In the City
The one-dollar pound
Tony Rudd
When the late Hugh Fraser was bidding for Harrods he had his brokers try to buy up one of the Harrods preference share issues which happened to have a vote, with the result that the price of the issue went to a ridiculous level in tents of its intrinsic worth. None the less, when one of the brokers went on to a certain Scottish institution, bidding some miraculous price for this holding of the voting preference shares, his offer was refused, the manager of the institution saying, 'We'd rather wait and see what a vote is really worth'. As it happened that institution missed the boat, failed to sell its voting preference shares while the bid situation was on and had the ill luck to see the preference shares halve in value once the bid went through. The broker, yielding to a temptation which he should have resisted, rang up the said institution and said, 'And now, Mr McGregor, you can see what a vote is really worth'. Of course he never dealt for that particular citadel of Scottish finance again but presumably the sweetness of the moment compensated for a subsequent lifetime of lost business from that quarter.
For the Harrods voting preference share read the pound sterling. Anybody who failed to sell while the going was good now has the galling experience of seeing the value slip daily. It was Christopher Johnson, the Lloyds Bank economist, who went out on a limb last year and said that the pound 'was walking on water'. It went up after he had said that, but how right he has been proved. From around $2.40 to the pound at the turn of the year it is now around $1.88 and looking a particularly nervous performer, even at that level.
It is difficult to put one's finger on exactly what aspect of the pound sterling last year represented the equivalent of the Harrods preference vote. Presumably it was to a large extent oil. And yet North Sea oil is still worth almost as much to the Treasury now as it was then. For, paradoxically, it doesn't really make sense to justify the devaluation of a currency like the pound because of a drop in the price of oil when this, in turn, has the effect of dropping the currency against the dollar. For oil is invoiced in dollars everywhere. Whereas North Sea oil last year was bringing in, say, $41 a barrel, the exchange rate was fluctuating between $2.20 and $2.40 to the pound. In sterling terms therefore a barrel of oil was bringing in, say, £18. Now, the price of oil having softened, BNOC is only getting, say, $35 a barrel, yet in sterling terms that is still over £18 a barrel. North Sea oil therefore remains, in sterling terms, worth just as much today in current terms as it was a year ago. It's what comes of having a dollar asset in the first place. So, although the magic has very much gone out of the oil scene recently, it is difficult to attribute sterling's sudden weakness to this factor alone considering the way that the arithmetic actually works.
Two other factors are, surely, more important. The first is the pull of American interest rates and the whole new attractiveness of the dollar as perceived in world currency markets. American interest rates are, of course, at astounding levels. The fact that we appear to be becoming inured to high rates should not be allowed to disguise the fact that the actual level of rates in the US, with prime at over 21 per cent, amounts to a total financial crisis in itself. It is a very high risk strategy indeed. And it is putting an appalling strain on the international financial structure. No wonder money is being sucked into America from all foreign centres, including, now, London. This surely is the paramount influence on sterling at the moment.
The second factor is more difficult to quantify, namely the growing unease about the Thatcher administration. It is not a question of whether or not the Prime Minister is going to give in to the 'wets' but simply a growing doubt about whether this Administration has sufficient time left to produce, out of its hat, the economic success which most people think will alone guarantee it success in the next general election. The Prime Minister has always made it plain that she needs two terms of office in order to achieve that fundamental change in British attitudes generally and in the British economy specifically which will put the country back on the right road. Unfortunately that truth carries within it a political contradiction. A ten-year programme must mean that, halfway through, things are at their nastiest. And this more and more appears to be the likely case. There may indeed be some slight recovery as we bottom out from the current dragging business cycle but it won't amount to a vote-winning situation. Unemployment will still be relatively high and the long-term secular recovery, the growth of new industries, the flowering of the new entrepreneurial enterprises, and the benefits of a fall in the proportion of the economy taken up by the public sector will hardly be discernible even in two years' time. What is more likely, indeed, is that the economy will be back on the rack of renewed inflation / caused by intemperate wage demands at home and a continued loss of the pound's purchasing power abroad. This may be too cynical and pessimistic a view but it is one that is now widely held by those who have a choice concerning where they put their and other people's money. That is why the lure of high interest rates in America and a prospect of making money in the American economy is pulling funds out of Britain so easily. There is less and less at home to keep these resources employed here. And as the election nears the process will speed up. In turn this will put further pressure on the pound and once again we will be into one of those self-seeding cycles with which we were all so familiar during the past two or three decades before, for a short period of two or three years, we were sheltered by North Sea oil. It looks as though the next stop on the charts could be a $1 pound before it recovers to $2.
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