THE ECONOMY
The holy estate of 'stability' and its substitutes
JOCK BRUCE-GARDYNE
The doctrine of unripe time, like all good things, has its day. It is, we learned last weekend, the considered opinion of our Foreign Secretary, that we cannot 'go on giving indefinitely' the response to all enquiries that we do indeed intend to sign on with the European currency system `when the time is ripe.' Absolutely not. Although when Sir Geoffrey was Chancel- lor he displayed no qualms about the repetition of this cliché, year in year out, from 1979 to 1983. The Foreign Office, one gathers, is more impatient.
It is not alone. Sir John Hoskyns, of the Institute of Directors, is the latest recruit to a somewhat overloaded bandwagon. I was taken aside last week by a former senior minister who is now a great person in the City, to be asked how I would react to the information that 'someone — no names, no packdrill — knows (and it's his business to know these things) that if we only joined the EMS, our interest rates would fall'? I said my reaction was that the respected 'someone' — Governor Leigh- Pemberton, for example? — was a braver man than I was, Gunga Din.
Currency stabilisation plans are crowd- ing thick upon us. We had a small debate last week in the House of Lords, promoted by Lord Soames, designed to extract from the Government a clear explanation of what, in God's name, it was waiting for before it took the plunge and signed the pound up with the deutschemark. On a wider front the US bond markets have become positively neurotic about all the conflicting signals from Messrs Volcker and Baker, of the US Federal Reserve Bank and Treasury respectively, Mr Clayton Yeutter the US special trade representative, not to mention Herr Otto Pohl of the German Bundesbank and Prime Minister Nakasone of Japan.
But when have US bond markets been anything else? Back in the early 1980s, when monetarism was all the rage, an informed guess about the US weekly money supply figure was enough to put the market in a turmoil. Since money passed from fashion there have been the 'flash' forecasts — nearly always wrong — of what would soon be all revealed about US car and house sales, inventories and unem- ployment, to keep the bond salesmen on their toes. And all the time there have been the keenly scrutinised asides of Messrs Volcker and Baker and suchlike great gentlemen (or better still what they were rumoured to have said or thought) about interest rates, and those three key currencies, the dollar, the yen and the deutschemark. Truth to tell, Mr 'Rambo' Stallone, confronted with an invitation to display his biceps and risk the bombs of Libyan terrorists at the Cannes film festiv- al, is a model of moral fibre compared with the Wall Street bond market.
Mr Volcker allows it to be known that he lies awake at night agonising over prospec- tive inflation, but is not minded to tighten US monetary policy just yet. Next day he warns that the Germans and the Japanese must cut their interest rates before the Americans can do so, and then that US rates will fall regardless of what the fore- igners get up to. Mr Baker calls for exchange rate stability and a cheaper dol- lar, and Trade Secretary Malcolm Bal- dridge and former Chairman of the Presi- dent's Council of Economic Advisers Mar- tin Feldstein announce that the present exchange rate for the dollar is simply irreconcilable with the current level of the US trade deficit. The market scampers around in terror like a headless chicken, and the dollar acts like a yo-yo.
So their Lordships decide that what the world needs, above all else, is 'stability'. `Stability' is, like matrimony, a holy estate, but less easily attained: indeed, unlike matrimony, never attained for very long. So maybe we ought occasionally to be grateful for the substitutes. Six months ago what the French call the gros legumes of the world financial system met in New York and announced that the dollar was too high for anybody's comfort. They would bring it gently down. My how we snorted! Either the dollar would rise to yet more stratospheric levels, we said, to teach the gros legumes their manners and a proper sense of humility. Or alternatively it would plummet uncontrollably. It has done neither. It has slithered. Mournfully it has not yet slithered far enough to cure the Americans' trade deficit, or to silence the clamour for US trade protection, although considerably further than the Germans or the Japanese can bear. The worst of both worlds, in fact.
Or is it? Without a doubt the Germans and the Japanese have had the cutting edge of their export effort vis-à-vis the United States somewhat blunted. But had it not been, would President Reagan have been able to hold the line — for the most part, at least — against his domestic pressures for protection? They complain that they are forced to take risks either with their export markets, by watching their currencies appreciate, or with their domestic monet- ary conditions, by cutting interest rates. But is that not precisely what the 'adjust- ment process' is supposed to be all about? Equally it is true that the US trade and budget deficits still yawn. But all experi- ence should tell us that there's a lengthy time-lag between currency changes and a change in trade flows. As the Bank for International Settlements said earlier this week, 'what is necessary now is to muster the patience to wait for the effects. • • which will . . . come through eventually.' It may be that Messrs Volcker and Baker are floundering around, as the bond mar- kets complain, like a couple of drunks. They have so far, no doubt by happen- stance, induced just about precisely the controlled devaluation of their currency which they appeared to have in mind. Of course if they had shown true states- manship and locked the dollar into a `stable' exchange rate with its major trad- ing partners, they would have been awarded the Nobel Prize. And we should probably have had a protection war. As to sterling, Sir John Hoskyns tells us that 'full membership of the EMS repre- sents one of the best insurance policies to safeguard Britain's counter-inflationary policies and encourage employers to furth- er reduce unit costs'. Precisely so. Forget the grammar, and concentrate upon the syntax. Had we signed on with the Euro- snake six months ago the pound would not have depreciated 20 per cent against the deutschemark, since presumably we would have felt obliged to keep our station. If se, had Sir John's members not felt `encour- aged... to further reduce unit costs' not a few of them would have been thinking about taking golden handshakes by now' Unfortunately most of those who clamour for the 'stability' of participation in the deutschemark bloc don't share Sir John s enthusiasm for short, sharp shocks. They believe, on the contrary, with my infor- mant's 'someone', that it's a sort of shangri-la. They might yet be in for disillu- sionment (although not if the Prime Mims" ter has anything to do with it, since she still believes in letting the train — of sterling `take the strain').
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