The economy
The buck stops where?
Jock Bruce-Gardyne
Every night when I was a Treasury Minister, lying on the top of my 'box' was the Market Report on what had been happening in the main foreign exchange and gilt and bond markets around the world. More often than not, it revealed that the dollar had gone stronger 'on expectation of bad US money supply fi- gures this weekend'. Occasionally I paused to wonder whether, like Alice, I had somehow gotten onto the wrong side of the looking-glass. Had we not been told that excessive monetary growth would lead through to high inflation by depressing the exchange rate? Admittedly, that wasn't exactly what had happened to us in 1979- 80: but then it was explained — at the time and since — that our monetary policy, contrary to appearances, had not been lax at all, but excessively severe. Similarly, in 1982 it seemed to be agreed that the markets were behaving quite logically in buying dollars whenever the weekly US money supply figures were bad, since the US Federal Reserve would assuredly push up American interest rates to reward the purchasers of US government stock (by depressing the value of what they had just bought — but let that pass).
In fact, it did not take much analysis of the public utterances of Mr Paul Volcker to divine that, from the moment the Mexicans announced, in the summer of 1982, they couldn't pay their debts, dearer money was about the last thing the Fed desired whatever the money figures might be saying. But no matter. The bond markets knew better, and usually seemed to win the argument. Still, we all agreed it couldn't last. One day the world would wake up to the realisation that America's trade deficit was unsustainable, that the Fed had thrown the monetary reins over the horse's head, and that inflation was just around the corner. The central bankers let it be known as their considered opinion, there- fore, that the dollar parity was due for 'correction' downwards by some 10-15 per cent. Then of course everyone in sight dashed off and bought the blessed green- back as if they had stopped making them.
That was only to be expected. But consider the messages from the transatlan- tic entrails over the past week. The US auto workers had done their duty by the world's currency markets and gone on strike. Every sort of leading indicator was said to be agreed that the great US boom was drawing peacefully to its close. There was another record deficit. Inflation was as flat as a pancake. The polls suggested that Mr Mondale was almost out of sight. The money supply fell. And even Dr Kaufman felt constrained to agree that the Fed was hell-bent on cutting US interest rates. There was, in short a bright golden haze on the meadow. So did the dollar fall? No Sir! It shot through the barrier to cost more than three Deutschemarks for the first time since the early 1970s, and the one-dollar pound approached (it's already worth a punt, after all).
Fortunately, all has been made plain. We now have it on the authority of a learned German bank economist that the almightiness of the dollar hasn't got any- thing to do with the American budget deficit, or interest rates, or the prospect of President Reagan's re-election, or fears of third world debts. It is, quite simply, the tribute of the marketplace to the vigour, efficiency, enterprise and flexibility of the American economy; and we had better lie back and enjoy it.
Now it must be said that there is quite a lot to enjoy. Since we're all compulsory investors in the Airbus, it's presumably just as well that PanAm wants to buy it (providing that they actually pay for it, that is). Jaguar justifies the rush to buy its shares. The West End theatre — due to be closed down four years ago under the burden of 15 per cent VAT — basks in its busiest season in years, and Lord Forte laughs all the way to the bank. Stockbrok- ers justify their massive golden handshakes — or perhaps one should say wedding rings — by persuading clients to buy shares in any company the Americans have ever heard of in expectations of a transatlantic bid. The EEC will soon be able to flog the contents of its silos for real money. And it's worth noting that those hard-pressed debt- ors of South America have made more in the past twelve months from selling goods in the US market than the extra cost (to their creditors, who actually pay the bills) of servicing their loans.
Even the view from Great George Street is not — or should not be — all gloom. Admittedly the Treasury mandarins ought to have known that if they gave the TV newscasters a wigging for harping on about the pound/dollar rate the trade-weighted exchange rate would take a nosedive to teach them manners, as of course it did. But so long as commodity prices remain weak sterling's softness should have only a muted effect on high street prices. So far at least the pressure for a rise in UK interest rates has been containable — and if the turmoil in the currency markets frustrates our masters' impatience to see them lower, then that is probably just as well with government borrowing still rising suspi- ciously fast. Yet when persons of great wisdom and experience tell us that something is here to stay, it is not infrequently advisable to line up the farewell party. Back in the late 1950s, several august academics made good money for themselves and their publishers with spine-chilling descriptions of the inevitability of something called the `dollar gap' — the propensity of the Amer- icans to sell more goods abroad than they would ever import. Subsequent events revealed that, even while the pundits were proof-reading their manuscript, the 'dollar gap' was vanishing. On this occasion, the latest explanation for the rise and rise of the greenback surely begs a question or two. Certainly, Amer' ican labour markets, with their relatively low level of unionisation, display enviable flexibility. Certainly, the 'enterprise cul- ture' flourishes in the New World as it doesn't in the Old. Certainly, the sheer size of the US marketplace exercises a magne- tic attraction for overseas investors in times of uncertainty. But were all these features- or indeed any of them — imperceptible just five short years ago, when the Deuts- chemark was heading up towards 1.7 to the dollar, and the pound towards $2.40? Have the efficiency, enterprise, flexibility etc etc of the Japanese really slipped by nearly 20 per cent against the Yanks in less than four years? Or course, poor Jimmy Carter was a duffer, while Ronald Reagan reassures us all that nowadays the leadership of the western world is in safe hands; and maybe Chancellor Kohl is not the world statesman Chancellor Schmidt was supposed to be (some might say, Thank God). But does the spectacle of Reagan vs Kohl suffice to make the dollar worth almost twice as many Deutschemarks as it was in the days of Carter vs Schmidt?
This is not the build-up to a prediction that by the time these words appear the dollar will have shed a quarter of its value. Prophecies of a cheaper dollar currentlY display courage beyond the call of duty. Besides, it takes more than one definitive assertion of the permanence of a condition before we can be confident that it is on its way. If the European finance ministers are really sincere in their complaints about the frightfulness of dear dollars (and it is not exactly obvious why they should be), the instead of devoting the forthcoming Fund and Bank meeting in Washington to whing- ing on about US interest rates — thereby encouraging their natives to buy US Treas- ury bonds before their price goes uP -- they should seize the opportunity to issue solemn declaration that in their considered judgement the dollar is a 'buy'. That should do the trick.
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