THE ECONOMY
Why the Chancellor should choke the credit boom now
JOCK BRUCE-GARDYNE
Twenty-two years ago, at the height of the Profumo scandal, I was summoned to break bread with Cecil King, then maestro of the Mirror group. The Denning Inquiry, which had just got under way, would, he solemnly assured us, bring the Macmillan Government tumbling down, since it would reveal that every member of the Cabinet apart from the Prime Minister himself and one other — Lord Home, I think it was — was busily engaged in sexual practices of the most exotic nature. I remember feeling sorry for Mr Macmillan and Lord Home, that they should be so left out of things. But the point of this recollec- tion is that in the feverish atmosphere of that time in Westminster and Fleet Street such absurdities were quite liable to be taken seriously. And so it has been again (apart, alas!, from the sex) these past few weeks. Those of us whose daily round takes us to Fleet Street and Westminster have been living in a dream world, in- creasingly divorced from the day-to-day interests and concerns of the mass of our follow citizens.
As we gradually come to again after our collective Westland trip, we find the world has changed. Will the collapse of oil prices finally precipitate that international bank- ing crisis of which the Cassandras have been warning us ad nauseam these four years past? Clearly it could, if we are not rather careful, since several of the fore- most names in US banking are not only heavily exposed to the threat of having to declare many of their loans to Latin Amer- ica 'non-performing': they are similarly exposed at home, where much of the collateral for their loans to domestic oil Producers has gone up the spout. Again, will the Government, emerging from its difficulties, confront a good old-fashioned sterling crisis?
Let us stand back for a moment. At the time of the first oil shock, older readers may recall, there was much argument about whether it was 'inflationary' or deflationary': some eminent authorities - including Chancellor Tony Barber — in- geniously explained that it was both. Yet in retrospect it was, surely and inevitably, deflationary, for it involved a straight transfer of wealth from the industrialised countries and the developing ones, both groups with a high propensity to spend their cash, to a small number of Arab oil producers who could not remotely be expected to do so.
So by the same token the third oil shock must surely, in the medium term, have inflationary implications. In the short run, it is true, cheaper oil should help to lower people's expectations of inflation in the pipeline. But unless the governments of the oil importing countries display a wholly uncharacteristic rectitude by charging high- er taxes to neutralise the extra spending power transferred to their citizens by the generosity of Opec (or unless the central bankers fail to prevent a domino collapse of commercial banks with yawning holes suddenly appearing in their balance- sheets), there is going to be a worldwide boost to demand for other goods and services, which is all too liable to give a kick-start to the next wave of inflation.
Against this background, how real are the hazards now facing Mr Nigel Lawson? For the moment, the market pressures on sterling and on interest rates seem to have lifted. But the underlying dilemma is still unresolved. Unless the Chancellor bumps up interest rates to the extent required to reverse the impact of the collapse in oil on sterling, the trade-off between the effect of cheaper sterling on our other imports and the effect of even cheaper oil on petrol and derivatives could be just about zero, leav- ing us with our consumer demand still frothing up and the CBI basking in the joys of the sort of exchange rate vis-à-vis the mark they would not have dared to dream about a few weeks ago.
And what, you may ask, could be wrong with that? Just this. The CBI, browbeaten by Prime Minister and Chancellor about the level of wage settlements when it complained about the awesome height of sterling — notably against the mark — in the autumn, went away and told its mem- bership that the slogan for the winter wage round should be 'nowt for nowt'. To which Ford, bellwether of the CBI's flock, re- sponded with a wage offer which repre- sented summat for nowt — only to be confronted with a call for strike action by its unions, who backed it up, just as the law requires them to, with a secret ballot, which they won. So Ford promptly offered a good deal more for nowt, which the unions graciously accepted, leaving HM Treasury feeling rather sore.
Now in the bad old days when the Treasury applied its mind to such yard- sticks as it had to measure the rate of domestic credit creation, the present com- bination of galloping lending by the banks to private borrowers, whether they be corporations bent on swallowing others on the back of loans from their bank mana- gers, or individuals bent on building up their mortgages to finance their purchases of consumer durables, and soaring prices for real assets such as housing, would have called for sharply higher interest rates in any case. But nowadays when the ex- change rate is the yardstick that dare not speak its name, increasing interest rates is liable to be denounced as a fatuous and misguided exercise to choke off precisely that adjustment in the 'real exchange rate' which Nigel Lawson told us would be the appropriate response to the eventual shrinkage of our revenues from North Sea oil.
There remains one more dimension: the political. I have frequently suggested in these pages that Nigel Lawson would be well advised to persuade his lady friend next door to make a date with the electors about this time next year, before the consumer boom in prospect turns into a hangover. Now it is being said that we can safely put the next election back to 1988. For one thing the Government and party will need the extra year for memories of the Westland fracas to fade. For another, the slump in oil, or more precisely the slump in sterling flowing from it, will lead to more inflation than the Chancellor was reckoning on, and thus choke off, in whole or in part, the rise in living standards for those of us at work which had appeared to be in prospect. That means both that we won't be feeling as prosperous and well- disposed towards the Government as Nigel Lawson hoped we would in early 1987, and also that if we give it another year we shall not now be running headlong into trouble by that time.
Convenient, if true. For there's no gain- saying that it would be just as well that Westland should be well and truly buried before we come to put our crosses. But unfortunately it's much less clear to me that the fall in oil and sterling will now suffice to put off trouble into 1989 or late 1988. I can't help feeling that if Westland really rules out a rendezvous with voters in the spring of 1987, then the Chancellor would be wise to grit his teeth and choke the boom in credit here and now. Whether his colleagues — and first and foremost his Prime Minister — have the stomach for that sort of medicine after what they've all been through is, of course, quite another matter.
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