The Half-Per-Cent Solution.

A few people have worked out that the Reserve Bank Monetary Policy Committee should not have raised interest rates recently, but have usually done this for the wrong reasons, and without much intelligent debate on the subject.

Why did this happen? The Reserve Bank’s mandate is to control inflation, which, according to its economic theory, is the greatest problem in macroeconomics. This was considered too vague a mandate, so it was made specific; the mandate was to restrict inflation to less than 6% per annum. Interestingly, however, the decision was also to keep inflation higher than 3% per annum. It might seem surprising that a terrible demon like inflation should be considered so evil when it is over 6%, but also evil when it is under 3%. The first question should be not “Why inflation targeting?” (inflation targeting being setting limits to inflation) but “Why should moderate inflation be acceptable, if inflation is evil?”.

The answer to this question is a bit complicated. Inflation simply means that the amount of money in circulation is increasing faster than the rate of production of goods and services. Actually, this is inevitable in a growing economy, because money will be borrowed to finance investment, but not all of that investment will succeed; therefore there will be some spare cash circulating which has no counterpart in the real productive economy. The only way to stop this happening is to put the brakes on economic growth. That’s why the favourite tool against inflation is interest rates; raising interest rates discourages borrowing, at least borrowing for productive purposes, and therefore slows down the growth of the productive economy, and therefore raising interest rates curbs inflation.

Ta-ra! You can have economic growth, or you can have low inflation, but you can’t have both. According to this theory, then, the best way to curb inflation is to promote recession or depression. Which is actually true — during a depression there is an oversupply of goods and prices fall, and the circulation of money slows down and so the money becomes more valuable because there’s less of it to go round. (This is why monetarists call the Great Depression the “Great Contraction”; they pretend that the shortage of money was the cause of the depression rather than a consequence of it.) So putting a lower limit to inflation restrains the Reserve Bank from wrecking the economy and putting us all out of a job. They have only put a third of us out of a job (unless we started looking for a job ten years ago, in which case it’s more like half to two-thirds). Hurray for the Reserve Bank!

Why, however, should inflation itself be such a problem? Obviously, for people who don’t have much money in the bank it is no problem at all because salaries will have to rise to keep pace with inflation — otherwise people would stop being able to buy stuff and the result would be depression. Obviously, for people who spend their money on durable consumer goods and fixed assets it isn’t a problem because the value of those things goes up in step with inflation; inflation does not harm the value of your house. Again, if you have money in the bank, interest rates are generally factored in to be above inflation in real terms, so your money continues to grow in real terms. The real inflation rate in South Africa is something like double what the official inflation rate purports to be, but none of our billionaires are crying into their platinum-label Johnny Walker.

If inflation isn’t really a problem, however (unless it gets well into double digits, in which case it becomes really inconvenient) why has it been made the be-all and the end-all of the Reserve Bank, as it has been made the cardinal goal of all other major central banking institutions? Someone must benefit from this mad focus on an irrelevancy — someone for whom it isn’t mad at all. Why, then?

The answer, presumably, is to distract attention away from the need for investment in meaningful productive infrastructure which generates employment, a distraction known as monetarism which serves the policy known as financialisation. According to monetarism, the government should not concern itself with anything more than the money supply (which is why the government pretends to know how much money is in circulation, although it actually does not); doing anything else interferes with the proper functioning of the markets within which money circulates. Therefore, all that can and should be done is to raise or lower interest rates, which supposedly controls the money supply (though it does so only crudely and partially).

Therefore, the government does not attempt to direct capital away from investment in financial speculation, and in speculation in financial speculation, the latter being called derivatives, the famous “financial weapons of mass destruction” which ruined so many banks a few years ago. Therefore the financial speculators are free to make a lot of money and nobody will criticise them — because financial speculation is much more profitable than investing in manufacturing or extraction or agriculture, especially if you can control the environment in which the speculation takes place.

