Monday, June 24, 2013

The government debt trap.

Why Pravin Gordhan is concerned about the current state of the markets.

Those who favour aphorisms are likely to be familiar with the “10 cannots”. Despite popular belief that they were written by America’s famous statesman, Abraham Lincoln, they were apparently the work of a religious minister, Henry Boetcker.

They are worth studying and following in all of our affairs, particularly government and public. But at least two will no doubt sound very strange in our modern world:

· “You cannot bring about prosperity by discouraging thrift,” and

· “You cannot establish sound security on borrowed money.”

The world is drowning in debt and funny money and it’s a moot point whether, with all the academic postulates and hypothesis that deluge analyses of the debt of different countries, we would not conclude that they would be either insolvent or close to it if they were individuals – at least from a cash flow perspective. While comfort is often sought in the debt to assets ratio, this is pushing hypothesis to beyond credence. A grand auction of all household and national assets to cover debt is pure fiction. So we see nations trying to revert to a Boetcker like thrift or “austerity” to roll back decades of indulgence and to spark off a heated international debate about whether, in the interests of suffering and stone throwing citizens, there should not be a leaning toward “spending our way out of debt”.

There is no easy answer, particularly because it is difficult to blame the 99% for the pre 2007 financial frenzy that left only 1% better off today. For a large part, the same financial shenanigans are still being practiced and the economic cappuccino machine is still generating much froth. I have a clear empathy for the 99%, but as a product of a generation of thrift and prudence, I am strongly drawn to those qualities being the cornerstone of a solution.

Broadly speaking there are three main forms of country debt:

· personal or household,

· foreign trade and

· Government.

In South Africa all three are cause for concern. Individuals are indebted to the tune of about R1.4trn (or about R50 000 per household), with only a quarter for fixed and appreciating assets such as homes. In foreign trade of both so-called “invisibles” and physical goods, we are constantly earning less than we are spending with our external debt also at about R1.4trn. And our total government debt now stands at about the same.

Global attention, stimulated in no small measure by public unrest, is focused mainly on government or public debt. Which raises the question: how comfortable can South Africa be with its level of government debt close to 40% of GDP (the value of goods and services produced in a year)? And if we are, can it be maintained or even rolled back, or are we heading for a government debt trap?

Not quite…although we could be there soon if one interprets an analysis of government finances by South African economist Christo Luüs. His insightful and coherent treatment of the issue is a must read for anyone interested in our economic destiny and can be found at this link. He sketches five scenarios of which only one can reverse a negative trend, and is highly unlikely; and another which could maintain current comfort, but is also becoming less likely.

In short, there is a strong interaction between three critical components that feed off each other to push government debt either into an exponentially worsening trap, or away from it. They are

· economic growth, or movements in Gross Domestic product;

· the budget deficit; and

· interest payable on that debt.

If one moves in the wrong direction, the others do the same. For example, current capital outflows cause an increase in the interest burden which will force government to go into a deeper deficit to maintain spending on vital services; in turn increasing the deficit as a percentage of GDP; then increasing concern among government bond investors, forcing interest rates up further and so on. You then quickly pass a threshold where, unless some drastic event changes one of the components positively, you are caught in a vortex.

I suggest you look at his scenario 4 which is simply keeping the fiscal ship on course, and then compare that with the latest developments on GDP, inflation, bond yield movements, foreign sentiment, and politically driven expectations to draw your own conclusions.

For me there are more important issues at stake. We are at the mercy of statistics! -- a set of numbers that influences our taxes, inflation, interest rates, jobs and many more.

When that happens my little Human Touch gremlin looks for a spanner. And the first ill-fitting nut it finds is – what if the stats themselves are wrong? In one of the most important statements in years, Economist Mike Schussler wrote that the God of all stats – GDP – could be wrong and understated! Yet, apart from Stats SA’s petulant rebuttal, such an important challenge fails to even remotely rattle the overwhelming obsession with it and receives little attention in mainstream media. On top of that, even if the GDP number is accurate, there is a growing realisation that it is an imperfect measure of progress.

The assessment of the budget deficit itself is arbitrary to say the least. It is based on the “primary deficit”, defined as the deficit before interest payments or debt servicing. It ignores the important distinction between capital expenditure such as infra-structure, and operational expenses such as salaries and wages. There’s a huge difference: like between paying off a home loan, and maxing out on your credit card. The one pays for future assets and is not recurring after a certain time; the other covers exponentially increasing, often inefficient running expenses. Even here, what is capital and what is operational? One could argue that education is similar to infra-structure spending because it develops people rather than structures.

Why the obsession with these questionable “debt benchmarks” – 40% for developing countries and 60% for developed countries? Developing countries need credit to develop and build. Developed countries should be beyond that and their deficits are far more likely to be based on fiscal imprudence.

When South Africa comes close to the 40%, there’s market aversion and censure. But most of the developed nations are way beyond the 60% mark: Japan 134%; Singapore 108%; U.K. 83% and U.S. 108%. Despite these unacceptable debt levels, witness how “risk aversion” caused a huge outflow of capital from emerging markets to developed countries, leaving many national economies vulnerable, their currencies clobbered, their stock markets in tatters, their debt servicing costs increased, their economic growth threatened.

Short term speculative expediency has for decades out-trumped moral legitimacy. Global capital driven by some dubious statistical triggers has become dysfunctional as a stable source of financing growth and entrepreneurship. We and billions of people in emerging economies are still exposed to George Soros’s “wrecking ball”. Of course one can defend it from a paper trader’s point of view – from the global financial institution to the hedge fund to Joe Soap at his computer. No doubt your comments will do this for me.

So be it! If we can’t attract stable capital through questionable statistics, then we have to do so through our behaviour. The pinnacle of maturity according to Abraham Maslow is the point at which “you no longer seek the good opinion of others”. In order to duck the wrecking ball we have to grow up, and fast!

