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Andrew Glyn

Boom – or Bubble?

(September 1977)

From Militant, No. 375, 30 September 1977, p. 6.
Transcribed by Iain Dalton.
Marked up by Einde O‘Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

‘Reserves at record level’, ‘Britain’s trade out of the red’, ‘Stock Exchange at all-time high’.

These typical headlines from recent weeks reflect a degree of euphoria in the media that at last “things are going right for Britain”. James Callaghan and the other Labour leaders have seized on this mood as justification for their policies. But what is the real significance of these developments?

The Reserves

The reserves of gold, dollars and other foreign currencies held by the Bank of England have risen to nearly $15 billion, as compared with just over $4 billion around the turn of the year at the height of speculation against the pound.

This increase represents cash which the multinational firms and banks have decided to deposit in British banks because interest rates are relatively high. This, combined with less worry about an early further downward slide in the pound, makes investment in one of the City’s financial markets attractive.

The present level of reserves would allow Denis Healey to pay off the borrowing from the IMF many times over. That is, if only he was sure that the recent cash influx would stay in London. But at the first sign of the government’s pay policy being decisively breached, the money can be moved out of London instantly, and the reserves would evaporate even quicker than they were built up over recent months.

Far from being money which has been earned through higher exports, it is all borrowed – in fact the current account of the balance of payments has been in deficit to the tune of around £2 billion so far this year.

The Bank of England could let the pound rise a bit more in the face of this inflow of cash, and this would reduce import prices and help keep down the cost of living. But it is a fundamental part of the government’s strategy to increase exports and any rise in the pound reduces their profitability.

So the Bank is preventing the pound from rising by buying dollars for all its worth. The whole operation is like following the advice of the Chicago moneylender who advertised his services with the slogan: “We will lend you enough money to get you right out of debt.”

Britain Out of the Red?

After the huge deficit in the first half of the year, the balance of payments surplus of £316 in August was greeted with rapture by the press. In fact the surplus was due to lower imports of “the traditionally volatile items of diamonds, ships and aircraft” (Financial Times).

And to put the surplus in perspective, if UK industry was working at full capacity, imports would be about £700 million a month higher. So August’s surplus would turn into a massive deficit.

But the most important point is that although the volume of exports has risen by about 12% since this time last year, stagnation is worsening in the world economy. Moreover, the competitive advantage British exporters gained when the pound tumbled has been eroded.

The National Institute’s latest forecast is for exports to rise by about 3½% over the next year. So any notion that August’s surplus signifies that the economy is about to be launched into a sustained export boom is completely wrong.

Stock Exchange Boom?

On September 14th the Financial Times 30-share index stood at 549.2. This was 5.6 points higher than the previous record of May 1972. The FT index measures the average value of a representative bundle of shares in leading industrial companies. On average, these have risen by nearly 300% since the ‘low’ of January 1975, with the individual shares rising from 107% (Spillers) to 852% (Lucas).

To put this rise in context it is necessary to go back a few years. Between the mid-1960s and 1972 the share index stayed at much the same level in real terms. That is, the rise in the price of shares more or less balanced the rise in prices over the period. But it was over this period that the downward slide in the rate of profit in Britain really got going.

By 1972 profitability was only about half the level of the mid-’60s (Bank of England Quarterly Bulletin, June 1976, p. 156). To some extent at least the capitalists were victims of their own archaic accounting procedures. For the real decline in profitability was masked by the inclusion of fictitious profits resulting from inflation, and to a degree the Stock Exchange was dazzled by these paper profits.

When Tony Barber’s boom of 1972 collapsed the stock market collapsed with it and in real terms share prices fell to around one quarter of the level of the Sixties and early Seventies. By the beginning of 1975 shares were worth less in real terms than at the time of the Dunkirk evacuation. The average company was valued on the stock exchange at one third of what it would have cost to produce its buildings and machinery.

But the rate of profit had again fallen by one half since 1972. By 1975 it was about one quarter of the level of the Sixties. So the collapse of the stock market just about reflected the fall in profitability over the previous ten years as a whole.

During the last year, the rate of profit has increased slightly, helped by wage controls and profits from North Sea Oil. The rise in the stock market represents a reaction to this rise in profits and a hope that it will continue. Another factor is the fall in interest rates which makes the return from holding shares more attractive.

The fact that the market moves in sudden lurches reflect the sheep-like behaviour of the manager of the big institutional investors (insurance companies, pension funds etc.) which dominate the market. They can get into just as much of a panic about being left behind when the market rises as they do when they fear it will fall.

Already much of the most recent rise in the stock market has been wiped out, probably reflecting the fact that so far at least the rise in profits has been quite small – in real terms they are only 14% higher than in 1975.

Nor does the stock market boom, such as it is, mean that the capitalists will soon follow Denis Healey’s exhortations to invest more in plant and machinery.

The boom is in the price of old shares. It does not mean that there is a flood of companies coming to the stock market to sell new shares to finance real investment projects. This would only happen if the rate of profit was decisively restored and if the capitalists saw the prospect of expanding markets.

So far, neither of these conditions is present. The real state of the British economy is shown not be the temporary waves of optimism on the stock exchange; but rather by the fact that manufacturing output is only ½% above the level of the 3-day-week, and that investment in manufacturing industry, over and above replacement of worn-out equipment, is only two thirds of the level of 1970.

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