Wall Street Cries Wolf
By NICHOLAS DAVENPORT
WHAT is amazing about the giant America today is that everything seems to be out of control—the money market, the stock market, the motor industry, the Vietnam war, not.to mention NATO and the Grand Alliance. One reads ridiculous stories of how President John- son has found himself—how he has learned to relax and live with himself, but is he in control of anything besides himself? Does he really know where he is going? It does not appear so. Clearly, when the Vietnam war got out of con- trol the bond market went to pot and the President could not prevent Mr McChesney Martin of the Federal Reserve Board putting up the re-discount rate to 4 per cent. From that moment the bloom went off the Johnson boom in Wall Street. The bankers are now demanding higher taxation to curb the inflationary trends, but how can Congress be induced to pass a tax in- crease on the eve of the Congressional elections in November? It looks as if the President is hold- ing his hand and waiting to see what sort of mess the Federal Reserve, under the lead of Mr McChesney Martin, can make of the economy before he intervenes. An unholy mess seems cer- tain—as the cunning Johnson knows, Mr McChesney Martin is bound to be blamed.
As the free capitalist economy of the United States breathes through its stock market, it will be instructive to look at the Wall Street chart. A year ago it was just emerging from a nervous reaction in its long-term bull market. The Dow- Jones index had dipped to 833, but by February this year it had climbed to the magic 1,000 mark. Momentarily it broke through 1,000, but never decisively. Back it came to 920 and then, after the first quarter's reports had pointed to a rise of over 10 per cent in company earnings, implying a 10 per cent rise in the gross national income to $736,000 million, the market made an impressive rally to near 950. But there were danger signals. On the American Stock Exchange, the former Curb market, there was an outburst of speculation in the lower-priced glamour stocks and the volume of trading was the highest seen for a generation. The subsequent reaction was severe. Down came the market in hectic selling bouts to 864. The authorities became nervous. Over-speculation points to an over-heated economy. New orders, unfilled orders, stocks and planned expenditures on plant and factory extensions were all rising too strongly for conservative taste. Unemploy- ment was down to the unusually low ratio for America of 31 per cent. (The unemployment statistics anyway are unreliable.) Mr Gardner Ackley, the chairman of the Council of Economic Advisers, who is no conservative, declared bluntly that profits had been growing too fast and had better slow down. Mr Vanderpoel, vice-president of the First National Bank of Chicago, told a business conference that company earnings had in the past year gone well above 'trend lines.' There was a general feeling that many COM- panics now lacked 'growing room.' Out of all this discussion came a consensus of opinion among economists and bankers, voiced, of course, by Mr McChesney Martin, that a tax increase is required and that a surcharge of at least S per pent on personal and corporate taxation should.be imposed at once and lifted only when the inflationary pressures had subsided.
Now the blame for all this can be put upon the Vietnam war—or upon the government's dis- honest way of financing it. By making use of stockpiles and past appropriations in the budget which had not been spent, the government has been able to hide the real cost of the war from the public. The budget may put the twelve months' increase in the war cost at only $5,000 million, but Mr Walter Heller, the former chair- man of the Council of Economic Advisers, has estimated that after taking account of the stock- building and plant extensions brought about by war orders and their multiplier effects on con- sumer spending, Vietnam is responsible for about $15,000 million of the increased domestic de- mand. This is reason enough for extra taxation and credit restraints to be imposed on the economy. Yet it was not the threat of taxation and dearer money which brought Wall Street crash- ing down in its last attack of nerves. It was the shock of cutbacks in motor production. Both General Motors and Ford had temporarily put their plants on short-time working. This was followed by the announcement that the April sales of General Motors, Chrysler and American Motors had all fallen by 10 per cent to 15 per cent as compared with April 1965. There was no economic explanation of this anti-boom pheno- menon. It was simply the public's reaction to the safety campaign started three months ago by Mr Ralph Nader's book Unsafe At Any Speed and subsequently popularised by televised hear- ings in both House and Senate Committees. Obviously official interference in car design for the public's safety can quickly upset a mass- production industry like Detroit's—and perhaps the whole economy.
No doubt President Johnson, disturbed by the warnings of the economists and not knowing what course to adopt, unless it be to let things go from bad to worse to the discredit of Mr McChesney Martin, is secretly pleased to see some heat go out of the motor industry. It had been overproducing—at the rate of nearly ten million cars a year—and stocks had been piling up in dealers' hands. A production cutback was called for and if the manufacturers have to in- corporate about seven new safety devices in the 1967 models, putting up their costs by about 121 per cent, it will serve them right—in the President's view. Motor company profits are, therefore, heading for a decline in 1966. And the rise in many industrial profits will be checked by dearer money and rising costs. But the pro- ductivity of labour is still increasing—thanks to heavy' industrial investment—and there is nothing fundamentally wrong in the American economy Which cannot be corrected by the conventional fiscal methods and the end of the Vietnam war. But they can still fight a war and make some progress, even if at a slower rate, towards the Great Society. For the moment the bear market in Wall Street will probably run on and test the 833 level of its 1965 predecessor as I hinted in this column on February 25, when the Market was over 900. One must expect the American giant to feel off colour from time to time. As Mr Charles Bohlen, the American Ambassador in. Paris, said the other week : 'We are simply too damn big and rids.'
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