Money market lunacy

Press, 27 August 1983, Page 22

Money market lunacy

By

DAVID LIPSEY

of the “Sunday Times,” London Every Friday afternoon, at 4.15 precisely, an undignified event disturbs the tranquil corridors of the Federal Reserve Bank of New York. The door opens to the press room, where a dozen journalists have gathered to hear the latest weekly figures for the growth of the United States money supply, and the journalists sprint to their individually assigned telephones to convey the golden information to an expectant world.

The New York markets are alrady closed; and the Fed has moved the release from 4 p.m. to 4.15 p.m. so that Chicago and Kansas City will be closed too — but such devices predictably failed to curb the exuberant greed of the financial markets. Officially, the news flashes to San Francisco to boost or break the Pacific stock exchange; unofficially, in New York bars, the dealers gather for a little out-of-hours money making. Recently as a direct consequence of this little drama, the apparently inexorable rise of the dollar came to a sudden end. The markets, primed by the 30

analysts who compete full time to predict the Ml numbers, had expected a $1 billion rise. In fact, the Fed announced a S4OOM fall. So the markets reasoned that the Fed would not, after all, have to put up interest rates. The flow of international hot money into the United States would thus stop, and so, the dollar was set to dip down. And the process was repeated following the recent SSOOM Ml decline.

There is about this everyday tale of market folk both a lower and a higher lunacy. The lower lunacy is that in logic it resembles spotting a starling, declaring it to be a swallow, and on that basis prophesying the imminent arrival of summer.

The Ml figures are now (as every dispassionate student agrees) hopelessly distorted by changes in the United States financial system, such as the burgeoning Money Market accounts. As a result, the Fed, in deciding its interest rate policy, now largely ignores Ml, and the link predicted by the market between better Ml figures and the expectation of lower interest rates thus hardly exists. When that link is applied, moreover, to the figures for Ml for a

single week it becomes an absurdity.

To this lower lunacy, the markets have now contrived to add a higher lunacy. Not only do they react to the wrong indicator, they react in the wrong direction.

The market is, of course, monetarist. If you are a monetarist, you believe that high money growth means high inflation. So you should

want to get out of the currency of a country where the money supply is growing fast, and into one where it is growing slowly.

But now, the markets are doing precisely the reverse. When United States money supply grows fast, the dealers expect higher interest rates and pile into dollars. When it grows slowly, they expect lower rates and bail out.

This perverse reversal of the way the market is supposed to work is currently inducing a policy paralysis at the Fed. Even the magician of money, the Fed chairman, Mr Paul Volker, now seems to be groping round like a blinded bear, unable to predict where the markets will next attack.