Don't just slump, do something (2)
Nicholas Davenport
My first call for anti-depression action — namely that the managers of the life funds should re-enter the market and resume their normal buying of cheap equity shares — was happily answered before the lines were in print. (Which revealed that Mr Lewis Whyte . and I had been thinking on the same lines.) The FT index recovered sharply from under 200 to just over 220 — now 214. As my second call for action concerns the Government and the rate of interest one cannot expect such a quick response. Indeed, one may have to wait until a new government is elected. But the matter is equally urgent. There can be no business revival — certainly no revival in industrial investment — until the rate of interest is brought down. What businessman would want to raise new money at a cost of over 15 per cent to install a new plant — without any labour guarantee of high productivity — when he can sit in an armchair and buy the undated old Consols at 153/4 per cent ex-dividend to yield nearly 16 per cent gross in perpetuity? As Harold Lever, Chancellor of the Duchy of Lancaster, has remarked: "Present interest rates are outrageous, dangerous and destructive."
The conventional view is that we cannot reduce interest rates in this country if higher rates are obtainable outside. Indeed, the argument is that we must always have higher rates than the American in order to attract foreign money to London in order to bolster up our intrinsically weak currency (sterling has, however, lately been supported by special oil payments made in sterling at the higher prices). Unfortunately, Dr Arthur Burns, the head of the Federal Reserve, has been keeping his interest rates high and the supply of money tight in order to curb the rise in the rate of the American inflation (which is approching ours). This policy has forced the prime lending rates of the American banks up to 12 per cent and over. It is, I think, a stupid policy which has pushed US Treasury bill rates up to nearly 10 per cent, caused American savers to withdraw from savings and loan associations, and brought about a famine in housing mortgages, not to mention a slump on Wall Street. It is not for us to interfere in American domestic affairs but Dr Burns should be told at once that his monetary policy is having dangerous international repercussions. He is driving up the huge interest bill which the oil consuming nations have to pay to the Arab producers. By quadrupling the price of their oil the Arabs have added some $60,000 million to the year's cost of world oil imports and as Western Germany is the only one of the great industrial nations presently with a surplus on its balance of payments the rest will have to borrow at punishing rates. An interest rate of 10 per cent on $60,000 million is a staggering $6,000 million a year. It is vital to bring the borrowing rate down for the deficit countries.
Dr Burns should be asked to attend with Mr Symon, the able US Treasury Secretary, an early meeting of the finance ministers of the OECD nations — and the IMF — and consider what joint action can be taken on money rates and what joint proposals can be made to the Arab creditors. It is ridiculous that with the world's financial centres awash with billions of Arab oil money the international level of money rates should be at its peak! The West'sfinance ministers should. sit down again with the Arab finance ministers to discuss (a) how the extra oil money can be, in part, re-cycled and in part invested, and (b) how the Arab money can be protected against depreciation from further inflation in the West. Dearer money is just adding to everyone's cost-inflation.
Take the case of the debt-ridden UK. We have already borrowed abroad over $4,000 million for the capital account of the public sector, thus faking our official reserves up to $5,300 million. On top of that Mr Healey disclosed in March that he had arranged a Euro-dollar loan of $2,500 million and in July a further $500 million from the Shah of Iran (neither drawn upon yet). A total overseas official debt of $7,000 million means that in due course we shall have to pay some $700 million a year in interest to foreign creditors and so wipe out a quarter of our net invisible income. Is this not improvident seeing that on the seven months trade figures we are running a deficit this year on our balance of payments of over £4,000 million? Could we not have arranged much cheaper and safer loans from the IMF? At the present rate of our expensive borrowing the interest charges are likely to mop up our first year's profit from North Sea oil. We are mortgaging our future too heavily.
Until there is an international agreement to bring down the rate
o,,The„ pec-ca-cor September 7, 1974 of interest we should endeavour to operate at home a two-tier system of interest rates which would allow the authorised banking depositaries to pay a higher rate on foreign money than that obtainable in the gilt-edged market or on 'the street'. The Bank of England might well spend more time on working out such a system (originally suggested by Keynes in 1931) than on trying to rescue some fringe banks or mushroom insurance companies which ought to be allowed to go bust. In the meantime the Bank might well cause a sustained rise in gilt-edged and bring down our domestic rates by changing its market policy.
It will have been observed that whenever the gilt-edged market has been active and on the move upwards the Bank has usually issued a new 'tap' stock and squashed the rise. Thus it issued £600 million in March (Treasury 12 per cent 1983), £600 million in April (Treasury 111/2 per cent 1977) and £400 million in May (Treasury 123/4 per cent 1995). The first 'tap' was finished in July. The government has sold such a lot of stock to the non-banking public this year that it has cut down the rate of increase in the money supply (M3) very sharply, and so added to the liquidity problems of the private sector. This 'tap' squashing policy should stop. The gilt-edged market should be allowed to move up on the momentum of institutional buying and bring down the rate of interest. Yields of nearly 14 per cent on medium-dated stocks and nearly 16 ° per cent on longs are much too high for our industrial survival. They fuel the fires of our inflation.
The momentum of institutional buying might well be accelerated if the Governor were to call the managers of the life and pension funds to his parlour in the Bank for a talk about the volume of their gilt-edged investment. As I pointed out last week their net premium income in 1973 allowed these managers to invest long term £2,201 million of which only 15.6 per cent went into the gilt-edged market. that is, not much over £61/2 million a week. This is a much smaller percentage of their funds than used to be the case in the good old days before government bonds had lost their respectability. I suggested some months ago that the Government should consider directing a proportion of the flow of savings which the life and pension funds collect into a special Public Works Fund which could be re-cycled into the housing market. This would help to stave off the coming slump in housing and avoid denuding the private sector of finance, which usually happens when the Bank sells stock to the non-banking public. Let the Bank aim first at pulling down the yield on long-dated stock to below 15 per cent which it could do next week if it told the jobbers to quote accrued interest as they do on 'shorts'. This would be the first step towards a revival in industrial investment. The , storm clouds are gathering over the economy as the National Institute warns in its latest Bulletin. So I would beg the Bank of England once more — Do something about the rate of interest.
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