THE ECONOMY
The joys of a tiff across the garden wall of Downing Street
JOCK BRUCE-GARDYNE
Anyone who serves time as a member of Her Majesty's loyal Commons House of Parliament soon learns to steer clear of a quarrel between neighbours. Confronted at his 'surgery' with an aggrieved consti- tuent who demands that something should be done about the next-door householder's menagerie of monkeys, or plans to add a sauna and massage parlour to destroy the view, the trained MP pleads sudden illness. Adjudication on the rights and wrongs across the garden wall is a mug's game.
So we must tread carefully. For Down- ing Street just now displays such a scene of semi-detached strife. At No. 11, Mr Law- son maintains an illicit liaison, now of almost 12 months' duration, with the Ger- man mark, and brags to the Financial Times about the tight rein he keeps it on. Up to three marks for the pound, but not a pfennig more: and not many pfennigs less either. He, at any rate, is not in the business of 'baling out' British industry if it allows its costs to get out of hand/Bon- dage, in short, is his thrill.
Across the garden wall at No. 10 such exotic bedroom practices are frowned upon. 'Geared to the deutschmark'? Cer- tainly not. Not us. Others may go in for this sort of thing, but we are liberated people. 'We have not been so geared and we have had a greater degree of freedom in relation to both the dollar and the deuts- chmark and I just think that I am grateful for that.' The deutschmark is 'slightly deflationary', and that is not the sort of company we wish to keep.
Now another thing one learned in the parliamentary 'surgery' was that not only are there no brownie points to be won by sorting out the neighbours' quarrels, but also that the quarrels, not infrequently, actually kept the neighbours happy. It could well be so in the present instance.
Consider the following. The Chancellor has long since jettisoned domestic monet- ary restraints upon inflation. He spends a king's ransom buying dollars in a some- what forlorn attempt to prop up their value, and then boasts at the Mansion House that he is not in the business of `sterilising' such purchases through extra gilt sales to prevent them seeping through into domestic credit. He denounces the Germans for giving 'overriding weight to domestic indicators of monetary policy' i.e. for doing what we used to do, at his behest, in the early 1980s. Yet he clings to these wayward Germans and their curren- cy, for better or for worse.
This reassures the watching world. It makes sterling a currency worth investing in. Paradoxically, when the Chancellor says that he has no immediate plans to cut interest rates, as he did last week, the foreigners come running into Treasury bonds, and sterling rises so fast that the Chancellor may in the end find himself constrained to cut interest rates again. To keep in step with the deutschmark (and to do what, perhaps, he aimed to do in the first place? Like Major Bagstock he is `devilish sly' is our Chancellor).
Such are the wonders of bondage. On the other hand there are circumstances in which it could become embarrassing. In- deed they could materialise any day now. The realisation that the American budget deficit reduction 'package' is almost entire- ly made of bubblegum, and that — for all Mr Lawson's urgent counselling — neither Treasury Secretary Baker nor Alan Greenspan at the US Central Bank are of a mood to put up US interest rates to defend the dollar, is already leading to a further slide in the international value of the US currency. Our Chancellor may deplore such instability: but since his lodestar is supposed to be the deutschmark, he should in theory take no notice. As the pound moves up towards two dollars — or even beyond? I don't think we should count upon it, with the likes of Jaguar and BAT and ICI hammering at his front door for pain relief.
This is the point at which his neighbour's interference comes in very useful. She couldn't stop his liaison, but she could prevent a marriage; which might require divorce. If the day were to come — as it might — when the Chancellor's prescribed (though formally undisclosed) boundaries for the pound in terms of marks proved irksome, he would have his neighbour to thank for his ability to change them with- out a hassle. So he has the best of both worlds. His liaison enhances his credit- worthiness; yet if he were to choose to slip out of it he could do so without the public spectacle of a formal divorce in the shape of currency devaluation. Lucky him! Lucky us? Well, that depends. Mr Lawson won this year's Spectator prize as Parliamenta- rian of the year. He's no mean cookie as a Chancellor, when it comes to that. But he undoubtedly enjoys living dangerously, and he flies by the seat of his pants.
His current strategy seems to be that by keeping the pound in station with the deutschmark he can exert pressure on the rising trend of our labour costs, while the Stock Market crash will take care of our appetite for credit. He may be right. But it is a situation which will need careful watching. Mr Stanley Kalms of Dixons, the `white goods' chain, set the cat amongst the pigeons by announcing that consumer de- mand was already falling short of expecta- tions the other day. Since then, though, we have been told that he was misunderstood, and other retailers continue to proclaim that they are looking forward to another bumper Christmas. The CBI's latest survey of the membership expectations was the most buoyant we have seen in years; and whatever else may be said of counsel from that quarter, these surveys have proved a pretty reliable guide to future performance hitherto. There is, in short, precious little hard evidence as yet to show that the slump in shares has knocked the stuffing out of the consumer boom.
Similarly, the glib assumption that 1988 is bound to be recession year in the United States, either because the Wall Street slump will turn spenders into savers, or because the US authorities will push up interest rates to protect the dollar, is beginning to look a little premature. When you are as heavily in debt as the Americans are, and entering an election year to boot, the temptation to let inflation rip is strong. Stronger, maybe, than the impact of stern calls from Whitehall to set US interest rates 'at a level that can both support the dollar and finance the budget deficit'.
Interest rate disarmament, ill short, like the other sort of disarmament, is not a game that we can play alone. The late- lamented General Secretary Andropov, when asked whether unilateral nuclear disarmament by Britain would persuade him to copy our example, replied, 'We are not naive people.' It looks increasingly unlikely that the Chancellor will achieve his heart's desire of an early meeting of the `Group of Seven', at which all the leading players would promise to stabilise their currencies and reduce their interest rates. (And this week's Central Bank interven- tion to support the dollar without benefit of American participation was, to put it bluntly, a rather fatuous substitute.) Mean- while, 'naivety' is to be avoided.
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