In the City
Cash madness
Nicholas Davenport
In the January number of Lloyds Bank Review Lord Kahn, whom I rate as the wisest of the old Keynesian eeonomists, remarked that the men who run the CBI and the TUC bodies are 'sadly lacking in intelligence'. He added that one serious aspect of the 'astonishing stupidity' of our labour leaders was their complete failure to take a long-sighted view. Their sole concern was with the level of the real wage in the immediate (twelve months) future as opposed to the rate of increase in the real wage through productivity. I think he might have gone on to remark on the astonishing stupidity of some of our own economists who are also too concerned with the twelve months view of money rates and supply as opposed to the rate of increase in the interest charge through dearer money and continual borrowing. The Treasury has estimated a rise of £1,616 million in the debt interest charge of the public sector in the current financial year but this has already to be revised upwards. The stupid economists are now talking up the rate of interest which will bring the total annual interest charge on our rising debt to over £7,000 million. This means that the borrowing requirement—estimated to rise by £1,200 million to £12,000 million—can never be reduced. How silly can clever men get ?
The threat of dearer money has already knocked the stock markets flat. Wall Street sloughed 19 points off the Dow index in a single day. After touching 1,000 it is now down to 975. The FT index in London after reaching 420 has now dropped to 361 under the weight of new issues and Bank rate. This is its lowest level for the year. You might imagine that our two economies were heading for recession. In point of fact, the US are making a yery strong recovery from the 1974-75 slump. In the first quarter of this year company profits before tax were up 45 per cent. The official estimate of the annual rate of real growth has been raised from 7i to 84 per cent. But what does the great economist do—Dr Arthur Burns, the head of the Federal Reserve Board ? He gets in a panic about the resurgence of inflation, calls a meeting of the open market committee and resolves on a policy for 'restraining the growth of the money supply' and 'some modest firming in money market conditions. So the Federal Funds rate is moved up from 5 to 54 per cent and the chairman of one of the big banks forecasts a rise in the prime lending rate to 8 per cent by the end of the year. Wall Street is now mesmerised by the threat of dearer and tighter money. So is Throgmorton Street.
The City was half-expecting the Bank of England to raise its minimum lending rate again last week. The folly of raising it from 9 to 111 per cent, which was followed by renewed selling of the pound, may now have been realised by the Governor but there is still talk of the inevitability of our money rates moving up if the American rates go higher, so that our extra margin of 5 to 6 per cent above may be maintained. The Prime Minister might now warn the Governor of the Bank that if he cannot devise an effective system of two-tier interest rates—a high one for the foreign money lender and a low one for the British—he will be in danger of elevation to the House of Lords.
It will be a painful joke—to illustrate how silly economics and monetarism can be—if Dr Arthur Burns raises the Federal Reserve rate sufficiently to slow down the American recovery while Mr Gordon Richardson pushes Bank rate up to a level which kills our own recovery stone dead. It is not often that can quote Mr Enoch Powell with approval but in a speech on Saturday he said : 'The international beggar-my-neighbour game of competitive increases in interests rates is pure lunacy. It is unnecessary; it is futile; it is harmful'.
The National Institute of Economic and Social Research, which can always be relied upon to produce some economic fun, has just reported that while our interest rates must rise in line with an expected 2 per cent rise in American rates this year there is no reason for them to rise at all. There is, it says, a large amount of liquidity in the economy.
Spectator 5 June 1976 The banks will find themselves with In°re than enough reserve assets to supply a yeti large expansion of credit when the tor° comes but the private sector, it says, will not be needing so very much, the growth in real national output being directed towards a moderate 3 to 34 per cent rate of growth; But we may not get even a moderate 3 to 3,1 per cent growth. As Mr Enoch Powell solo.; 'No economy can prosper—it is a miracle n it survives—when money for investment °r building is charged at 15 per cent or higher:,; His call for a Bank rate of 3 per cent shout° not be laughed out of court. 'If the Govern: ment were to reduce its expenditure, an° therefore its borrowing', he added, inerest rates would fall like a stone to levels at which industry would be happy and eager t° invest'. This is what must happen in the end. The Government will be forced to cut its exPeAni' diture because the pound may not stop fal‘ ing until it does. Warnings have been gill° to the local authorities to cut their spending' which already has exceeded the budgetallt limits, because any excess will have to ber,e, from the rates, not from the Exchequer. working class as well as the middle class Is already up in arms against local extrava gance. When the report of the Commissif,le on Corruption is published soon, I imagT.e the surge of indignation against t" local councils will surely curb their exttKe gances. Rate-payers and rent-payers will insist that their councils stop recruiting for their already swollen staffs. That Nwill the first beginning in the drive to cut borrow; ing and debt. But the Government nlus follow up with cuts in its own expenditure': especially in the Departments of Indust"( and the Environment. The City view is Of steps must be taken now to enable cuts the £2,000 to £3,000 million to be made in planned spending for 1977-78.
A final bizarre advice from our econottee
pundits is contained in a chart of ti;i 'effective exchange rate' in the Nati°4 Institute's Bulletin. It observes that the utse terms of trade are worsening because of t'ts exchange rate depreciation. It then forecastle the effective exchange rate to maintain the the competitiveness of British exPorts,:„ suggests a further 4 per cent drop for sterlwill between now—after a 13 per cent droP three months—and late 1977. No foreigia would react to that subtlety except bY g1ni short of sterling immediately. He has have to look at UK costs and prices, which .0
not is bearishness. those abroa
j d, With the new pay deal and a re,.eal budget from Mr Healey there had been ' grounds for optimism and it is therefore sad to see the bull market in industrial eclu...ey shares destroyed by monetarist rn°e"ad authorities resorting to dear money inst.,a, of the control of credit and its distributl'ile No • wonder the confused lefties on the National Executive are demanding they nationalisation of the banks. What iisa• should be demanding is the reflation tion of the Bank of England.
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