humiliation which went with devaluation were to be abolished — then our masters would indulge in huge inflation.
The conventional wisdom of those days, by contrast, was that a floating exchange rate was the cure for every evil known to man, from `stop-go' to housemaid's knee. If only the statesmen of the world would drop the twaddle known as 'Bretton Woods' and allow their exchange rates to find their own level we should have 'growth', autonomy of monetary policy (not that many gave a fig for that), low inflation, full employment, prices and in- comes policies which worked — you name it.
Needless to say it hasn't worked out that way. But then it hasn't worked out the way I feared either. It did for a time: between 1972 and 1976 we had the 'Barber boom' and, in due course, 27 per cent inflation. But gradually the markets got the message, and it turned out that floating rates could actually produce a swifter discipline on spendthrift governments than ever came from Bretton Woods. So naturally they've been a great disappointment, and now Lord Lever is back in the height of fashion. Even Mrs Thatcher and Mr Lawson — so we are told — have quite lost patience with the lightheadedness of the foreign ex- change markets, and think the time has come for all good men — i.e. all good central bankers — to come to the aid of the parity. Loud guffaws from the critics.
It is, however, less than clear that such mutual aid is readily available even if it is desired. On Monday, during a perform- ance of breath-taking assurance and fleet- footedness before the Commons Treasury Committee, coming as it did towards the end of what must have been about the Chancellor's most uncomfortable day to date, Mr Lawson told us that the recent Washington agreement on currency in- tervention was designed to 'show the two- way risks in foreign exchange dealing'. Still, the new US Treasury Secretary, Mr Baker, has not sounded much more enthu- siastic about intervention than his prede- cessor used to do. So what more — if anything — can be done at home to help the pound?
The Chancellor once again acknow- ledged 'some feeling in the markets that the Government was no longer giving sufficient priority to maintaining down- ward pressure on exchange rates', and undoubtedly the Treasury has been punished for the careless talk of preceding months. But just as all news is good news for a currency in fashion, so all news is bad news for a currency that is out of favour. One of the contributory reasons for last weekend's sterling weakness was said to be the trade figures for December, and the provisional trade outturn for 1984. Yet what those figures showed was that by the end of last year exports were at last beginning to respond quite powerfully to the attractiveness of overseas markets, and that notwithstanding the huge temporary cost of replacing Arthur Scargill's coal we were still estimated to have balanced the books. On past performance that means that we shall probably turn out to have run a healthy surplus when all the revisions are in. In less jaundiced markets those results could well have been read as a bull pointer for sterling. Then there was last week's Public Ex- penditure White Paper. It has come in for a deal of ribbing for wishful thinking: wishful thinking about the public corporations appetite for cash; wishful thinking about the public sector pay; wishful thinking about prospects and timing of asset sales; above all wishful thinking about the Treas- ury's ability to pin down the spending departments. So here too the market's reaction seemed to be 'if they have to try and sell us this sort of guff then public spending must be really out of control.'
Now of course there is a fair amount of wishful thinking about future spending — even a touch of desperation, if you like. When modest plans to cut back on sub- sidies to assist the middle classes to gentrifY their houses lead to 'threats of ministerial resignation, and modest plans to cut back on subsidies to assist the middle classes to see their offspring through university are shouted down by the Tory Party, a whiff of desperation in the Treasury is eminently understandable. Yet if you compare the latest White Paper with some of those we had in days gone by, when huge volume increases in spending in years one and two were excused with promises of miraculous economies thereafter, and equally miracu- lous projections of economic growth to keep the books in order, the latest offering is a model of caution and honesty by comparison. Nor does anybody — so far as I'm aware — challenge Nigel Lawson 's claim to be relying less on borrowed money than almost any of his international coun- terparts (indeed the fashionable complaint is that he is borrowing far too little). So it is a case of 'laugh and the world laughs with you, weep and you weep alone'. For the moment the plus points are ignored. Once Mr Scargill's attempt to repeat his victories over elected govern- ment in 1972 and 1974 has been seen off. and once the markets think they know the worst about the price for oil, now that the Treasury has roundly reasserted its counter-inflation priority, sterling should be free to convalesce. Meanwhile, as Mr Lawson rightly told the inquisition on Monday afternoon, while market judg- ments can be both painful and perverse they are still a better yardstick of be- haviour than can be ever had from attempts to operate a 'command' eco- nomy.
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