MONEY More• investing under the Tories
NICHOLAS DAVENPORT
It is nice to know, said a correspondent Investing under the Tories', that you an- ticipate a return of the bull market in equities in late 1971-1972 but how is this possible if companies cannot afford to finance expansion in the long-term capital market with an interest charge of around 12 per cent. In other words, how can you see a bull market returning in equities until we have had a bull market in bonds? The answer is that I don't. My belief is that as the wage-cost inflation is being seriously ag-
gravated by the rise in interest rates the Government will be forced to intervene in the bohd markg, bring down the domestic rate of interest and if necessary use its capital and exchange controls to maintain a two-tier system of interest rates. Its anti-infla- tion policy should be, as I have already argued, first to reduce Bank rate in order to bring down mortgage rates and council rents, next to induce companies to come to the capital market, fund their bank advances and raise capital to extend their plants and install more labour-saving machinery, and finally to reduce indirect taxation and so reflate. Incidentally, the fall in interest rates in America would justify au immediate cut in Bank rate.
A lot •of dangerous nonsense is being talked about the gilt-edged market. I was shocked to see the EcOnomist last week sug- gesting that the way to persuade people to hold more gilt-edged was to give_ them higher interest rates. The man had no un- derstanding of market psychology. The way to persuade people to btiy-government bonds is to convince them that the Bank of England will not only support the market on weak days but will see to it that it has a steadily rising trend: ;To. ask for higher yields is -as inflationary as asking for higher and -higher wages. Yields are already attractive. The GLC has just raised a loan with a 91 per cent coupon giving a yield of 9:6 pefcent. Elgle Star are advertising annuity investment bonds with a guaranteed growth of 14 per cent each year. If you exercise the cash. op- tion a £1,000 bond will become £1,500 in five years and £2,250 in ten years. The National Mutual Life is advertising similar bonds with slightly more favourable returns. What more can an investor want except an assurance that the Government will tackle the inflation problem on the sensible if unconventional lines I have outlined above?
It is simply not sensible for. the Govern- ment to instruct the Bank of England not to support the gilt-edged market but let it find._ its own level. War Loan which patriots tendered for conversion from a 5 per cent to a 31 per cent coupon at par in 1932, might then fall from its present level to 351 to say, 25 to yield 14 per cent (allowing for a price inflation of 7 per cent). That would im- mediately put up the cost of mortgages and rents and add to the price of inflation. It would also. bring the capital market to a standstill, for no company could finance ex- pansion at 16 per cent or more and make a profit. Britain would then cease to be ap in-
dustrial power and the balance of payments would return to red.
And with such a penal rate of interest how could the Bank of England cope with the stock redemptions which fall due next year? £568 million of Treasury 61 per cent stock falls in January, £409 million of Conversion 5 per cent in July-and £72 million of Gas 31 per cent and £900 million of Exchequer 61 per cent in September, a total of around £1,950 million. To offer conversion stock with yields, say, of 12 per cent would add in- tolerably to the tax burdens of the national debt service which has now risen to over £1,500 miffilm a yeae—six times more than it was in Dalton's day. Excessively high in- terest rates and excessively high rates of.tax- ationL--all these add to the fires of the infla- tion. It would be mad to fan the flames.
Yet this is what the -conventional monetarists and trendy Friedmahites like to do. They still believe apparently in -the shock monetary treatment. They want to restrict the annual increase in the money supply to 5 per cent at the most. This would mean that the banks would not be able to ex- . tend further loans to companies which sub- mit tqhinflationary wage demands, regardless of whether ttey may •be worth thing. Bankruptcies would then fly around like the fallen leaves of autumn. The liquidity crisis would come to a head in the first quarter of 1971 when the Inland Revenue collects its monstrous load of taxation from illiquid companies and forces the weak ones to the wall. Unemployment would then • rise to sickening 'heights—perhaps- over a million. and more—and this, according, to the, monetarists' faith, would frighten the trade unions into *age restraint.
What a ridiculous notion this is! The Old- fashioned idea that wages • cduld be restrained by mounting unemployment was killed for good when the current Wages ex- plosion occurred at a time when unemploy- ment was high. If anyone is foolish enough to cling to this make-believe I would point out that as we now treat the unemployed more humanely than in the past—a privileged few even fihding that it pays not to work—a million or more Out of work would not have the slightest psychological effect upon the trade unions except to make them more angry and more bloody-minded than - ever. Indeed, the deflationary shock treat- ment of the monetarists would push the present industrial crisis the way the revolu- tionaries want, that is, it would bring the trade union establishment on to their side—the side of anarchy. 8 December is the day set for the token strikes—the preliminary try-out of the revolutionary tac- tic.'
In this dangerous and critical situation when one half of the nation is in an ugly state of mind the Government cannot afford to let blind money market forces bring the economy to a standstill. It will have to in-
- tervene and stop this dangerous money game. It wil not only have to direct institutional money into the gilt-edged market, as I have already urged, -taking my cue from other countries, but exercise more control over the rates charged by the joint stock banks cartel. The Minister of Trade has already admitted in a letter to two Labour MPS his concern about the cartelised state of. the banking in- dustry and hinted that he might refer it to the Monopolies Commission. It should by now have dawned on the Chancellor that when he is confronted by a raging wage-price inflation the first thing he must do is to put the money- lender in his place, that is he must bring un- der his direct control the price and distribu- tion of money. That would be a far more rational exercise than the monetarists' blind Control of the money supply at source. The
- first sign that the Ch_ ancellor. is moving in this direction would be the signal to buy bonds.
ffolkes's investors' alphabet R is for Re-issue
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