Monday, November 22, 2010


If it were a group of South African bakers meeting in Seoul to discuss the price of bread, they would have faced some very hefty fines from the Competition Tribunal. But no, these were the revered heads of the Group of 20 most influential economies in the world. And they were not discussing fixing the price of bread, but rather their exchange rates and the entire range of products on their export catalogue. Let’s put it this way: if the Americans and some others had their way, you would be paying at least 30% more for that Chinese bakkie or motor scooter.

clip_image002To add to the irony, the world is lamenting the fact that they were by all accounts not too successful in drafting a practical action plan for this collusion, while still (and this is the extreme irony, if not hypocrisy) swearing allegiance to “free and floating exchange rates.” Cliché’s like “you can’t have your cake and eat it” come to mind.

By now every Joe Soap has become foreign exchange literate – indeed many of them “traders”. We all know that a strong currency makes imports cheaper but plays havoc with jobs. A weak currency does the opposite but has a threat of inflation.

It was not all that long ago (as old men often say when they mean a generation past) that our small pioneering team of economic journalists at the SABC was struggling to convince the controllers of news to allocate a few minutes for “economic indicators”. We swung it with the entire monetary and fiscal establishments and organised commerce backing us. But those same controllers were so petrified that the standard anchors would get it wrong that they insisted that we present them ourselves. And so we gained our 15-seconds of fame – more like 5 seconds if you take the graphics into account.

One of our problems was in presenting the Rand exchange rate. Before the mid-70’s the Rand was pegged to the dollar and quoted in dollars per one Rand. At that time you could buy $1.30 for R1 which would be expressed today as $1 = R0.75c. Shortly after the last formal 15% devaluation in 1975 South Africa joined the floating exchange rate regime, first in what was called a “managed float” pegged to the dollar and then onto a free float. But of course, we all know that monetary authorities across the world try and “manage” the exchange rate, while avoiding the loaded term “manipulating” their currencies to suit a political agenda.

These off the cuff reflections are not mere nostalgic ramblings. The point is that the then new Minister of Finance, Owen Horwood, had a severe time of it in championing a politically unpopular devaluation. Later we and our print colleagues were sternly lectured by Dr Gerhard de Kock, former SARB Governor on avoiding terms like “weak” and “strong” when referring to currencies, but rather to say “cheap” and “expensive”. And to ensure that any reports on exchange rate movements reflected the cause which was often dollar strength.

I went on the air explaining this one night, and a few days later a daily newspaper had a cartoon depicting a puny Rand in a boxing ring with a well built Dollar as his opponent. I was shown whispering into the wimp’s ear”: “Don’t worry. It’s not you that is so weak; it’s only he that is so strong!”

The bottom line is that a consistently strong currency reflects economic health, and a weak currency the opposite. This axiom is rooted not only in classical theory but also in common sense.

clip_image004De Kock’s lecture on semantics has clearly fallen on deaf ears. Perversely, the term he baulked at – “a weak currency” is now a desired state. Even workers are toyi-toying to trash the Rand. What would really make him turn in his grave, I suspect, is the view that a “strong” currency is undesirable. He was a huge admirer of Switzerland and its monetary management. This stemmed from his passion for the Central Bank’s task of protecting the integrity of the Rand domestically and internationally. If a free exchange rate is allowed to do its job, he would have argued, it should do nothing more than reflect the strengths and weaknesses of an economy and then move to correct imbalances especially in trade and capital flows. It’s a bit like a thermostat – cuts the heat when the temperature is too high, and switches it on when it is too low.

What we are witnessing is severe interference in that mechanism. The thermostat settings are simply being tampered with to turn up the heat without checking its efficacy – like whether the doors and windows of the room being heated are closed or whether the heater itself is working.

Simplicity is the essence of broadcasting. I quickly learned that if you cannot explain something to a 14 year old, it is because you don’t understand it yourself. In broadcasting you cannot be the “king with no clothes”, hiding behind complexities and jargon. If you don’t understand it, don’t say it! Few things amuse me more than when you break things down to their fundamental basics, you get the defensive response: “but things aren’t that simple.” It’s the same as that famous infidelity line: “It’s not what you think!” Invariably it is what you think, and invariably it is that simple!

That’s the beauty of behavioural economics. While it is not an exact science, it is closer to our economic essence and valid intuition. You will get as much of an insight into economic fundamentals if you understand your own and others’ behaviour as you will from books. After all, “economics” in ancient Greek means nothing more than “good housekeeping”; something they have clearly forgotten.

In this context we may ask: what’s so wrong with a currency war? For those who do not get involved, a stronger currency means cheaper imports including the all important capital imports such as plant and machinery and it puts a lid on inflation. But more importantly, it forces you to be super competitive, super efficient and super productive.

I accept that there’s a point at which a currency can be severely overvalued given its domestic circumstances. At the same time, currency depreciation can be used to hide all kinds of sins such as low competitiveness, low productivity, waste, inappropriate wage pressure, and government inefficiencies. Few things work better in denying a spoilt brat his way than the response of “I don’t have it!” Mind you, you should not have promised it in the first place. Of course, if every country gets involved in the war, then it is back to square one only with the prospect of rampant global inflation.

We can also ask whether the floating exchange rate system has not become so contaminated with speculation, derivatives and national interest manipulation that it has become dysfunctional and needs some or other Bretton Woods type of anchor again. World Bank President Robert Zoellick seems to think so and has even suggested gold as part of that package. National interest and principles seldom make good bedfellows.

The real and many imbalances in the world cannot be addressed by currency fiddling. Exchange rates fluctuate quicker than you can say “j-curve” and I am yet to be convinced that anyone can do long term planning or large job creating investments on exchange rate expectations. There’s no quick fix for years of succumbing to rampant expectations way beyond affordable reality, and a global cappuccino economy creating froth liquidity without tangible added value.

These are the doors and windows that remain open while we fiddle with the thermostat.


  1. Do you think that maybe our enormous and complex world has become so accessible to just about every Joe Soap in just about every conceivable field, even important ones like economics, that there are people sticking their fingers in pies when they don't have the knowledge or foresight of their actions and its messing up systems that previous worked well and fine? That's the way it appears to a "layman's" eye (such as mine)... that even leaders no longer have respect for the "expert opinions" and disregard them to the detriment of the whole society, especially here in Africa. THEA JARVIS

  2. That's certainly a very large part of the problem. But then even the "experts" are confused these days. One could argue that we became too clever...ignoring some very old and easily understood rules of prudence.