Monday, February 24, 2014

The Governor’s dance.

Marcus doing an interest rate tango on crutches.

With the January inflation rate at a higher than expected 5.8%, speculation is rife that the next Monetary policy committee meeting will see another increase in the repo rate.

At least this time there should be few who will be caught off guard as there was with last month’s announcement by Reserve Bank Governor, Gill Marcus, when she lifted the repo rate by 50 basis points (that’s ½% in non-esoteric terms).

Just as an aside, but an important one to the many whose economic welfare is sensitive to them, the presentation of numbers often hides some important truths. The increase actually translates into a 10% increase in the cost of using other people’s money and, just as important, a 10% income increase for a very large number of people trying to save or living on income from low risk savings. Indeed, in less than five years and even after the latest increase, the cost to borrowers has been more than halved and the income for savers even more so.

More telling than the actual announcement, or her defence of it, were the responses that inevitably followed from the usual “dial-a-quote” sources. They ranged from “surprise” to “inevitable” and from “wise” to “ill-advised” or “premature”. Few seemed to pick up on the irony that if it was so “inevitable”, why was it surprising? Even fewer, if any, questioned the fundamental premise that these interest rate manipulations are a cure-all for our economic woes -- if not a cure all, then crucially important in changing our economic course.

It’s an easy thing to do in a world that seeks facile control of its destiny and the touch of a magic button that can counter-balance underlying mischiefs or create a buffer against storms elsewhere: much like a fat-trap pill to reduce obesity. It’s a myth and a convenient one for many, including the labour movement and other sectoral interests unwilling to take the painful steps needed to get their own houses in order and make the country more productive and competitive.

And it’s a context where authoritative myth-busters should be applauded for having the courage to challenge their peers and colleagues and reveal the king with no clothes. Economist Mike Schussler is one of those. He did it once before when he dared tarnish that holiest of grails -- the measurement of Gross Domestic product. Given the inordinate obsession with this metric and its influence not only on policy but on the business mood and company strategies, I still believe his challenge was one of the more important economic developments in decades.

And he did it again recently, perhaps intuitively a few weeks before the Monetary Policy Committee announcement. In a Moneyweb Article, he shattered the myth that a lower exchange rate inevitably corrected trade deficits by encouraging exports and discouraging imports. To that one can add that despite more than ten years of declining interest rates, we have had very little economic growth to show for it.

The primary constitutional role of the Reserve Bank is to protect the integrity of money or the country’s currency -- internally through containing inflation and externally through a strong exchange rate. This questions the validity of any other role that may remotely threaten this task: such as promoting economic growth, job creation, or succumbing to any other social or political pressure. It also questions the role of the Reserve bank as being pro-active rather than reactive. One could argue the same for fiscal policy, or government spending, albeit to a much lesser extent. The forthcoming national budget will no doubt reflect how fiscal policy is being interpreted - accommodating or disciplined - in an election year!

These may be severely out-dated premises going back to the pre-seventies, if not earlier. Perhaps I have also overstated them in an environment where technology, knowledge and speedy responses have ridden rough shod over old world logic. But one thing is certain, and it’s an argument that I have constantly presented in my writings: no policy -- monetary or fiscal -- can accommodate or make up for misbehaviour. Behaviour at a personal, organisational and national level ultimately shapes institutions, policies and measurements. It is not the other way around.

And it is cause for celebration when old world logic trumps all of our impudence and arrogance in believing that we are so much in control of things that we can simply break some fundamental rules. In a nutshell the desired behaviour means living within our means, earning more than we spend or giving more than we take. In that way we create surpluses and in turn prosperity. The converse creates deficits and poverty.

Our forefathers knew this. Nothing has changed except our strange belief that things can be done quicker and easier by the stroke of a fiscal or monetary pen; by massaging statistics; by moving the goal posts of prudence; by a cheaper currency; by a benevolent banker; by the wizardry of an overpaid executive; by a charitable government; by marching in the streets or by withholding our efforts in the workplace. We see the effects of this fantasy world in burgeoning debt as individuals, government and as a trading nation.

The overriding remit of those at the helm of both monetary and fiscal policies (Gill Marcus and Pravin Gordhan) should be to courageously, vigorously and openly challenge these misbehaviours at every turn. There simply is no place in our current circumstances for political niceties and all of the vested interest nuances that are brought to bear on their decisions.

