THE ECONOMY
It looks like a long wait for November 1988
JOCK BRUCE-GARDYNE
C
We have had no end of a lesson,' sang Kipling at the end of the Boer War: 'it can do us no end of good.' The immediate lessons of the stock market bloodbath are obvious enough — for instance that linked computer terminals around the globe are liable to shake the Gadarene swine look like maiden ladies out for a walk; that Paul Volcker's successor at the US Federal Reserve Bank, Alan Greenspan, confronts a learning curve (if you tell the markets that all is hunky-dory immediately before the unveiling of murky trade returns, the markets will take it amiss); and that the US Treasury Secretary, James Baker, should watch his tongue. But will it do us no end of good?
For the moment the omens are not exactly propitious. We are asked to take comfort from the fact that instead of tightening liquidity as they did with dis- astrous consequences in the aftermath of the 1929 Wall Street crash the US author- ities 'affirmed their readiness' to 'serve as a source of liquidity to support the economic and financial system' — and no doubt we should. Similarly the Germans' readiness to pull back from any further tightening of their interest rates must make sense in present circumstances. But none of this deals with 'the fundamentals' — the US fiscal deficit and the consequential trade imbalance — which have finally proved too much for investor confidence around the globe.
Admittedly President Reagan has said that he is 'willing to look at' any sugges- tions that Congress may have to offer with a view to the contraction of the budget deficit — even including an increase in taxes. But his aides were quick to point out that he didn't really mean that — not tax increases. Since his attitude toward fiscal rectitude has always been the reverse of Mrs Thatcher's towards mortgage interest relief, the aides no doubt knew what they were talking about. It will take more than a sudden and dramatic crack on Wall Street to bust the White House embargo on tax increases this side of the 1988 presidential elections.
In the meantime, so we are being asked to believe, the sharp contraction in the value of financial assets across the globe means that interest rates should be relaxed if we want to avoid a slump. Yet quite apart from the possibility that in modern conditions of stock market volatility most or even all of this contraction could be as rapidly reversed, the open-ended pledge from Alan Greenspan to come to the aid of any institution which finds itself in diffi- culty (a pledge which is tacitly echoed by the other major central bank governors) could involve a substantial relaxation of monetary policy anyway. If on top of that the US Fed were to try leading American interest rates downward it is not obvious whom they are to look to from overseas to help them out with their future auctions of US Government bonds.
Ah, but then we have — as Mr Lawson was quick to remind us — the 'Louvre accord' on currency stability to keep us warm and cosy as the nights draw in. Well certainly anything is better than the barrack-room abuse between Washington and Bonn that did as much as anything else to trigger the stock market crash. And it is true that the foreign exchange markets have so far remained remarkably aloof from the turmoil. But here, too, the `fundamentals' leave much to be desired.
The Japanese and British central banks may continue to be under orders to buy up surplus dollars — the Japanese because they don't want to see their goods priced out of US markets by a tumbling dollar, the British because of Nigel Lawson's eagerness to keep the pound in station with the European currency club. But there is no sign that the German authorities are going to be any more prepared than they have been hitherto to take risks with their domestic price stability by copying the Japanese and the Bank of England with massive intervention in the currency mar- kets. Ditto, for that matter, the Americans themselves.
So we have to fall back on tea and sympathy: assertions repeated with in- creasing stridency that everyone is quite enchanted with the current price for his own and everyone else's currency. It takes a brave man to assume that this alone will do the trick in these interesting times. What happens if it doesn't? Clearly what has made investors run for cover has been the fear that if Mr Baker really meant it when he took his stand against rising US interest rates last week then the dollar would sooner or later — sooner, rather than later — go into free fall. At which point Mr Baker would be forced to eat his words, and it would take a massive hike in US borrowing charges to halt the stam- pede; and that this would, in turn, plunge us into slump.
Fortunately perhaps the ability of even the US authorities to ape the courtiers of King Canute is more limited than Mr Baker would have us believe. If the watch- ing world does not see tangible evidence of action to cut that federal deficit, whether through an increase in taxes or through a substantial cut in spending programmes, Messrs Baker and Greenspan are liable to find they cannot resist the pressure to pay more to attract foreign savings into the US bond market whether they like it or no.
Without a doubt it would make a lot more sense in these somewhat anxious times for the President to eat his words and put up US taxes. Could not somebody remind him that he won election to the White House originally, not on a pledge to cut taxes, but on a pledge to balance the budget (but then so did President Roosevelt in 1932, and we all know what he did with that )?
Maybe the real lesson to be drawn from the turbulence of the financial markets is that the world has finally grown scared by the evidence of palsy at the heart of government in Washington. (It was touching to read in one American news- paper last weekend that the White House entourage was worried lest at this particu- lar juncture the President should be 'dis- tracted' by the First Lady's illness: as my colleague Christopher Fildes remarked, `When was he last "tracted"?'). If so the next 12 months while we wait for the US electoral procedure to sort out Snow White and the seven dwarfs amongst the various candidates for the succession will seem long indeed. Yet those of us who have been moaning for many moons about the extreme 'matur- ity' of the bull market, with its symptoms of dodgy finance too easily forthcoming for dodgy ventures should not complain too loudly when the froth is swept away.. If junk bonds are now perceived to justify their name, and the Porsche dealers have to work a little harder for their money, the world could yet be a safer place for the rest of us as a result of the past fortnight's antics.
Besides, it's an ill wind. On any ordinary day the latest news of our borrowing from the banks and building societies should have made the gilt-edged dealers gag. On Tuesday it passed with scarcely a burp.
Previous page
