THE ECONOMY

Of aspirins, appendicitis and poppycock-land

JOCK BRUCE-GARDYNE

nflation', the Chancellor informed us 18 months ago when he was officiating at the memorial service for the late LIVI3, 'is the judge and jury.' So what are we to make of last week's news that it has suddenly shot up to 4.5 per cent per annum, 15 months ahead of the schedule laid down in the autumn statement? Is the jury out?

The official line in Whitehall is that it is nothing to lose sleep over. Nothing more than a touch of the seasonals: veg caught by early frost, lambs with staggers, that sort of thing. No reason to adjust the Budget forecast (repeated in the autumn statement) of a rate of four per cent by the year-end. Well, I'd hazard a guess that Whitehall's got its fingers crossed about that prediction.

Be that as it may, those silly old spoil- sports at the Bank of England have once more contrived to sound notably less re- laxed than Big Brother at the other end of town. 'Capacity constraints' — too many orders chasing too little output, and too many vacancies chasing too few applicants — are, according to the Bank, far less acute than they were in 1973. Which, as assurances go, is in the category of the doctor who tells the lapsed alcoholic that he hasn't yet reached the pink elephant stage again. For in 1973 we were heading straight for hyper-inflation and the second- ary bank collapse.

The recent cuts in interest rates, accord- ing to the Bank, were fine as these things go. (Well, what else could they say?) But enough's as good as a feast: what with the continuing rapid growth of 'broad money', yomping credit demand, and exuberant pay settlements, we'd better keep borrow- ing costs at 'close to current levels'.

The Bank will have won no brownie Points at the Treasury for this douche of cold water. For the Chancellor's theme remains that as soon as poor old Hopalong has done his duty and fixed a deal with Congress on the US budget deficit, then the finance ministers will forgather at some salubrious watering-hole and cut interest rates all round — simultaneously announc- ing (not for the first time) that the ex- change rates between the major currencies have reached a point of perfect balance, at which they will be sustained by the aggres- sive intervention of the central bankers.

By the time this edition of The Spectator hits the bookstalls we may know that Hopalong has indeed done his duty. Or again, maybe we won't. While we were waiting my eye was caught by an unman- nerly assault upon our Chancellor's current passion for exchange rate management from a most unlikely quarter, Mr Brian Reading, in last weekend's Sunday Times.

This is worth pondering since Brian Reading is not one of your pesky unre- formed monetarists like Tim Congdon of Shearson Lehmann (or even yours truly). Indeed so far as I'm aware he's not a' 'monetarist' of any sort. Rather he has always yearned for a return to the good old days when governments tried in vain to defy the elements.

And yet he was very caustic about the Chancellor's Mansion House denunciation of 'the idea that somehow exchange rate stability promotes stock market instability' as 'manifest poppycock'. Of course it is. But the serious charge, as Brian Reading pointed out, is quite different. It is that you cannot squander billions, as the hapless Bank of England, and the presumably equally hapless Bank of Japan, have been told to do in recent months, to try and hold the dollar at a level which the American authorities themselves did not appear to find particularly appropriate, without up- setting the bond markets. Which, in turn, leads to upward pressure on interest rates. And there you are — in poppycock-land. Brian Reading advanced from this analy- sis of the immediate past to a health warning against the whole concept of currency stabilisation, arguing very plaus-

The full significance can only be appreciated from the air.'

ibly — or so it seems to me — that if the world is as turned off by Reaganomics as it says it is, then support intervention of the dollar by other central banks is about as appropriate as aspirin for appendicitis.

Was the Prime Minister's advice to the President to ignore the contradictory cat- calls from economists, and simply do what she did in 1981 more appropriate? There's a snag here too, is there not? What she did in 1981 was to put up taxes, slash the budget deficit, and let monetary policy hang out. There followed, as she proudly pointed out, six long years of growth — together with a sharp contraction in the exchange rate for the pound. Is that precisely what the world expects of Mr Reagan now?

It evidently isn't what the Germans expect of Mr Reagan. Their finance minis- ter, Herr Stoltenberg, made it crystal clear at the end of Monday's gathering of the Community moneybags in Brussels that if the dollar was going to go on sliding then the rest of the world can whistle for any further stimulation of West Germany's economy.

In practice it looks as though we shall end up with something for everybody. Notwithstanding his careless talk about 'wrong steps' by 'hiking taxes', the Presi- dent will presumably take a few of them, II only because Wall Street is in a mood to go suicidal if he doesn't. And then Nigel Lawson will presumably achieve meeting of the Superior Seven which he yearns for.

Whether the world will thereby be made a safer place for all of us is surely more debatable. Judging by the less than entirely harmonious meeting between the Amer- icans, the Europeans and the Japanese under the aegis of the OECD this week, a meeting of the 'Group of Seven' could quite easily break up in disarray. And then the stock markets would really take a bath. But even if it did produce agreement on interest-rate disarmament and currency management would that really be the best way to persuade the Germans (or the Japanese, for that matter) to do whai others see to be their duty, by going on a spending spree? If their partners are going to collaborate to put a 'cap' on apprecia- tion of the mark then why should not the Germans sit back and enjoy the best of both worlds—i.e. strict financial discipline at home, and assured access to overseas markets for their artefacts?