The nonsense of 'Business as usual' MONEY
NICHOLAS DAVENPORT.
The amazing thing is that while the world dithers on the brink of war the open capital markets in the Western democracies still func- tion without fuss. One would have expected them to freeze up. Wall Street is, of course, sensitive to war news. When the Cuban crisis burst upon it the Dow Jones index of indlis- trials fell 28 points or 5 per cent. Last week it dropped nearly 20 points-5f per cent below the year's highest—but recovered well above the worst, except in international oil shares. In Throgmorton Street there was a fall of nearly 5 per cent in the first few days, but that was soon overcome and the market was finally higher on balance. The fact that the Prime Minigter went to smoke his pipe alone at Chequers—without Mr George Brown dart-.
ing in and out—was taken as a reassuring sign. The safe return of Sir Francis Chichester was all that really mattered. And Celtic's victory in the European Cup. The only warning sign that another war might break out at dawn in the Middle East was an unprecedented demand for gold on the London bullion market. The daily purchase ran from fifteen to twenty tons —five times the normal turnover. This was not a scramble on the part of private hoarders.
It was a Cush on the part of the central banks of the Middle East to build up their gold re- serves for war.
Are not capitalists in the Western world in danger of overdoing the ploy of `business as usual'? It is slowly dawning on Wall Street that the war in Vietnam, becoming fiercer, larger, more prolonged and more expensive than was ever imagined, is capable of bringing on another money squeeze, another budget crisis, another balance of payments crisis and finally another dollar scare. Mr Eliot Janeway, in his outspoken economic service, wrote on 24 May : `At the present rate of escalation the war is going to break the market wide open, hurting it . . . more than the open- ing shock of the outbreak of war hurt the market in the summer of 1914.'
Of course, the market in Wall Street, having come up from 786 to 909 (Dow Jones on 8 May), has reached a point of recovery which is wide open to `bear' attack. (It has recently suffered one—down to 862.) It has discounted the resumption of a strong growth rate in the economy while company reports are still revealing the drop in net earnings which followed the mild business recession of the past six months. It has also assumed that the President's proposal for a surcharge of 6 per cent on income taxes will never be carried out. But if the economy is seen to be over- heated this autumn, which may well emerge if the business revival keeps pace with the escalation of the Vietnam war, an increase in taxation will become inevitable.
In fact, the soaring budget deficit will pro- bably cause President Johnson to ask for a higher increase than 6 per cent. Mr Henry Fowler, the Secretary of the Treasury, has already warned Congress that the deficit on the conventional administrative budget could rise to $24,000 million in the fiscal year beginning on 1 July. That would be an all-tinie record and it is already being said that `the budget has run out of control' If the Treasury will have to bOrrow at least $12,000 million in the last half 'of the year, what will happen to the bond market? To what height will the borrowing rate go? All these are danger sig- nals for common stocks, in Wall Street. The Vietnam .war and the mounting world crisis Will, I am sure, finally catch up with the American market, as Cassandra Janeway warns; another money squeeze, as he says, may be `the carrier of war pressures from the theatre of combat into the economy.'
If Wall Street is slow to face up to the war crisis or to the possibilities of a war economy it cannot be expepted that Throgfnorton Street will be any readier. Indeed, the Government is doing its best to protect it from reality. At the first sign of a break in the market in govern- ment stock—perhaps a reflex of the fear of dearer money in, America—the Treasury hastily intervened on the buying tack. War Loan is actually being pegged at 521 as I write.
What is the reason for this paternalism? It is to prepare for the issue of £520 million of government stock on 28 July at the dearest possible price for the takeover of the steel in- dustry. What is the reason for the takeover? It is certainly not an act of preparedness for a war crisis or a war economy. In the event of war the steel industry wpuld be-immedi- ately taken over by the Government without any question of compensation for •the owners. It is merely an ideological act to please the doctrinaire Clause 4 Socialists. The new In- dustrial Reorganisation Corporation could have rationalised by regional mergers the steel in- dustry of this country and the old shareholders could have been offered minority shares in a holding company of which the state held con- trol If this had been set in motion two years ago we might have been steel-prepared today for any world crisis.
But the market in Throgmorton Street has now been conditioned by the Government to think only in terms of the short-term domestic balance. A new version of Economic Trends has just been published which assures it that `in the months ahead the balance should tilt more strongly towards expansion.' Demand, it says, should move upwards supported by increased house-building in the private sector, by a re- covery in the rate of stock accumulation and by a jump of around 2f per cent in consumers' expenditure. The last is to be brought about by a rise in wage rates which will probably be `of the order of 6 per cent over the eighteen months to end-1967.'
All this is intended to support Mr Callaghan's estimate of an increase of 3 per cent in output by the end of 1967. It may well turn out to be true, especially if exports continue their rise, which was 61 per cent in the first four months of the year, but if wages after July were to show signs of running ahead of the official estimates we have Mr Callaghan's warning that he would have to deflate the economy once again. More stop, I suppose, if more go.
I find this preoccupation with the next six months' index of the domestic output and the next six months' balance of payments dis- tressingly unreal. We would not be worrying about the balance of payments if the Govern- ment were not spending over £300 million a year on military commitments abroad. We would not be spending so much money on defence abroad if we were not building up forces in the Persian Gulf and maintaining a presence in the Far East to help the Americans in Vietnam. We cannot dissociate our domestic balance from these external affairs. In point of fact, by tying our currency to the dollar we have brought external affairs more into our domestic economy. If the dollar gets into trouble through increasing American commit- ments, not only in Vietnam but in the Middle East, we can no longer talk of `sterling riding high.' It will be riding with the dollar—below par. Perhaps this explains Mr Wilson's haste to get into Europe and join the. European monetary bloc—and perhaps keep out of a war in the Middle East.
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