America's money crisis MONEY
NICHOLAS DAVENPORT
The all-powerful United States is a 'law unto itself, economically and politically, and there is nothing that we can do about it. If it chooses to turn a local war into a major war without putting its economy and money on a war footing there is bound to be trouble in the world's markets. Vietnam is pushing the American budget into its biggest deficit of all time. The Secretary of the Treasury, Mr Henry Fowler, has in fact confessed that the 1967-68 deficit may reach $15,000 million or even $24,000 million. So when the Treasury suddenly announced a fortnight ago- that it was planning to borrow as a start some $6,200 million through the sale of short-term bills the money market was thrown into utter con- fusion and panic. It was even feared that the financial machine would break down— that the Treasury would not get the money it needed to pay off maturing securities, which was an immediate $3,800 million. When there came the weekly auction the thirteen-week Treasury bills made a sensational jump from 3.46 per cent to 4.28 per cent and the twenty- six-week bills from 3.95 per cent to 4.72 per cent. Few dealers had wanted to buy the bills, but had made throwaway bids which the Treasury had been forced to accept. And at this week's auctions these rates were even slightly raised. If this starts a wave of interest rate advances throughout the savings banks and loan associations the worst sufferers will be the unfortunate seekers after home mortgages.
Trouble, you may well suspect, will not be confined to the American mortgage4arket: it will extend to our own in Britain.. If the American rediscount rate is forced up from the present level of 4 per cent to 4f per cent our own Bank rate could be pushed up to 6 per cent. With Treasury bill rate 5.32 per cent, a 51 per cent Bank rate is already looking vulnerable. And the rise in the Euro-dollar rate to 51 per cent is not- helpinematters. When the Vietnam war made money very tight in America last year the American banks called in money from their overseas subsidiaries and those in England and Eire alone sent home $1,500 million.. (The total remitted was 42,300 million.) A further recall on this scale and -the Euro-dollar rate will rise to 6 per cent again. (Its peak last year was 7 per cent.) This is the rate which is now the deciding influence on the flow of international 'hot' money. At 5f per cent the flow has already turned away from the British mortgage market. The London mar- ket is only offering 51 per cent for seven-day money and the cost of covering sterling forward has made this unattractive to foreign banks.
The supply of money can, of course, always be increased by the central banks at any time. but, when it is, there is usually another scare about inflation. Conservative bankers do not like to be accused of printing money like South American republics. The American Federal Reserve has already been pumping money into the commercial banks. Mr McChesney-Martin, the chairman of the Federal Reserve Board, has now warned the American government that he cannot go on expanding the money supply to help the Treasury's borrowing programme while
Congress refuses to approve the President's request for a 6 per cent surcharge on existing taxes. It is now evident that to ease the pres- sure on the money market and avoid a further steep rise in interest rates a higher tax sur- charge than 6 per cent is necessary: say, it per cent on individuals and 10-or 12 per cent on companies. But even if Congress approves the surcharge, which it may do by end-year, it will not eliminate the budget deficit or do more than slow down the rise in interest rates.
Companies had been anticipating an autumn up-turn in the private sector of the economy by borrowing heavily in the first quarter of the year for investment in new plant and equipment, the President having restored the 7 per cent investment tax credits. They raised a record $5,400 million—more than in the first quarter of 1966—and pushed the borrowing rate for first-grade industrial bonds up to 51 per cent. This explains why the Treasury has asked for the removal of the 4} per cent interest rate ceiling on longer-term Treasury bonds. If the businessmen are correct in their assessment, that is, if the economy booms and the cost of the war in Vietnam goes on inflating, there is bound to be another scare of inflation and a call for higher interest rates. Many bankers' are already worried by the gov- ernment spending billions in excess of income. To create money in advance of the formation of real assets is sound enough, but to create money for the blowing up of expensive military hardware in Vietnam can be highly inflationary.
Wall Street frankly does not know what to make of it all. It staged a big recovery from 786 in January to 910 in May (Dow Jones indices) while business confidence was strong, but fell to 860 in one hectic trading session. It is now churning around 875. In view of the fall in company profits in the first half of the year, stocks cannot be considered cheap with an average dividend yield of 3 per cent and a price-earnings ratio of nearly 19, but the fear of inflation will probably prevent the market from falling very far. If the coming fight be- tween the motor managements and the trade unions over the next pay agreement ends in favour of the unions there could well be another big inflation scare. The American public has not faced up to the fact that its war ex- penditures are running out of control. And the longer the Vietnam war lasts the more likely will the government find itself com- mitted to a new costly missile race with Russia.
The American money crisis puts Mr Cal- laghan in a tight spot. The rise in American money rates comes at the worst possible time —on the eve of the Treasury's issue of £500 million of government stock for the take-over of the steel industry. Mr Callaghan must be praying that his friend Mr Fowler, the Ameri- can Secretary of the Treasury, can hold the situation until at least 28 July, when the issue has to be made. He may be lucky, but sooner or later the American money crisis will be felt, not only in Whitehall, but in the local council offices throughout the land which have so unwisely been making use of 'hot' inter- national money.
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