In the City
Strange optimism
Nicholas Davenport
The banks in Iran, they say, are working much more smoothly now that under Islamic law they can charge no interest. Although I was brought up with a prejudice against moneylenders — in the old Christian days of Keynes we used to work and pray for the euthanasia of the rentier — I have never denied that bankers should have some interest: I have only objected to the very high rates of interest they are allowed to charge since our nationalised moneylender, the Bank of England, became obsessed with putting up its lending rate (now 14 per cent). When we English had our own revolution, which was over three hundred years before the Iranian, we had a clause in the Agreement of the People (1649) limiting the rate of interest to 6 per cent. If we had that rate today our economy would not be heading for recession.
In spite of the fact that everyone, except bankers, knows that very dear money kills business enterprise and inflates business costs, the Bank of England indulged its obsession at the end of last week by issuing another £1,300 million of gilt-edged stock, partly paid, with very high coupons — £800 million of Treasury 2003-5 with a coupon of 131 per cent and £500 million of Exchequer 1987 with a coupon of 13i per cent — to yield respectively 14.3 per cent and 14.1 per cent. In America 'longs' yield 9i percent and in Japan 6 per cent. I protested last week at the grievous burden of servicing the high coupon debt which this constantly borrowing government has issued to meet its debts. The debt charge is now running at over£6,500 million a year. We taxpayers are sweating our guts out to pay this colossal sum to moneylenders. We don't like it and a lot of us down tools in a fury to demand excessive wages to match the excessive costs of running our inflated establishment. I am not seeking to draw a parallel between the Iranian and our own social revolution but it is a curious fact that money has been at the bottom of both. In the case of Iran the influx of billions from the export of oil, inflated in market price by four in 1973, enriched the outrageously rich ruling establishment, caused corruption in high places, brought inflation of prices with the imports of expensive consumer goods, disorganised society — not to mention incidentally the traffic jams on the roads — and upset the old Islamic order. In the case of Britain it was the build-up of the socialist welfare state, with its vast bureaucracy, pouring out money through the 'social wage' until public expenditure on current and capital account topped £70,000 million a year (over half the GDP), it was this that brought about over-taxation and over-regimentation and a revolt on the part of the alienated work force. The series of strikes have really been strikes against the 'system'. The explosion came when every worker down to the lowpaid in the poverty trap, was outraged by the offer of a shilling in the pound to meet the high costs of living in this extravagant welfare state. The prime minister, like the Shah, has confessed to a miscalculation. Happily we still have him with us. It was very wise of him to avoid the confrontation of a 'state of emergency' but has he really got a 'concordat'? Or only a smoke-screen?
Once before the trade unions had promised to behave and follow a code of good conduct but fell down on their promises. It is obvious that they cannot control their militants on the shop floor and that when discontent is rife there will be unofficial strikes and strong-arm picketing. The novel feature about this new concordat was the agreement to work for an inflation target of 5 per cent by 1982 and to hold a forum of trade unionists, employers and government mandarins every year before Easter to assess the economic prospects affecting our pay and behaviour. It will be as pleasant and as useful as an Easter egg.
The first result of the coming forum, if it is attended by sane people, will be to discover that it is impossible to measure the state of inflation twelve months ahead and ridiculous to set a target of 5 per cent by 1982. As Sam Brittan reminds us in the Financial Times the state of inflation depends not only on excessive wage claims but on the exchange level of sterling, which depends on monetary policy, which depends on the dollar, which depends on OPEC oil pricing and investment — or re-cycling — policy, as well as on decisions not yet taken by the US Federal Reserve and the confidence or lack of it which follows. What we need is not so much an economic forum, which could end in rival economists tearing themselves apart, but a political forum where the prime minister says to the TUC leaders: 'Comrades, if you insist on pushing up wages each year ahead of productivity we are all sunk. What changes in the system do you require to get your members to work without strikes and even to get interested in improving their output?' I don't suppose that they have a clue. The English disease is mental and is not curable except by a miraculous change of thought about co-partnership.
These dark thoughts came to rue when the Stock Exchange suddenly became bullish this week. This bullishness was not due simply to the beginning of a thaw in the weather or in the strikes; it was due to a growing conviction in the gilt-edged market that interest rates had peaked. With monetarists in power at the Bank of England I would have thought that this was too optimistic a view to take but institutional money poured into the 'tap' stocks in the gilt-edged market — it is thought by as much as £1,000 million in a week. Certainly the Bank has now issued more than enough 'tap' stock to the non-bank public for this financial year to maintain its money supply target.
It is generally believed that the life and pension funds have been piling up cash. Messel's estimate of institutional liquidity at the end of January was £4 billion, which may be close to the truth seeing that the annual cash flow of the life and pension funds is now reaching £10,000 million a year. Bullishness in the gilt-edged market has now spilled over into the equity share markets, which may also point to some institutional buying. It is recognised that the life and pension fund managers must wish to increase the ratio of equities to total assets to reverse the imbalance caused by their heavy purchases of gilt-edged 'tap' stocks in recent years to comply with the funding policy of the Treasury. Let us hope that the Wilson Committee on the City institutions, whose final report is now awaited, will not intervene with silly directions to upset the balance of their commonsense.
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