Onward to 10 per cent and trouble MONEY
NICHOLAS DAVENPORT
We are going through a monetary period in the City when every damn thing goes wrong. Last week the building societies raised their mortgage rates to 81 per cent and brought dis- may to millions of homes. This week we saw a renewed slump in the poor gilt-edged market which is now thoroughly demoralised. Following the shock of the 8 per cent Bank rate it had to stomach the bad February trade returns and this week a further rise in the American 'prime' borrowing rate from 7 per cent to 74 per cent. An investor can now obtain a yield in perpetuity of over 81 per cent from War Loan and nearly 9 per cent from Treasury 3 per cent. But what private saver would now consider putting his money into an irredeemable government stock? He has been 'had' for a sucker once before but never again. This was when f480 million of 2f per cent Treasury stock. undated, were issued by Dalton at 100 in October 1946. It has now lost nearly three- quarters of its original market value. (It touched 1001 on 13 January 1947, its lucky day.) A fall of this catastrophic size has very serious consequences. First of all, it con- vinces the private saver that the National Savings movement is really a fraud. Secondly, it involves the Treasury, that is, the taxpayer, in an enormous loss. The reserves of the National Insurance Fund were invested in 'Da!tons' and when these reserves have to be tapped in periods of high unemployment and sickness the Treasury has to stand the loss of f72 Million on every £100 million drawn out. The only minister who might smile at this tragedy is Mr Richard Crossman who will wel- come 8.85 per cent if he can invest at this yield when he starts his new Pension Fund.
It must now be clearly understood that the Government has abandoned its conventional support policy and has handed over the gilt- edged market to the jolly hard-faced bankers who make a big killing out of dearer money. This was fully disclosed in the last bulletin of the Bank of England. Its conventional gilt- edged policy was described as follows: 'The authorities were, as always, prepared to deal in response to market offers at prices judged by them both to conform with the underlying trend of interest rates and to be consistent with the underlying long-term objective of preserving market conditions favourable to maximum official sales of government debt—particularly .roles to investors outside the banking sector.' This means softening a market fall, so that private savers should not be scared and aban- don their habit of putting savings into govern- ment bonds. But the Bank of England goes on to disclose that this conventional policy has now gone by the board: 'Further selling [this refers to the November/December period] was provoked by the international currency crisis and the market became more unsettled during the conference of finance ministers in Bonn. . . . When the foreign exchange markets had calmed down after the meeting a rise in UK interest rates, other than the very shortest, was seen as an appropriate accompaniment to the measures which had been taken to restrain domestic demand and the authorities reverted to a policy of allowing any weakness to be fully reflected in prices.'
The reason for this volte-face is that the Bank fears that unless it pays more attention to the question of money supply it will get 'a rocket' from its creditors overseas. The American pundits are now obsessed by the correlation be- tween a rise in the money supply and an in- crease in internal inflationary pressure. When the Bank of England buys government securi- ties it puts money into the hands of the sellers and in the last quarter of last year it bought (net) over £400 million. The actual money supply (domestic British-owned bank deposits and currency in circulation) rose by £680 mil- lion, making the increase for 1968 about 61 per cent. It is, of course, a nonsense to say that this necessarily increased the domestic inflation be- cause in so far as the sellers of government stocks take their money out of the country and invest it overseas it is the reverse of inflationary. Money fanatics here are moaning that we have lost control of our money whereas we have really lost control of our senses.
It may well be that the course of interest rates in America is still strongly upward. The money theorists believe that the rise in interest rates will check inflation by throwing more people out of work. It is obvious that President Nixon could not tolerate a rise in unemploy- ment over 41 per cent because of the already dangerous negro unemployment in the big cities but the Federal Reserve, unlike the Bank of England, does not have to take orders from the government. So we may see 10 per cent money in America before long.
It is therefore very important that we should
take every step we can to insulate ourselves against monetary folly abroad. We have no need to attract 'hot' money here for the sup- port of sterling which, thanks to the Basle Agreement, is not in any immediate danger
unless the franc is suddenly devalued by 25 per cent or more. But we should not encourage borrowing in the Euro-dollar market where rates have been hoisted by the withdrawal of American bank money to the United States. It is, therefore, wise that the Gas Council has been allowed to borrow in Germany where borrow- ing rates are lower. The Gas Council is, in fact, borrowing at 6f per cent instead of 81 per cent which it would have to pay in the open capital market. It is, however, significant that the Gas Council has taken a government Insurance cover for two thirds of the total issue against any change in the sterling om exchange rate.
A final note for those investors at this late hour who feel inclined to run into equities. The equity market had a nasty fall this week on fears about a tough budget and the Financial Times index dropped to 458—a fall of about 12 per 'sent from its top. 1 have been talking this market down since September but on 7 March I said that on a further dip it could become a 'buy.' At 458 the average price/ earnings ratio is 18.6 which is much more attractive. There are leading shares today which, allowing for some rise in profits this year, will be on a price/earnings ratio of under 15. Clearly, if Mr Jenkins does present a reason- able instead of an intolerable budget there will be a good post-budget recovery in our equity shares.
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