MONEY
Through the Top the lot
Nicholas Davenport
When the miners' strike was going on it was noted that the Stock Exchange boom in equity shares was never halted. When the railmen stupidly rejected the Jarratt award and declared a work-to-rule the market momentarily shuddered. Could the TUC leaders be stupid enough to force the Government to the Industrial Court and, if they persisted in putting themselves above the law, impel Mr Heath to go to the country? It was a potential constitutional crisis scarifying enough to shake the market confidence. But common sense prevailed in time to stop more than a day's shake-out. The dull minds of the TUC leaders woke up at long last to the fact — which the market always knew — that Mr Heath is a tough prime minister who means to stand or fall by his revolution. So with the exception of oil shares every equity market went through its top. The FT 'thirty' ' index broke through 522 to end up at 530 — a rise of 70 per cent from its low point in March 1971. Now you may think that it is very foolish for the market to remain so bullish with so much industrial unrest in the country. Of course, it is discriminating; it is not yet bullish about capital goods shares which depend on a revival in industrial investment not likely to be seen before 1973; it is certainly not bullish about the engineering companies in the front line of the battle with militant shop stewards. But apart from these black spots there is a good technical reason why equity shares must go up — there is a lot more money chasing after them. The Bank of England has just issued a statement that the money supply has lately been increasing at the rate of one and a half per cent per month or eighteen per cent per annum. This is not surprising seeing that the Budget reflated the economy to the huge extent of £1,211 mil lion — £1,729 million in 1973-74 — which will become E2,000 million when VAT, the imputation system of corporation tax and the simplification of income tax and surtax come into operation in 1973. By the end of next year the Tories will have remitted £3,500 million of taxation — the biggest economic boost ever given by any government in our history. If the labour leaders were not so stupid as to insist on inflationary settlements this should result in a steady decline in unemployment — vacancies advertised are already up — but, as Mr Barber said in his Budget speech, "if particular groups insist on pricing themselves out of jobs and the nation out of business no government can secure full employment." The Chancellor justified this upsurge in the money supply — and officially repudiated Friedmanism — by saying "monetary policy will be geared to the needs of the economic situation ... the high growth of output which I intend to sustain will entail a growth of money supply which is high by the standards of past years . . to proceed otherwise would reduce the growth of output itself." Of course, at the outset of such a colossal reflation money supply tends to rise faster than the growth of output. This is es pecially the case when, the ceiling on bank advances having been lifted, bank loans pour out into the personal sector. Bank loans to persons went up by £250 million in the quarter ending February 16 — an increase of £100 million on the average quarterly increase of 1971. This extra money supply overflows into the security and property markets and inflates the prices of houses and shares.
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