Until they do, they will be performing a tango on crutches in a ballroom full of clutter.

Monday, February 10, 2014

Enslaving the born frees.

Through the shackles of expectations and dependence.

In the hype that has accompanied the grand seduction of the so-called born frees into registering and voting in this year’s national elections, the seduced may want to heed the words of one of the most profound political observations ever made: “Man is born free and everywhere he is in chains”.

They were written by the 18th century Swiss philosopher Jean-Jacques Rousseau, whose political thoughts, many historians believe, influenced the French Revolution as well as the development of modern political thought. They ring true with thunderous clarity in South Africa today against the bizarre irony that political freedom achieved two decades ago has spawned large scale and frequent civil protests as well as the birth of the “economic freedom fighters” now contesting the elections.

At the very least this reflects the self-evident reality that freedom itself is never an absolute, contradicting much of the large promise that underpins the election spin. Rousseau’s context expounded in “On the Social Contract” still holds true: that in the name of freedom we subject ourselves to a contract with others – customs, conventions, laws, rules and regulations which in turn inhibit freedom.

Those are obvious restrictions to freedom. But there are many other less obvious: imposed and self-imposed, that not only constrain freedom but lead to a vague inner agitation that often spills over into blaming of others, or misguided responses that have very little to do with the initial constraints or simply replace one set of constraints with more onerous others.

Nature, climate, living conditions, health, and access to basic life satisfiers all play some role in our inner experiences of freedom. Political freedom itself extends far beyond the franchise. Democracy may be the best system we have but as the Greek philosopher Plato observed centuries ago, it has some severe flaws which modern technology and sophistication have done little to assuage, indeed perhaps they have been highly exacerbated.

Majorities seldom rule. That rule is far more strongly influenced by personal expediencies of political incumbents, external vested interests and lobbies than by the expression of the popular voice every 5 years. Majorities more often than not contain as many dissenters and detractors as can be found in opposition parties.

None of this detracts from the importance of the vote and the need to exercise this right at every occasion. The danger lies in the creation of unrealistic expectations. The banner under which all the election hype is paraded, the seductive call of the concept of freedom and the extravagant promises which mesmerise followers, persuade large numbers into surrendering their destiny to others. In that, the born frees submit to the greatest enslavement of all: dependence on others and an expectation that things will and must be done for them. It is the addictive substance that governments use either directly or by implication to gain power over subjects and keep them subjugated and more often than not exploit them for self-gain.

Throughout time, politics and economics have been virtually indistinguishable. The relationship between them has been the predominant theme in virtually all debate and thinking on how societies are best structured.

What is perhaps less understood, measured and appreciated is how the political process itself, the election roll-out and political conduct within it shapes and drives individual behaviour that has a lasting and profound impact on economic destiny. The popularity contest that marks most democratic elections globally and the inordinate influence of money and media, make it increasingly difficult to attract the best leaders into government. The unpalatable reality that you can’t help people permanently by doing for them what they can and should be doing for themselves simply gets lost in a fantasy world of false promises.

South Africa has a particular challenge in the burgeoning youth vote. It’s a group that by and large has far fewer opportunities than before and are most vulnerable to political seduction and exponentially adding to that toxic mix where rights override responsibilities, expectations overwhelm aspirations, dependence is preferred over self-help, government becomes bigger and the number of people dependent upon it increasingly exceeds the number contributing to it.

It is perhaps an understandable global trend in a world clamouring for a change in the rules of the economic game against a backdrop of increasing concentration of wealth in hands of a few, the sheer size and behaviour of capital and the misbehaviour of large global financial institutions including banks. This has detracted attention away from lessons of history which, in broad brush strokes have shown that wealth creation is best achieved in the hands of free and private initiative, that the primary role of government is not wealth creation itself, but creating the conditions for others to do so.

While governments have a role to play in the wellbeing and development of citizens, they become counter-productive and nationally destructive when the former overshadows the latter, when indeed the two are seen as different. Anything that detracts from the willingness and determination of individuals to take charge of their own lives contributes to their enslavement. None are as free as those who are accountable for themselves in any circumstance.

What the born frees most likely will not hear from any politician is this: others cannot give you freedom; they can only remove restrictions to your freedom. The rest is up to you.