THE CITY

Ford, Healey and reflation

Nicholas Davenport

Last week I was taking my hat off to Mr Healey for selling such a hell of a lot of gilt-edged stock to the non-bank public. £3,000 million, they say, al the last three months! This last Monday he sold the hell of a lot more. There was quite a stampede into the 'long' end of the gilt-edged Market. I did say that another cut in the InInimum lending rate (Bank rate) would help

to consolidate the recent gains. The rate was cut last week to 101/2 per cent (against 12 per cent in mid-November) and perhaps another 1/2 Per cent cut will be coming this week. The Market is certainly expecting it, as the Treasury ill tender rate fell to 9.8 per cent. The latest

short' tap stock—£500 million of Treasury 91/2

Per cent 1980 — was actually taken up before

■ t could be quoted in the market and the latest 19ng,' tap — £600 milion of Treasury 13 per cent 1990 — was exhausted by Thursday last reek. The absence of any new tap stock on onday was no doubt responsible for the 'bull' staroPede.

The basic cause of the market's bullishness is, 9f course, the slowing down of the rate of

Inflation (to an annual rate of 14 per cent over the past six months), the cutting down of the deficit on the balance of payments, and finally the fact that labour has accepted the deflation,

that is, the rise in unemployment to over 11/4 Million, without more of a blow-up than the

friendly meeting this week between Mr Healey and the TUC. It is too early to say that Mr ealey will be able to carry out some reflation in his March or April budget — the measures

Which he has promised the TUC to take to

alleviate the sting of more redundancies in Industry are to be quite apart from and additional to the budget — but it is worth

!nicking at the budget which President Ford has Just presented to Congress to see how far

Arrierica is proposing to carry out the reflation of the economy which Mr Healey is not yet allowed to do in the UK.

We may laugh at Mr Healey's failure to get his budget figures right, especially the borrow

,ing requirement, but we should take heart that

7esident Ford's failure to get his own budget ugures right is far more serious than that of Mr

Healey. It is really astonishing that the Arnerican Treasury should make mistakes e. verY year of hundreds of billions in formulat1,_ng its budget accounts. The extent of its ruowlers was revealed by President Ford when presented his fiscal 1977 budget to Congress !aat week. 'Guesstimate' is a, horrible word but It does convey the nature of the estimates Which his budget director provides. , An American fiscal year normally runs to 'Jane 30 but the 1977 fiscal is to start on October ,1! 1976 and end on September 30, 1977. The rIlscal year which ended on June 30, 1975, was Oudgeted to provide a deficit of $9.4 billion but lit turned out to be a deficit of $43.6 billion. The 76 deficit originally estimated at $52 is turning out at $85 billion. All this was a ,nIg joke which no one took very seriously necause of the deepening trade recession and

the rise in uneMployment to 8 per cent (which is far worse than ours). The more the government spends by mistake, it was thought, the better for the nation. The fiscal 1977 budget now provides for a deficit of $43 billion because expenditure is put at $394 billion and receipts at $351 billion. But this is another joke. There is extra spending of about $25 billion by government agencies not included in the formal budget. Congress is also expected to press for another $20 billion spending, so that the deficit may become $88 billion or even $90 billion. No one has the slightest idea how it will turn out. No economic analust any longer takes seriously the budget figures put out by the Office of Management and Budget. The thing has become too big now that the American national income runs into trillions. (A trillion is a thousand billion and a billion is a thousand million.) On this subject of bigness I have been reading an interesting news letter written by the remarkable Dr Harry Schultz, called '2001' because it looks forward twenty-five years. In this period Dr Schultz thinks that there will be an American capitalist revolution from within — that the over-big Federal government will crumble and break down into smaller economic units. Perhaps he had been reading about our devolution debate here and sees the UK leading the way. The economic bigness of America is such that the poorer half of the world now depends upon President Ford's reflation of US buying power. On this point the President is extremely touchy. In his economic State of the Union message to Congress this week he says that some of his allies (meaning Mr Healey) are pressing him to take further expansionary action but he contends that this could fuel inflation. Besides, he added, an additional 1 per cent growth in the US would produce a rise in world trade of only 0.2 per cent. , The President is certainly doing what he can to reflate. Last year the US gross national product was down 2 per cent in real terms. Thanks to his tax remissions and his astronomic budget deficit spending — America is the only place where the old Keynesian doctrine can be applied — he says that the economic growth rate this year is expected to be between 6 and 61/2 per cent. The Democrats are actually pressing for a more reflationary programme but the chairman of the Council of Economic Advisers, Mr Greenspan, and the Treasury Secretary, Mr Simon, have urged the President to go for moderate growth so as to avoid a recurrence of the inflationary rise in prices. The only danger — from our point of view — is that the austere Dr Arthur Burns, who presides over the Federal Reserve, will take fright at the reflation and start to make money dearer and tighter. It will be a sad day for capitalism if these sophisticated money managers in the US cannot order their economic reflation without a return to dear money.

It may irritate some conventional monetarists that I keep harping upon the necessity for cheaper money but the world will never get out of its recession if it continaes to make moneylenders more prosperous than businessmen. Take the case of the developing countries. They managed to survive the deflationary shock of a quadrupled price of oil and a fall in the prices of their own products by borrowing, in other words, by getting more and more into the hands of the money-lenders. The non-oil producers total debt at the end of 1974 was about $85,000 million and at the end of 1975 about $100,000 million. At a compound rate of interest of 7 per cent this capital debt would double in a little over ten years. We are choking the developing world with dear money. It wants a period of interest-free loans to recover.

Finally take the case of the UK alone. Half the swollen borrowing requirement of £12 billion is due to interest on debt. It is on the hope and expectation that America will allow interest rates to fall and fortify its reflation that not only the boom in our gilt-edged market will depend but our chances of an early end to the rise in unemployment.