In the City
The trouble with TINA
Tony Rudd
Few people in the City would agree with Mrs Thatcher that 'there is no alternative'. There are plenty of alternatives; the only trouble is that most of them look no better than existing government policy. Certainly the alternatives being profferred by the Prime Minister's leading opponents cut little ice in the Square Mile.
Mr Heath's prescription looks particularly unrealistic. A 'ring fence' around a Europe which included the UK (the pound having joined the EMS) appears not just unattractive but unrealistic. Of course the impact of high interest rates in America upon European financial markets is unpopular but most observers would regard it, nonetheless, as inevitable and unavoidable. To start with, the world is suffering from a bout of high interest rates. It's no use just blaming America. The other day when the Bank pushed up rates in London we can see (now) that this was as much a response to the expansion of the domestic money supply as to anything happening on Wall Street. Indeed, very shortly after rates went up here they started to come down in the US. We have our own money and credit problems and cannot blame it all on the Americans. But even if the whole thing were imported from the US it would be extremely difficult if not impossible to erect a 'ring fence' that was effective. There are huge surplus balances slopping around the world's money centres, owned by third parties (mainly the OPEC oil producers) which go where they like. No fence would stop them — short, that is, of a system which controls the flow of non-resident balances as well as those of residents. Any attempt to do that would mean dismantling the Eurodollar markets. The alternative of trying to submit the latter to central bank control would not, in most people's view, be effective; it would merely drive the market in these balances to some other centre which was not subject to control. London's loss would probably become Hong Kong's gain. The dealing in off-shore dollars, sterling and so forth would still continue.
The more generally held opinion that Mrs Thatcher should switch to a policy of reflation through an increase in public expenditure is hardly supported at all within the City. The major difficulty which the Government is perceived as having at the moment is, on the contrary, its very high level of public sector expenditure leading to the prospect of a continuing high level of public sector borrowing (one which may indeed rise substantially next year apparently). It is this continued heavy borrowing requirement, which a few years ago had been expected to fall dramatically as the result of the impact of the revenues from North Sea oil, which is leading directly, most people think, to the very high and unacceptable levels of long-term interest rates. If the government weren't a heavy borrower, the 'yield curve' instead of being practically flat (meaning that the cost of money for seven days or fifteen years is practically the same at something in excess of 15 per cent) would be well and truly curved in a 'reverse' direction. In other words the squeeze on money now being exerted by the authorities would indeed mean that borrowers had to pay over 15 per cent for their short-term funds but, as few people would be borrowing long at these appalling rates, the yield for fifteen-year money might be down in single figures. This is impossible, though, while the government is borrowing. As a result industry is priced right out of the picture.
What the City would like is the exact opposite. Namely a swingeing cut in public expenditure. The criticism of Mrs Thatcher in the Square Mile is that she hasn't gone far enough, by a long chalk, in curbing government expenditure. All the pressure has been on the private sector. It is individual companies that are being ruined by high interest rates, not the Post Office or the local authorities. It is employment also in the private sector which is being decimated (and indeed made worse by the fact that what cuts there have been in the public sector have tended to be of capital expenditure rather than a slashing of current overheads, with the result that firms in the private sector supplying the investment requirements of the public sector have lost their contracts).
What worries the City most is the way that the recession has worked on government policies to produce yet a further tipping of the balance in favour of the public and against the private sectors. If there is one trend which since the early Sixties has been working against the interests of economic health in the United Kingdom it is this. The hope was that this government would reverse the process. In the event the recession has ensured that it has continued. This is not an issue which appears to be recognised by Mrs Thatcher's leading critics in the Conservative Party, which, to say the least, is a pity. Meanwhile the City does not really buy the argument that present circumstances are producing an industry in Britain which is leaner and fitter and altogether better able to cope in the world outside. Because investors and their professional advisers have a reasonably good working knowledge of the leading British companies they are on the whole profoundly depressed at what is happening. They know only too well the shortcomings of many of the businesses that they monitor and they are aware that they are simply not strong enough to be treated like Spartan babies.
The alternative which the City would prefer would therefore be a mixture made up of swingeing cuts from the public sector 'overheads' offset by some increase in public sector capital investment and a substantial alleviation of the burden now heaped upon the private sector. If the latter included some shelter for manufacturing industry against current high levels of interest rates, so be it.
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