MONEY AND THE CITY
President Nixon and Wall Street
Nicholas Davenport
"This is the American Dream," cried President Nixon as he was embraced by Sammy Davis Jnr at the Miami Republican convention. To me it seemed more like the American nightmare and it was a relief to switch off the goggle-box, tune in to economic reality and see what Wall Street was making of it all.
In June and July the market had had an attack of jitters as it read through the frightening economic and tax proposals of the radical Senator McGovern. (The same will happen in Throgmorton Street when Labour's socialisation programme is studied on the eve of the next election.) But its nerve was recovered when the Senator dropped many bricks, including Senator Eagleton, and revealed his doubtful Presidential capacity. In August the market, convinced of President Nixon's re-election, swept up to new heights — the Dow Jones touching 973i — and when news of Dr Kissinger's fresh talks in Paris brought the hope — false as it proved — of a Vietnam peace before the election it looked as if the market would break through the magical 1,000. More sober thoughts have brought it back as I write.
In his election campaign Senator McGovern gave precedence to an attack on the President's management of the economy. Five million Americans, he said, have been thrown out of work. Actually the increase in unemployment in the last four years has been two million. The ratio of unemployment rose from 3.5 to nearly 6 but came back to 5.5 in June. It is true that President Nixon first slowed down the economy in an attempt to slow down the inflation but this policy was reversed exactly a year ago by floating the dollar, by putting a surcharge on imports, by relieving taxation and by increasing the money supply. Since then the economy has been moving up and now shows signs of vigorous strength. People are spending more freely and car sales have been mounting. Most company profits are sharply up — on average perhaps by 20 per cent.
Senator McGovern has charged that the wage and price controls which followed the three months freeze have been weighted against the wage earner and in favour of big business. There is something in this charge seeing that President Nixon has been putting pressure on the motor in dustry to keep the prices of their 1973 models unchanged. General Motors responded by cutting its proposed increase from an average of $90 per car to $59, pointing out that $54 covered the cost of government-required safety and anti-pollution equipment and $5 the cost of new standard equipment. Thus we are reminded that what is good for General Motors is good for the country — and vice versa.
All things considered President Nixon can fairly claim that his new economic policy has been a success. The number of jobs is 2.4 million more than it was twelve months ago. The officially revised estimate of the gross national product in the second quarter of this year suggests that the economy has been growing at a much faster rate than was thought likely. The estimate comes out at an annual growth rate of 9.4 per cent. This is in real terms after allowing for an inflation deflator at an annual rate of 1.8 per cent. Some economists have queried the deflator figure but the general opinion is that the inflation has been slowed down from an annual rate of 4 per cent to around 2 per cent. However, the recent sharp upturn in farm and food prices makes it uncertain whether this modest rate of inflation — which is much slower than in other industrial countries — can be held much longer.
Food prices — and inflation — could therefore become an important election issue. The soaring budget deficit adds to this alarm. Having been brought up as a Keynesian I am all for deficit spending when the task is one of reducing unemployment but I think Keynes himself would have flinched at an American budget de it of £30,000 million. The current fin ncial year ending next June forecasts a government spending rate of $250,000 million. According to the Brookings Institute it will rise to £300,000 million in the next financial year. Many people therefore fear that President Nixon will have to raise taxation after his re-election. This he stoutly denies. He has threatened to veto bills that would push spending above the budgeted levels. Indeed, he has recently vetoed a Bill which would put up the cost of the education and health programmes. He called it a "perfect example of the kind of reckless Congressional spending that just cannot be done without more taxes or more inflation."
The dollar, of course, is not so much affected by the budget deficit at home as by the trading deficits abroad. In the first half of the year the trading deficit was still running at around $10,000 million per annum but this is an improvement and the fact that the prices of American imports Jaye risen much faster than the prices or (American exports indicates that in due course a surplus should return to the American balance of payments. The protectionist forces maintain that the system of world trading is still unfair and that discrimination by the EEC etc against American agricultural exports must be ended before there is any commitment on a new world monetary agreement.
This suggests that the immediate outlook for the dolalr is very uncertain. Many European money managers are talking of another dollar devaluation and there is no doubt that when the £ was recently set floating speculative pressures immediately built up against the dollar. The floating of the £ is scheduled to stop by January 1 when we enter the Common Market — at a fixed rate I believe of around $2.40 — but heaven knows what will happen if the British export trade, already stagnant, begins to fall off in 1973 through continued labour trouble and the £ is perforce allowed to float again. The French could then be so furious that they will force the EEC members to impose strict exchange controls, double the monetary price of gold for settlements between members and then let the dollar float against the European bloc. If that were to happen I would back the dollar to come out on top eventually as the free world's currency.
When the President is re-elected I for one will not be throwing my cap in the air, for I cannot see that it solves anything. The United States will continue to be governed by the triumvirate of Republican President, the Army chiefs and big business. But the world's trading and monetary system will remain unsettled and perhaps the Vietnam war too. And America will still be trying to find its soul. The only people who might be throwing their caps in the air will be the Wall Street boys as they see the Dow Jones breaking through its magical 1,000. Wise investors will then be taking their profits and sitting on their cash, waiting for the next crisis to time their re-entry into the market.
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