Andreas Whittam Smith: The cold economic wind blowing from the US

If these trends run on, we can give them a name: a dollar crisis

If Gordon Brown does decide to call a general election in October, the economic background will be different from anything he experienced when he was Chancellor of the Exchequer. The financial storm that knocked over Northern Rock will still be blowing, but its character will have changed. You could see early signs of this in the financial markets on Thursday and Friday.

Consider the following strange events that took place during those two days. The dollar fell in what was described as a rapid and disorderly manner. It tumbled to a 15-year low against leading currencies. Compared with the euro, it has never been as cheap as it is now. More remarkable, the Canadian currency reached parity with the US dollar for the first time since 1976. Then there was gold, which only perks up in a crisis and which rose to its highest level since 1980.

All these movements had a single cause – the fear that the abrupt cut in interest rates by the United States central bank earlier in the week in response to the credit crisis would stoke up inflation. As a result, the terms upon which the US Government can borrow long-term money actually rose from 4.7 per cent to 4.9 per cent to reflect that concern. If these trends run on, we can give them a name: a dollar crisis. The loss of faith in the American currency that has been so long expected will finally have come to pass.

How would electors in Britain perceive this? Not the dollar crisis as such, but a deterioration in the pound/dollar exchange rate, which directly affects the value of British exports. Indeed, as the pound rose ever higher against the dollar, if that is what happens, voters would hear cries by exporters that their businesses were badly affected.

Threats that workers would have to be made redundant, factories closed and production moved out to low-cost countries unless the pressure was eased would be heard. What would be meant by an easing in pressure would be a cut in interest rates. That in turn would put the Bank of England in a difficulty. Whether or not it thought that a reduction was appropriate, it would hesitate to make a change when the country was going to the polls.

But another set of people would also be experiencing stress and strain during an October election campaign – house buyers. Lending rates for borrowers with less than perfect credit are already rising, and will climb further. Moreover, the consequences of the Northern Rock collapse will still be working through the system.

For instance, the Bank of England has given a strong signal by announcing that if the collateral it is offered by building societies and banks seeking to borrow funds comprises mortgage loans, then their face value must on average amount to no more than 75 per cent of the value of the properties upon which they are charged. In short, the Bank will not support mortgage lending up to the hilt. In these circumstances, it is hard to see house prices resisting the gentle decline which began in August.

In describing what I believe would be an uninspiring, if not gloomy economic background to an autumn election, I am not seeking to show that the Prime Minister would be foolish to call one. Quite the contrary, as I shall indicate. To begin with, I acknowledge the significance of a YouGov poll taken after the Northern Rock catastrophe and published in The Daily Telegraph. It demonstrated that voters vastly prefer Mr Brown as Prime Minister to David Cameron or Sir Menzies Campbell. When asked who would run the economy better, Labour polled 36 per cent to the Tories' 28. Furthermore, more than half of those asked, 52 per cent, say the Government handled the crisis well, and 37 per cent badly.

To the Tories, this will seem unfair. Did not the very system of bank regulation, brought in by Mr Brown himself, with authority split three ways between the Treasury, the Bank and the Financial Services Authority, prove almost unworkable when put to the test, and aren't urgent reforms needed? Yes, that is so, and Mr Brown would be well advised to get improved legislation quickly onto the statute book.

But unfortunately this is where the attractive youthfulness of Mr Cameron and his shadow Chancellor of the Exchequer, George Osborne, tell against them. In financial markets, whiz kids are associated with trouble in most people's minds.

There is one further factor to be taken into account. Even if the economic weather may still be deteriorating during October, can Mr Brown hope that the storms will be over by the spring of 2008, providing him with a better opportunity to go to the country?

Myself, I don't think so. Keep a weather eye on the American economy, particularly housing, the origin of the present crisis. Alan Greenspan, the recently retired chairman of the Federal Reserve Bank, said 10 days ago that the decline in American house prices "is going to be larger than most people expect". He would not be surprised if the fall was in "double digits". A few days later, Robert Schiller, a Yale economist, told the Senate's joint economic committee that "the collapse of home prices might turn out to be the most severe since the Great Depression."

Listening to these forecasts, my hunch is that if Mr Brown calls an election next month, it will be the smartest thing he has ever done.