So, it would seem, for the sake of the enrichment of a tiny minority and the vanity of their hired pseudo-economists, governments have decided not to take effective action to promote economic development, but instead to focus their efforts on a foolish ideology which leads to destructive consequences. Nothing really new there. Also, this helps to explain why there is so little intelligent discussion on the matter.

But in that case, is it a problem that the interest rates have gone up? Well, there is another reason why they have gone up, one which has nothing directly to do with monetarism — but indirectly everything to do with the need for the rich to make a killing out of the misery of the rest of us. This is the lack of exchange controls, which permit the free flow of finance capital across South Africa’s borders. This is completely unnecessary for the development of the South African economy, but it is very convenient for people who a) want to pay as little tax as possible, and b) want to send their money wherever the investment is most profitable. In other words, for people who don’t want to develop the South African economy, at least not with their own money.

Since money can flow out of South Africa, there is the danger that we might be drained dry of capital. To prevent this, we have to be “attractive” for investors, meaning that they can temporarily stash their money in this country (so that we can use their temporarily stored money as virtual collatoral, borrowing money on that basis to pay our real debts) and make cash out of it. The money they make out of it is made through interest rates. Therefore, our bond rates have to be high — we have to pay out a lot of the money invested here. Therefore our interest rates need to be not too low.

What has most recently happened is that the United States has declared its intention of slowing the flood of money they are pouring into their own bond market. They have been doing this for six years in order to save the banks from the consequences of their profligacy and incompetence — essentially the banks are insolvent but refuse to change their policies to promote solvency, while giving the banks money directly would cause a confidence crisis, so the money is placed in the bond market and the bonds are then used by the banks as collateral for more lending and borrowing.

Unfortunately, this entails trillions of dollars which should mean that US inflation should be increased — over and above its current rate — by about 6%, which would be disastrous, in monetarist terms. Hence it is important that the bonds are never cashed in so that the flood of fabricated cash washes over the American financial system and causes another crisis. But “tapering” the flow of cash might lead to the bonds being cashed in out of panic. (This is yet another example of how utterly demented and suicidal the financial system is.) So in order to avoid this, the U.S. is cashing in its foreign bonds — meaning that all foreign currencies outside the Eurozone, Britain and Japan are falling against the dollar (and even more against the pound) and the rand is no exception.

How to combat this? Raise interest rates! Encourage people who aren’t Americans to buy our bonds! But of course everybody else is doing the same, and the consequence is likely to be a race towards the ceiling. As things stand, the modest rise in interest rates is not affecting the currency much and we can expect another fall soon. In which case there will have to be another rise, which will not work, and then there will be another one, and so our interest rates will inch upwards towards the relatively high levels of interest which we saw under the Mbeki government.

There are two problems with this. Under the Mbeki government we had twice the level of economic growth which we have at the moment, and we had less than half the level of state debt. Therefore, we are spectacularly poorly placed to counteract high interest rates. If those rates do indeed slow the rate of economic growth a little by discouraging investment borrowing, the consequences will be to push us towards recession. Meanwhile, raised interest rates will hit at the endebted people and the endebted government, leaving less money available for public spending (encouraging a recession) and less money for consumer spending (encouraging a recession). All in all, the stage seems to be set, thanks to the Reserve Bank, for a reprise of the economic crises South Africa saw in the 1990s, and meanwhile, with the lack of regulation displayed by both Reserve Bank and wider government, our banks are much less well equipped to deal with a financial crisis than they were in 2007-8, when they had not run up the kind of collateral-free loan books which they have been encouraged to run up by the current government.

The amusing thing is that this will be happening in Zuma’s second term, during which he has promised to generate six million jobs. We can assume that this will make the ANC unpopular. Unfortunately, these policies are wholly supported by the DA (insofar as the DA has any policy at all, rather than a set of disparate slogans drafted by brain-damaged neoliberal journalists and advertising executives). So we cannot possibly expect to escape the worst effects of the crisis which is plainly coming and which is being prepared before our eyes.

Woza Julius, woza!


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