The economy
Interesting times
Jock Bruce-Gardyne
We live in interesting times. As these words were written sterling had just bounced back from $1.05 to $1.10, and the Deutschemark accordingly. By the time the Spectator is on the bookstalls, sterling could be carrying on into the vigorous teens, or slurping back towards the dreaded dollar parity. That we are in the middle of what the market buffs call a 'mature bull market' in dollars is now beyond dispute. But which way the cookie will eventually crumble is still shrouded in mystery. It is one of those occasions when, for the generality of us humble citizens the course of wisdom must be to climb inside the tent and wait for the storm to abate.
The finance ministers of Western Europe currently look upon President Reagan with about as much enthusiasm as the leaders of the National Union of Mineworkers regard the TUC. Less than six weeks ago they all met in Washington and agreed — or thought they had agreed — on a campaign of solidarity to crush the wicked currency speculators. There was to be 'concerted intervention' to catch them on the hop. Then along came Ronnie Reagan like the bull in the proverbial china shop to tell the listening world that he had no intention of 'toying with' the value of the dollar. So the speculators toyed with it instead. But perhaps the finance ministers might reflect that this doesn't really alter much, since they have been asking the Americans to help support their currencies for months, and nothing much has come of it; until Wednesday, at any rate.
Undoubtedly the President's bank man- ager, Mr Paul Volcker, would not have put it in the way he did. 'The great American expansion' may be 'rolling forward': what worries Mr Volcker (as he made crystal clear ten days ago, and again on Tuesday) is that so is America's indebtedness. And so are the pressures for protection against the surging flood of ever-cheaper imports. Yet he also made it crystal clear that if Congress and the President were not going to get to grips with the budget deficit — and that looks less likely with every day that passes — and the President continues to set his face against a rise in taxes, then he, Paul Volcker, did not intend to help them out by printing extra money.
The message that the currency markets have deduced predictably from this is that American interest rates are not going to fall, and that the dollar is going to go on rising. Ingenious souls are even calculating that Mr Volcker himself is now scared of 'concerted intervention' since the higher the dollar rises, the further it could fall. All the more reason to buy dollars while there are still some going. Which brings us back to mortgages and all that. To begin with it was thought that 'the highest real interest rates since Jesus Christ' (actually the highest since the Napoleonic wars, but that doesn't sound quite so impressive) would be just a spasm, to be corrected probably on Budget Day. No longer. Indeed the smart money is beginning to move behind the idea of yet another rise in interest rates.
This, according to the CBI, is the fly in the ointment. It would be prepared to go along with the London Business School's predictions of a pretty impressive 3.6 per cent growth in output this year providing the cost of borrowed money eases soon. But is the proviso really justified? Assured- ly the cost of borrowed money spells bad news for members of the CBI: the house- building and consumer durables industries, particularly (and the building societies may not be quite as eager to raise the mortgage rate as seems to be assumed, since they are already not exactly in a seller's market). But in the manufacturing and international trading sectors the most obvious reason for borrowing money must be to lend it on again: you don't need to borrow for your actual trading business when you are sitting on a 'cash mountain' which grows with every sale contracted in America.
When we last had interest rates well up into double figures, back in 1979-80, it was argued with some justification that they were self-defeating, since they forced the business sector to borrow even more to avoid defaulting on the loans already con- tracted (just like Uncle Sam today, in fact). But circumstances are very different today. Today it is the personal sector which bears the brunt of dearer money: and maybe no bad thing either.
The personal sector, that is, and HMG. Mr Lawson needs lessons from the CBI about the desirability of a cut in interest rates like a duck needs lessons in swim- ming. Providing for the cost of gilt-edged dividends is already making a monkey of his Budget arithmetic. What the CBI — being above such things — doesn't tell him is how to get it down. Or perhaps it thinks it does — by urging him to sign up with the Euro-money Club.
If so, it is not looking much beyond its nose. It is true that for the moment, with the Deutschemark almost as weak as sterl- ing, and intermittently weaker, tying the two together might obviate the risk of our interest rates being forced still higher by market pressures — which is why I would by no means rule out the possibility that the Government will plump for a hastY marriage regardless of the distaste for matrimony it continues to display. But if it does so it should do so in full awareness of what could follow when the honeymoon.ts over. For when the dollar falls off its cliff keeping in step with the Deutschemark could rule out cuts in our interest rates for many a long day. Of course there are those who say that there is no end to the rise and rise of the greenback anywhere in sight. They remind us that over the past 12 months and more it is not the inflow of foreign funds which has fuelled the dollar's voyage into space. Rather it is the fact that the US banks have stopped lending overseas, and called in the cash they had abroad as well. True enough: but why that makes the trajectory of the dollar irreversible is less easy to follow. The American banks have pulled their money home essentially for two reasons.. First, because they are dead scared of their traditional customers south of the Bin Grande; and second, because they are dead scared of each other. When Con- tinental Illinois totters on the brink it is time to batten down the hatches. But banks don't stay battened down for verY long, least of all when their local customers have got to have the wherewithal to set UP shop overseas or go out of business. Earlier this week the director of the West Midlands Industrial Development Association was quoted as saying that he was in negotiation with six US companles which wanted to manufacture in this coun- try for their consumers back home. IviaYbe. he was whistling in the dark — it's still quite dark in the West Midlands. But maybe he wasn't. For it is increasingly bar.d to believe that American banks and their domestic borrowers cannot achieve a bet: ter return on their money on this side ot the Atlantic than they can back home. And bankers (and-the Japanese) are about the nearest things to lemmings on two legs When one jumps they all jump. LeavIll the dollar behind them. OK, so some of us have been forecasting nemesis for the dollar for two years Or more, and a fat lot of notice it has taken! That still doesn't alter the fact that even' tually nemesis will catch up; and the longer it takes the more dramatic it is bound to be. The real question is whether the protectionists will get there first. So long as President Reagan puts his electors first the rest of us need not take the stertorous noises from our central bankers all that tragically. The dollar may be lousy for holidaymakers, but it's marvellous for business. But if the President, with n° more campaigns to fight, were to hearken to his producer interest groups then vie really would be in trouble.
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