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September 18, 1992
Chaos in Europe kept domestic markets off balance, and prevented a normal bond market response to a new wave of poor economic data.
August Retail Sales fell .5%, as did Industrial Production, while Industrial Capacity Utilization dropped to 78.5% from 78.9%. Initial claims for unemployment insurance crept back up to 400,000.
The Consumer Price Index stayed well under control, up .3% in August, and the core rate rose only .2%.
The Bundesbank had its little joke on Sunday, announcing that it would back off its supertight monetary policy. World markets rocketed off at dawn on Monday, and were greeted by a mere onequarter percent cut in the stratospheric German interbank rate.
By Tuesday, this heavyhanded effort at financial politics had backfired: the .25% cut turned out to be a sop to diplomats, and the Bundesbank had no intention to ease. Stiff silence would have done less damage.
Already nervous markets careened back down, and on Wednesday in the currency markets, there was no bottom.
We wrote two weeks ago that the decline of the dollar against European currencies was a German distortion, not American weakness. All at once, in one single day, Wednesday, most European currencies joined the dollar devaluation versus the deutschemark.
The Italian central bank raised it's overnight rate to 40%, and devalued the lira 7%; Spain devalued the peseta 5%.
Sweden's central bank raised its overnight rate to 500%. No typo, no extra zero. Loan sharks everywhere are buying Volvos.
The Bank of England raised its overnight rate from 10% to 12% in the morning, to 15% at noon, and by evening political pressure forced a retreat back to 12%. The pound is suffering its first formal devaluation since 1967.
Though a great deal of money changed hands by painful surprise, these adjustments in currency values were healthy. If the Bundesbank wants a recession to salve its inflation mania, it is welcome to it. But there is no need for the rest of Europe to follow high German interest rates into the same recession pit.
Britain is already in deep recession, and the price of a "strong" French franc is 10% unemployment. European currency unity is not worth this sort of sacrifice.
In the States, a lot of uncertainty has been removed, pressure taken off the Fed to prop the dollar, and there is an excellent chance for American interest rates to resume their decline.
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