THE ECONOMY
Why monetarism is too simple for Mr Lawson
JOCK BRUCE-GARDYNE
Twoyears ago, when Nigel Lawson returned in glory to the Treasury, I ven- tured (from another pulpit) to predict that he would prove a most pragmatic monetar- ist. Truth to tell it wasn't a particularly daring prediction, since - as he reminded us last week at the Guildhall - that was exactly what he had already promised us way back in 1971, in Zurich: It has always been a grotesque caricature of the present Government's economic policy to pretend that it consisted of leaving every- thing to an automatic pilot known as £M3. As far back as March 1980 . . . we explicitly stated that to assess underlying monetary conditions properly it is necessary to take account of . . . all the various indicators .
In a world in which the monetary system is in a constant state of evolution, the exercise of Judgment and discretion is inescapable. The important question is: who is exercising that Judgment and that discretion?
If it is being exercised by those who do not really believe in the policy in the first place . . . then any departure from predetermined rules and guidelines will understandably be regarded with the gravest misgivings, since it will as likely as not represent a backsliding from financial discipline as such.
If, on the other hand, the discretion is being exercised by those whose commitment . . to the overriding need to maintain financial discipline is beyond doubt, then there is no cause for such misgivings.
In other words, my friends, when we saw Denis Healey entering a brothel we had good reason to assume the worst, for we all knew he was a libertine at heart. But with Nigel, why, God bless my soul, we all know he wears a hair shirt next the skin. So nothing to worry about. He's just popped in to bring the ladies of the establishment to salvation. That, in a nutshell, was the message repeated in the long-awaited Address to the Merchants and Bankers of the City of London. £M3? Forget it - it's altogether too contrary to lose sleep over. Little MO? A model of clarity and rectitude. But since the City is too ignorant or bigoted to understand its charms, OK forget it too. EMS? Ah, well, now you're talking. . Oh, pardon, that bit's got censored by my neighbour up the street. So what's left? Short-term interest rates: 'Should it at any time become desirable to tighten monetary conditions, that would be achieved - and let there be no doubt about this - by bringing about a rise in short-term interest rates'. In the end, though, 'the inflation rate is judge and jury'.
The imagination boggles at the thought of what Nigel Lawson, city editor of the Sunday Telegraph, would have had to say about this lot. He would surely have pointed out that it bore a striking resembl- ance to Lord Barber's discreet jettisoning of Roy Jenkins's monetary guidelines in 1971 - and look what happened then. He would have pointed out that 'the perform- ance of one indicator' - £M3 - had deterio- rated alarmingly, and asked scathingly what was the 'convincing evidence from the other indicators' - apart from the much-derided Little MO — which had led the Chancellor to conclude that 'this was acceptable'. He would have asked precise- ly how the Chancellor intended to 'bring about' a rise in short-term interest rates if (as might conceivably happen, even in a world commanded by 'those whose com- mitment . . .' etc, etc) he reckoned monetary conditions needed stiffening just when the dollar had gone into free fall and therefore the market was punting on a cut in our short-term rates. Above all he would have sternly reminded the Chancellor that it would be too late for him to try to mend his ways when the Great Judge Inflation had already put the black cap on. Fortunately, however, Nigel Lawson has better things to do these days than scribble for Lord Hartwell. As it is the City and the watching markets took it like a lamb. The `young Turks who write the brokers' circu- lars' (he must have been rereading Denis Healey's speeches) might fume - in fact, on the whole, they didn't - but sterling bounced up merrily and the gilts market took it in its stride. It seems they believe him - he's really in there saving little girlies from sin. So they take that hair shirt on trust? Maybe. But perhaps there is another, ra her subtler, explanation. Once again we have to go back to an excerpt from that famous Zurich lecture: 'The broad aim of funding policy will continue to be to fund the PSBR, by raising finance outside the banking system, from the UK private sector and from external flows . . .' Now of course the 'broad aim of funding policy' over the four years since he spoke in Zurich has been no such thing. It has been to correct the impact of booming bank lending to the private sector on the £M3 dial by overfunding. Until this summer, that is. The message to the Guildhall was that the discreet abandonment of over- funding during this year's rainy season is here to stay. Which has a most interesting consequ- ence (apart from presaging horrendous figures from the £M3 dial). For `overfund- ing' by way of selling gilts to lesser breeds without the law doesn't count: it doesn't help the performance of £M3. But if you forget about £M3, why, then, feeding gilts to Yanks and Froggies is just as good as feeding them to you and me at home. From which it looks as though the markets have drawn the eminently logical inference that that is precisely what he means to do. They take his stern pledges about the continuance of unrelenting battle with the demon inflation at face value because they judge him to be setting out his stall for all those across the world who want a 'better 'ole' for cash they have hitherto been depositing with Uncle Sam. So no wonder the pound has been looking chipper. And woe betide the members of the CBI who go on paying way beyond the odds to their employees. It is, in short, a characteristically soph- isticated strategy. Not, however, without the odd hazard. Item: the oil price. If Opec falls apart, will the foreigners still be keen to fund our deficit? And if they aren't, will he really be prepared to jack up short-term interest rates until he tempts their jaded appetites? Item, even if he is so prepared, what about his neighbour up the street? Would she be relaxed about another jump in mortgage rates? Item, if all is really hunky-dory on the monetary front, as he says it is, would jacking up short-term interest rates just because the sheikhs have fallen out really be so logical? Item, will he really be able to turn a deaf ear to the CBI and (more to the point) his own backben- chers if the pound shoots up to, say, $1.80? But let's not cavil. Best to fasten our lap-straps and take our Quells. We may well have need of them.
Previous page
