THE ECONOMY
Enthusiasts for exchange rate control
JOCK BRUCE-GARDYNE
Afortnight ago I spent a strenuous weekend attending one of those learned seminars at which assorted transatlantic luminaries put the world to rights. 'I tell you,' one of the most eminent of American economic historians warned us, 'my regu- lar tennis partner back home is saying that we ought to take our troops from Ger- many. And when guys like him say things like that you need to sit up and take notice.' The air was leaden with forebod- ing. Protectionism was approaching the dimensions of a tidal wave; polite nothings from the Japanese just would not do any more; Europe must rise to the occasion and help the US eagle off its troubled perch; let's get back to Bretton Woods, for God's sake, before it is too late. No cliché was left unturned. Now it's about as safe a rule as any that the surest signal that the horse has bolted is when they go to mend the stable door. By the week before our meeting it had begun to look as if the dollar had at last stampeded. After a weekend of oratory devoted wholly to the theme that `something must be done' to cure the greenback's 'misalignment' there was no longer room for doubt.
That should be good news. A falling dollar offers the prospect of a lighter load of Third World debts, falling interest rates around the globe, cheaper commodity prices to help with inflation, an end to the Yankees' immoral practice of living off other people's savings, the spectre of pro- tection fading — and a sock in the eye to President Reagan and all his talk about the wonders of his home-grown miracle for good measure. Joy should be unconfined.
I fear it would be wiser not to count on it. If the dollar slide continues, and gathers momentum, in next to no time we shall be deafened with gloomy warnings about Third World countries having their access to the US market closed, the European agricultural gravy bowl at risk from US `dumping', and the world plunged into a slump as exports to the US are priced out.
But first we should be due much learned talk about 'surveillance'. For another gol- den rule in these affairs is that when nature has begun to cure a problem it is time for the medicine-men to agree that 'benign neglect' has gone too far. Sure enough, US Treasury Secretary James Baker has de- cided that there might be something to be said for an international circus on exchange rates after all. Admittedly the British Treasury line seemed to be that this was just a PR move to shut the French up. But by the end of last week's session of the finance ministers in Washington, even Doubting Nigel was saying that 'when the nature of the foreign exchange markets changed, our approach to them also had to change'.
What all this is presumably meant to tell us is that everybody, including the Amer- icans, now believes in teaching the curren- cy dealers a thing or two. So far, so good. But experience does suggest that while the central banks can, if they are cunning, catch the markets on the hop and give the wretched 'speculators' a bloody nose, re- versing a currency tide is about as thank- less a task as Mrs Partington's assault upon the Atlantic Ocean with her besom. At the conference which I attended there was talk of a central bank 'intervention fund' of $10 billion. That sounds like an awful lot of tin. But it only represents about an average daily movement of capital flows in our international financial marketplace.
So something else is needed: 'surveill- ance' is the magic ingredient. If only everyone would do as they're told — the Japs stop saving and go on a spending spree; the Americans put up their taxes and slash their deficit; the Europeans slash their taxes and have a go at 'supply side economics' — the world would be a better place and the exchange markets would begin to behave themselves.
The true enthusiasts gt one stage furth- er. We ought to have a brave new world of announced exchange rate targets: one (higher) for the yen; one (lower) for the dollar; and one (somewhere in between) for the European ecu, to which the pound should get itself attached. For just as we used to be told that the Bretton Woods system gave the speculators a one-way option, so now we are told that published currency targets would induce the specula- tors to line up behind the governments' intentions.
Fortunately the likelihood of this brave new world emerging is more or less re- mote. The Japanese will go on saving, and treating the stickers in their subways which beseech them to buy foreign with the respect that they deserve. Mr Reagan won't cut his defence budget or put up taxes, and Congress knows better than to slash welfare spending. The Europeans are not minded to get themselves in debt and relaunch inflation. Nor is Mrs Thatcher going to overcome her instinct that an exchange rate club which would have us as a member is not the sort of club to which we should want to belong.
This is fortunate because the cures can usually be relied upon to turn out a good deal more unpleasant than the disease. Take the European exchange rate mechan- ism. If the dollar is now undergoing surgery, the appetite for Deutschemarks could put the system under vicious strain. So long as the British authorities drag their feet on softening our interest rates, some of that strain will be relieved as smart money moves into sterling as well. Were we to please the exchange rate targeteers by signing on with the system, all attention would be on the Deutschemark. Nor should we overlook the evidence that orchestration of economic policies usually produces painful discords. We are regular- ly asked these days to recall the marvels of the Bonn summit of 1978. Yet this was when the Japs were told to go away and give their economy a boost. So they went off and let their monetary belt out by a notch or two, thereby launching the cheap- er yen, for which they have been pilloried ever since.
Besides, the gyrations of exchange rates are not quite as horrendous as they are painted. The emergence of the currency futures markets has helped to exaggerate them, but also to make them tolerable to international traders. The private sector has learned to live with them. Astronomic interest rates which might be required to hang on to target parities, and dramatic shifts in fiscal policy in response to injunc- tions from 'surveillance', would be far more awkward to adjust to.
Previous page
