THE ECONOMY
What has Mr Bush done to deserve it?
JOCK BRUCE-GARDYNE
Many people nowadays,' A. A. Milne's King who liked butter for breakfast was sternly informed by his dairymaid, `many people nowadays take marmalade instead'. America's new President-elect must know the feeling. Challenged, at his very first press conference following his election victory, with an odious compari- son between his painless scheme to balance the Republic's books by means of a 'flexi- ble freeze' on federal spending program- mes and the 'voodoo economics' which he once attributed to President Reagan when he stood against him for the Republican nomination in 1980, Mr Bush responded plaintively that, 'There's a lot of good people think it's a wonderful idea.' And no doubt there is. Sadly it does not seem to include the people who pick a value for the dollar by their dealings in the foreign exchange markets. Never have those mar- kets given a frostier welcome to an incom- ing President, with strong intervention by the central banks of Europe and Japan entirely failing to check a tidal wave of selling of the greenback. Perhaps it was predictable. No one imagined that President Reagan in his twilight days would square up to the federal budget deficit. But with the White House fought and won, the watching world has to face its doubts whether his elected successor will do so either. It sees that the incoming President will confront a heavily hostile Congress, and that his only cam- paign pledge of significance is a pledge to eschew tax increases Match my lips'). It does not like the prospect. Indeed by last weekend it had worked itself up into such a state of nerves that many were predicting another 'meltdown Monday'. It didn't happen. The central bankers, led by the Bank of Japan, stepped in hastily to mop up unwanted dollars, and the markets breathed again. Nevertheless the mood is profoundly edgy, and if this week's US trade figures, due out after The Spectator has gone to press, should have turned out worse than had been expected, it will be lap-straps time again. What has the hapless Mr Bush done to deserve such a chilly welcome? After all, if history is any guide, his studious avoidance of any commitment to do something posi- tive to cure the 'double deficit' — i.e. the gap between America's external sales and purchases, and the other gap between federal tax revenues and spending prog- rammes — should be rather reassuring. For presidential platforms and presidential performances point traditionally in oppo- site directions. The two successful candi- dates for the White House this century who put the balancing of the federal budget at the top of their shopping lists were Ronald Reagan, and FDR. And look what hap- pened to both of them. By this criterion George Bush ought to turn out to be a second Gladstone as soon as he has been inaugurated. Only there is a limit to how far you can go against the grain in a modern democra- cy. When Mrs Thatcher lifted her axe over the trunk of British public spending in 1979, her fellow-citizens had looked into the abyss of hyperinflation, and taken fright. Mr Bush's fellow-citizens have had no such education. To them their country's plunge into indebtedness is akin to Aids: something you read about, rather than experience. For them it has meant low inflation, keen competition for their cus- tom, and a user-friendly jobs market (even if a lot of the new jobs created have been poorly paid). Hence, indeed, Mr Bush's easy ride to victory. So what is worrying the international audience is the calcula- tion that it will require a second Wall Street crash to bring Uncle Sam to his senses. That, and the fact that the ingre- dients of such a crash are thought to be assembled.
The ingredients are indentifiable. First, the incoming administration 'pushes' (in Mr Bush's terminology) for congressional observance of his 'flexible freeze': and pushes in vain. Then we have a series of US trade returns which seem to confirm `Run like mad! It's Jack the Crimper.' the recent evidence of a faltering in the correction of trade imbalances between the US, Japan and Germany. Then the Japanese investment houses take fright, and play truant from the US Treasury bond auctions. To tempt them back US interest rates have to be notched up fiercely. Nigel Lawson's tactics, in other words. Only with an important difference. Our companies are awash with cash: it is you and me who are overborrowed. So in our case dear money squeezes out consumption. But in the States it is the corporate sector which is over-borrowed. How would the leveraged buy-outs, and their bankers, (not to men- tion all those 'thrifts' — the American equivalent of our building societies teetering on the brink of insolvency) fare if Mr Greenspan, the chairman of the US central bank, were to find himself obliged to repeat the sort of medicine which his predecessor, Mr Volker, applied in the early 1980s: base rates in excess of 20 per cent? It hardly bears contemplation. That is what is scaring the foreign exchange markets.
Their fears are understandable. But, in practice, who is going to pull the plug out? Are the Japanese financial institutions going to turn their backs upon the dollar, when to do so would lock their manufac- turing partners out of essential US mar- kets, and at the same time destroy the value of their own vast portfolios of US Treasury bonds? Do the Germans want to have their American competitors on the capital goods markets offered dollar/ deutschmark parities which deprive them (i.e. the Germans) of all hope of profit? If Mr Bush's fellow-citizens are complacent about their national indebtedness is it not possibly because their international trading relationships have become a little akin to those childhood games of Monopoly in which the winners gave their winnings to the losers, so that the game could go on?
The reality remains, however, that the dependence of the US corporate sector on debt has grown to the point at which a substantial hike in US interest rates could bring the whole structure tumbling down. Will Mr Greenspan take those sort of risks? Or will he stare down the Japanese financial institutions and the foreign cen- tral banks, and dare them to deprive Uncle Sam of his sacred right to live beyond his means? I know what I would do if I were he.
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