MONEY Mentioning the unmentionable

NICHOLAS DAVENPORT

The photograph of our Prime Minister and President Nixon closeted together in a White House room under a picture of George Washington suggested two gnomes of Zurich discussing the latest down-turn on Wall Street. Yet when he returned home Mr Wilson at his press conference said that the word 'recession' was not even men- tioned. No doubt that was because it was unmentionable. Every one in America knows that there is a recession and every one blames the Vietnam war, the consequent inflation and the persistent—but unsuccess- ful=efforts of the Federal Reserve to kill the inflation by the tightest-ever money

squeeze. This credit squeeze caused such a scramble for money that interest rates went sky high—to 12 per cent and more. The great telephone giant has just had to offer a coupon of nearly 9 per cent for a bond issue—as much as the poor British Treasury in its hour of need. That was a real distress

signal.

One reads that a recession is officially defined in America as a period in which there is negative real growth for at least two

successive quarters. In the last quarter of 1969 the GNP, measured at 1968 prices,

showed no growth at all. The present quarter is expected to register an actual drop. Mr Paul McCracken. the chairman of the Coun- cil of Economic Advisers, has just forecast virtual stagnation in the American economy for 1970, the 41- per cent money rise in the estimated 1970 figure being due almost entirely to anticipated price inflation. Indus- trial production has, in fact. been falling for six consecutive months and the building of houses—the first victims always of soaring interest rates—has been declining for twelve. The Chicago school of economists forecast a fairly severe recession: the Council of Economic Advisers are clearly hedging. To soothe Mr Wilson's nerves they say that fears of a sharp decline in us imports are exaggerated.

Wall Street seems to have decided that the recession will be sharp. It has had some gloomy company reports to digest. The last

quarterly earnings of the great IBM failed to show an advance for the first timevin

twelve years. Chrysler turned in a net loss of $4.4 million for the last quarter against a profit of $112 million in the corresponding quarter of 1968. General Motors profits for 1969 were down $21 million—about 1 per cent—despite a record for sales. Its last quarter earnings were the worst for six years, declining by 14 per cent. Steel reports

were mixed, with us Steel down by 14+ per

cent and Jones and Laughlin by 20 per cent. Industrial reports from widely different sec- tors have been generally depressing. Wall Street so far has not behaved too badly in falling by nearly 25 per cent from its index peak of 98.9 at the end of 1968. But the fact that the index fell last week below 750, which was supposed to be a 'resistance' level being that of the previous hear market of 1966 has plunged many investors into gloom. The next 'resistance' they say, may be below 700 if there is no let-up in the monetary squeeze and if worse company reports are to come. Financial writers love to invoke the ghost of 1929 whenever Wall Street suffers a sharp decline. Sure enough one of them has called

on Professor Galbraith who wrote the classic story of The Great Crash of 1929 and asked him: Will it all end one day in another debacle?' And he answered: 'Of course it will'. The Professor really ought to know better. I have taken the trouble to re-read his excellent old thriller and I find that it makes it extremely clear why the great crash of 1929 cannot be repeated. 'The fact was', wrote the Professor, 'that American enter- prise in the 'twenties had opened its hospit- able arms to an exceptional number of pro- moters, grafters, swindlers, imposters and frauds.' Today we have the Securities and Exchange Commission as the tough police- man of the market and a Federal Reserve as the stern controller of credit.

Speculation has not, of course, been killed and the Professor is right to suggest that outrageous speculation will always meet its doom. But today it is not a national pheno- menon. It is confined to the moneyed class. The actual speculators today are the sophis- ticated young managers of mutual funds (unit trusts), hedge funds and investment trusts who play about with the enormous capital saved by those who can well afford to lose it. These speculating tiros were not even born in 1929 and are not terrified by its ghost but certainly add to the speculative nature of the stock markets. Hedge funds selling can make the slump worse than it ought to be and the subsequent recovery sharner than it ought to he. 1 have heard of one hedge fund manager being forced by the trustees to close a 'bear' position at the top because the agreed margin had run out. This would teach the speculative fund sub- scribers a useful lesson in loss-making. Yet there are still gamblers in the city who are prenared to pay the investment dollar premium of 33l per cent to get into a hedge fund overseas in spite of the risk of the dollar premium disappearing overnight if the Tories win the election.

It is now up to Dr Arthur Burns. the new chairman of the Federal Reserve, to deter- mine how soon to relax the monetary squeeze and bring the recession to a halt. He is an Austrian—not a Hungarian— economist and an old friend of President Nixon. He told the Senate Banking Com- mittee before Christmas that some casing of the credit squeeze was due in normal circumstances but he did not consider cir- cumstances normal. He has allowed the President to make the first moves by cutting government expenditure and producing a budget surplus of $1,300 million. (He has even disallowed a Senate proposal to spend more on education.) This budget surplus looks tiny in relation to the total spending of $200,800 million.

It is thought that Dr Burns will start increasing the money supply gradually next month but as no economist knows what real effect on the economy is caused by manipul- ating the official money supply up or down —money being obtainable outside official sources—no businessman is going to throw his hat in the air. The next—and more valuable—pointer will be the publication in six weeks' time of the official forecasts of plant and equipment expenditures for 1970, which has so far been well maintained.

As far as the British economy is con- cerned Mr Wilson may be saying to him- self that while 'real' growth in the American economy may stop, a continuing price infla- tion will still allow American imports to rise. British exports to the United States after their 24 per cent rise in 1968 slowed down in 1969 and did not share in the fur- ther import growth. Even if they fell this year by as much as 10 per cent it would represent a fall of under 13 per cent in our total exports. So, on the whole, we may watch the Wall Street slump with the non- chalance of Professor Galbraith.