THE ECONOMY
What did they really talk about in Paris?
JOCK BRUCE-GARDYNE
C an you,' asked Mr Martin Feld- stein, late of the President's Council of Economic Advisers, 'bring five people into a room and significantly lower the value of the dollar? You really can't.' But he was wrong. US Treasury Secretary Baker had brought five people — the finance minis- ters of Germany, Japan, France and Bri- tain, and himself — into a room in New York's Plaza Hotel, and significantly lower the value of the dollar was what they did.
That was 17 months ago. Now they are six (and if the Italians hadn't flounced out in a huff, they would have been seven). This year's parlour trick is harder to perform. Kicking a currency when it's already down — as the dollar was in September 1985 — is kid's stuff. Picking a currency up and making it stand pat is not so simple. At any rate the world's most distinguished central banker, Mr Paul Volcker, told Congress bleakly, forty-eight hours before the finance ministers climbed aboard their flights to Paris, that defining `reference zones' for leading currencies 'is not going to work' in the absence of `economic policy co-ordination and con- sistency'. And of 'economic policy co- ordination and consistency' there were not many signs in Paris.
True, Secretary Baker pledged that Un- cle Sam's federal deficit would be cut from 3.9 per cent of America's domestic product to 2.3 per cent by 1988; and the Japanese promised to do 'something' — precisely what, apart from an already discounted half-point cut in their discount rate, they didn't say — to turn their countrymen into a bunch of spendthrifts; and the Germans promised to add to the tax cuts they had in mind — for 1988. But we've heard it all before, many times, and it is hardly parsnip-buttering material. Furthermore although Chancellor Lawson contrived to hint that the major central banks might club together to give the foreign exchange markets a stiff clip over the earhole if they ganged up against the dollar, there were strictly no commitments.
Still, you never know. And one thing you never know is what will be the impact of the American tax reform, due to start to take effect later this spring. I was sitting at the feet of an eminent American industrial- ist the other evening, who told the assem- bled company that his fellow-countrymen really did not realise what was about to hit them. His own personal tax adviser, he told us, was going out of business. For years this succesful accountant had been organising tax-efficient shelters, it seemed, for his very highly paid client list, most of whom had not paid a penny to the Inland Revenue Service in years. Now, suddenly, almost every one of those shelters had been dismantled. 'The IRS,' our American industrialist informed us, 'is going to have cash coming out of its ears.'
Now there is no doubt an element of hyperbole to this. But it is worth noting that one of the reasons why our own Treasury is currently awash with cash is because Nigel Lawson traded the abolition of initial allowances for a lower rate of Corporation Tax. So while Secretary Bak- er's pledge of a federal deficit ratio re- duced by two-fifths may presume a rather optimistic rise in America's GDP, a sub- stantial shift in the US fiscal balance is not beyond the realms of possibility.
Moreover the Group of Six-and-a-Half (as I suppose it must henceforth be known) wisely refrained from adopting their French hosts' plans for currency 'reference zones'. They just said that they liked things as they were, and left the markets guessing as to what they were minded to do about it. That was surely wise for two sufficient reasons. First, that the announcement of such targets would leave the exchange markets with something to fire at — an invitation they would be likely to accept. And second, that Secretary Baker's free- dom to play to his domestic gallery, and at the same time to tease Bonn and Tokyo with remarks that are open to the inter- pretation that the US government would not be averse to an even cheaper dollar, does help to keep the forces of protection- ism at bay.
Certainly when one reflects on some of the alternative possible outcomes to last weekend's financial summit the one that emerges had a good deal to commend it. They might have broken up in total dis- array, which would have plunged the mar- kets into panic. Or they might have cont- rived to combine the French scheme for currency zones with the Baker scheme to force the Germans and the Japanese to mend their ways and spend their days in riotous living, which would have set off the next inflation spiral, and no mistake. The 'fudge' for which they settled looks posi- tively statesmanlike by comparison.
But that was all settled in advance. The `sherpas' had, as is the way of these events, mapped the mountain. The intrepid sum- miteers had but to append their signatures. Or was that really all? Let's hope not. For by pure serendipity their spring weekend in Paris coincided with a couple of develop- ments, neither of them predictable when the invitation cards went out, which should have given them furiously to think. The first is that the latest Opec price pact is coming apart at the seams. Nothing very surprising about that: it always smacked of Coudism. The world believed that Opec would put an $18 a barrel floor beneath the oil price for no more substantial reason than that the world wanted to believe it. Cheating, and the approach of spring, have put paid to that. Somewhat more ominous is the decision of the Brazilian government to declare default upon their debts. Thank God for the short time-span of the world's attention! Three, or even two, years ago the Brazilian default would have sparked off a run on the US banks. But we have lived with the sovereign debt crisis for so long that it is now greeted with a yawn (or what Paul Volcker calls a 'dulling of the sense of urgency'). Yet the repercussions — particUlarly on the 'rescheduling' of the Mexican debt, which is still dependent on the acquiescence of a number of marginal banks — could be distinctly awkward, to put it mildly. Roll that together with the impact of a fresh collapse of oil prices on US banks with loans on oil collateral, and top up with a dollop of speculation about the impeachability of certain of the 'Iran- gate' transactions, and you have, potential- ly, quite a lethal cocktail. Quite potentially lethal enough to be deserving of the attention of the gentlemen in Paris. But since the good old days when the 'Group of Five' could meet in secret are gone beyond recall, there's something to be said for a good cover story. And all the talk and communiqués about currency targeting and 'convergence' did provide that, if nothing else.
Meantime, if a cut in UK base rates no longer looks quite as imminent as it did last week, that may be just as well too. As resident Cassandra, Tim Congdon of Mes- sels, pointed out the other day, London equity yields are not yet quite as demand- ing as they were in 1972, nor sterling bank lending growing quite as fast: but the comfort margin is not that great. It seems a funny time to opt for cheaper money.
Previous page
