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.

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