In the City
Divining the future
Nicholas Davenport
The City has become extremely sour. The hope that I expressed last week that the new Treasury 'tap' stocks would be activated has not been fulfilled. The institutions simply will not buy them, although the 'long' tap' has fallen 14 points to 634 (65 per cent paid) and yields 12.8 per cent to redemption.
What upset the institutional buyers in the City was the interpretation put on the money supply figures by the soothsayers. Very significant, very dangerous, they said. M3 showed a rise of 164 per cent over the past financial year and in the quarter ending April 1978 a rise of 24 per cent. One of the most revered and ancient of the soothsayers has called for an immediate reintroduction of the bank 'corset' in order to restrict bank lending. As I have said, it will take months before the Bank of England finds out into whose hands the extra money has gone — it will probably be the public sector which quietly keeps on expanding its fearful army of expensive bureaucrats. It would be abSurd if a new bank 'corset' were to restrict bank lending to the private sector, which is trying to emerge from its deep recession. That old sorcerer, Professor Friedman, always insisted that the money supply aggregate must rise ahead of the rise in general output and it would be alarming if the sorcerer's apprentice, our Chancellor of the Exchequer, got the magic wrong.
This hold-up in the City — the Government has to sell about £450 to £500 million of 'tap' stocks to the non-bank public every month to neutralise the money inflation of the PSBR (public sector borrowing requirement) of £8i billion — reminds one of ancient times when a Roman general asked his soothsayer to tell him whether it was propitious to take the offensive. After dis embowelling a goat or cat and studying the movement of its entrails a decision might be taken to move or stop. Towards the end of this week the Chancellor, after studying the entrails of the money supply, must take the decision whether or no to raise the MLR (minimum lending rate) to 10 per cent and so activate his 'tap' stocks by giving the perverse institutional buyers what their soothsayers wanted.
Studying the entrails of the inflation rate figures is another restraining influence on the gilt-edged market. Some regarded the April figures as bullish and some regarded them as bearish. Over the twelve months to April the annualised rate of inflation is down to 7.9 per cent, the best for a long time, but last month saw a rise on the price level of 1.5 per cent, which is bad, having regard to the steady rise of 0.6 per cent in January, February and March.
Apart from the movement in the sterling exchange rate the major influence on prices is, of course, the next round of wage claims, that is, after the one ending in July. No wonder the Chancellor is beginning to impress on the trade union movement that an average rise of over 6 per cent in 'stage four' would be inflationary. The truth is that until there is a general agreement or understanding between the Government and the trade union movement that wage rises must be related to productivity rises there will be a perpetual and ghastly annual fall in the purchasing power of our money wages and salaries. This has already begun to push the non-unionised middle• class salary-earners down into the red on their monthly bank accounts. As the recent Tory political broadcast rightly made clear it is the savage distribution of wealth —from middle class to working class — which is bringing Britain into decline. Until the trade union move' ment believes in and works for the creation of wealth the decline will go on.
The equity share market is in a see-saw movement but it clearly does not want to g° down very far. There is always a fairly quick recovery after a fall. The reason is that managements have detected a more
reasonable — that is, a more conservative
attitude on the part of the work force who are resisting more strongly the disruptive tactics of the wild revolutionaries. (Witness
the latest move in the Observer crisis.) But there is somewhat disturbing news from NO 10 Downing Street. The prime minister !$
having trouble with the wild men of his party over the drafting of the election manifesto dealing with the Bullock report. He is putting forth a compromise which nulY upset the CBI. It will be recalled that the Bullock Committee recommended a trade union seizure of half the board of directors. This was a preposterous suggestion. The CBI replied that they did not object t° workers coming on to company boards provided that they were elected by a free workers' vote and not nominated by the trade union caucus. If they were caucus meh they would simply be interested in paying out more to the closed-shop union members, and less to the shareholders. They woulo not be interested in improving productivitY or the future welfare of the company. I d° not suppose that the prime minister's cony promise will go down well with the CBI or the market in the City. No compromise on this subject will do.
This incident reminds one that the cont. ; ing election will really solve nothing and will not prove to be a major bull or beet influence, The reason why Britain is declOr ing, why our productivity record is the worst in Europe, is because the working class in our still class-ridden society still feels coin' pletely alienated from our national estak" lishment. This is due mainly to its oWri history, for the Labour Party was formed to. destroy capitalism as its Clause 4 compelslt to do. So the average shop steward spews his entire time in trying to raise moneY wages without raising productivity. (T11! reverse happens in America where the work force is not historically bound to destroY capitalism.) Mr Callaghan is not the man force through a change in the constitution 0' the Labour Party — the much stronger Hugh, Gaitskell tried and failed to get Clause abolished in 1960 — but the historicity of the Labour movement will be changed by the force of world events. It has become too dangerous for Britain to allow itself W become the weakling of Europe and the satellite of Soviet Russia. The work forc:e, on the shop floor is realising this and will eventually produce leaders of a stronger 'We're ruined. He says the marron glace is calibre. So don't sell the equity market ideologically unsound.' short.
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