That will require getting the national budget on track, at the very least eliminating that half of the deficit that cannot be attributed to infra-structure. It will mean financing more of the deficit through our own domestic and personal savings. It will mean adopting the wisdom of Boetcker and returning to those “old school” qualities of prudence, thrift and firm and moral leadership. Those are but a few that speak to our national integrity.

We can start by adopting another of Boetcker’s “cannots”, the failure of which is putting increasing pressure on government spending.

“You cannot help men permanently by doing for them what they can and should do for themselves”.

Monday, June 10, 2013

The profit conundrum.

The growing alienation between company profits and other interests in society is a much greater problem than we may think.

At the same time some long held assumptions about profit maximization are being challenged. It has become increasingly evident that the profit motive does not ensure customer care; that being profit driven is not the same as being market driven and the belief that the pursuit of maximum profit is the invisible hand that feeds all is patently wrong.

This is a simple role play that illustrates what happens when companies have a single focus on profits….


When billionaires pout.

How the evil of envy can consume even those who have too much.

How does one feel sorry for a man who is worth some $20bn – or to make it sound even more dramatic, about R200bn?

You don’t of course. Especially if it is Saudi Arabia's Prince Alwaleed Bin Talal, the richest man in the Arab world. He has enough self-pity to satisfy his need for attention and adoration of his copious abundance, to make our empathy as ordinary day-to-day strugglers hopelessly superfluous. The man is miffed to say the least. He’s bemoaning the fact that his real wealth is being understated by Forbes magazine in their rankings of the world’s richest people. And he is peeved enough to announce that in future he is going to boycott the magazine and its rankings.

Forbes must be shaking in their libertarian boots! Not only are they going to lose the princely weekly subscription, but he is encouraging others to follow the Bloomberg rankings which place him as the World’s 16th richest (against the Forbes highly insulting 26th) and has his net worth at $8bn more.

On top of that, he believes it’s an Arab thing, “designed to disadvantage Middle Eastern investors and institutions.” Take heed, South Africans! This is how you play the race card even in multi-billionaire circumstance.

Am I really writing this stuff?

Perhaps one can find cause for the prince’s puerile petulance in the fact that he is part of one of the most oppressive regimes in the world or perhaps it is because being Saudi Royalty; the prince was born with a proverbial golden spoon.

One would think that the super wealthy would be immune to the little green monster called envy. Or was Maslow wrong in his assumption that once you have taken care of all of the “needy” stuff in your life, and you’ve reached the hierarchical pinnacle where the billionaires reside, you can focus on “self-actualisation” and blossom into the benevolent being you always wanted to be to become “independent of the good opinion of others”?

Of course, I’ve taken Maslow so badly out of context that his surprisingly many followers still today will no doubt baulk at my statement. But the point is that we all seem to harbour a belief that “I will be a much better person if I had a billion in the bank.” And in the process restrict the most valuable asset we have even as mundane middle incomers – generosity.

Unfortunately, the Prince is not the exception. While we may not be able to place CNN founder, Ted Turner, in the same category of inanity, he once said something that gives some insight into the billionaire’s kindergarten.

Recalling his decision to give half of his fortune to charity, he declared: “To be honest, my hands shook as I signed it away. I knew I was taking myself out of the race to be the richest man in the world.”

Is there really something of an obscene “race” amongst those at the top? And does this give us a different insight into the noble status of philanthropist – that it is a confession of sorts that feel they do not deserve what they have?

Personally I do not have an issue with those billionaires, including Ted Turner, who got that way by making a meaningful difference to our lives – those creators and builders that I have applauded on many occasions, and who are living proof that unimaginable rewards can be the outcome of benevolent intent and not necessarily the hunger for profit.

That is what economics and business is about!

Yet, there are countless thousands, who cannot claim the same; who must examine their state and question whether they are deserving of it. There are just too many who, by their own admission in a recent PWC survey, defend their rewards purely on the basis of “what others get”. There must be quite a few hundred South African executives (like the revered three bankers Moneyweb reported on recently) who in a moment of unrestrained swagger, can whisper to a friend or acquaintance over a glass of KWV 15 year old: “Do you know I earn more than President Barack Obama?!” Of course, if he adds up all his benefits, our President Zuma would probably be able to say the same – and that’s without his R ¼bn home!

Columnist Ann Crotty once put it incisively: ““Despite a huge amount of guff, passing itself off as insightful and expensive analysis, the key factor influencing pay was that playground whine: ‘He’s got more than me, that’s not fair.”

And that’s what they call the “executive” market!

There has been global outrage at the scourge of unbridled greed that has contaminated the ideal of free economies. But even more dangerous and threatening is greed’s evil twin and perhaps its primary source – envy.

It is self-evident that the “have-nots” who are becoming more and more agitated and restless, are primarily driven by envy and not purely by their mostly self-defined deprivation. But those “haves” who so lightly dismiss those grievances because of it, are just as guilty, if not more so. Envy among those who have little is understandable; among those who have much it is inexcusable. With the display of such puerility can they remotely qualify for the positions they hold? And should remuneration committees tolerate and accommodate even to the smallest degree such adolescent and vitriolic contamination of their processes?

Envy leads to resentment, to disquiet, to unrest, to violence. Life skills gurus will often tell you that envy is a self-concocted poison that will eat away at you.

It is equally so with a society. With wealth disparities globally being one of the most critical issues of our time, it is a frightening force that could overwhelm us all.

Wednesday, June 5, 2013

Power in the workplace.

This is one of my earlier presentations to companies, perhaps more relevant today. With Organised labour fragmenting, can business regain legitimate power in the workplace? As a follow up to my earlier article.