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”.

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 16^th richest (against the Forbes highly insulting 26^th) 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.

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.

 

The labour power vacuum.

Can management restore legitimate power in the workplace?

On the surface it seems to be about some unassuming Trade Union offices at the now familiar Marikana platinum mine near Rustenburg.

But that’s clearly understating the breadth and depth of the issues at stake – issues that are much wider than even the Farlam commission of inquiry into the Marikana shootings will finally cover.

This onion in South Africa’s economy and labour relations has many layers that at their heart are challenging a myriad of assumptions, not only about organised labour but about power itself.

The first layer is about the battle for recognition between AMCU (The Association of Mineworkers and Construction Union) and NUM (National Union of Mineworkers). The mine owner, Lonmin has confirmed that AMCU now has a membership of 70% and NUM about 20%, reflecting a significant shift in representation in the last year or so, and challenging the latter’s right to office space at the mine. That’s a thin layer of onion in itself – but pungent enough to have triggered another “wild-cat” strike at the mine recently.

The thicker layer underneath of course, is union rivalry reminiscent of the 1980’s when there was a scramble for membership by unions who had been formed after Nic Wiehahn’s famous freedom of association reforms. They in turn were in no small measure prompted by the absence of a political franchise and the belief that some form of expressing majority aspirations was needed, and that the place to do this was in the workplace. That gave an extremely risky onion layer in the form of politicising the workplace – which explains the extreme degree of political expression in organised labour in South Africa, including the tripartite alliance between the ANC, COSATU, and the SACP.

Which bring us to a deeper layer – the centralisation of power politically, economically and in the labour movement. With that centralisation comes an increasing level of interaction and collusion with other powerful constituents such as government and big business, leading to compromise and a softening of former populist and intransigent positions. On the surface this may appear to be a good thing, were it not for the fact that with greater centralisation of power, one also finds increased corruption, nepotism, very strong personal jockeying for positions and a growing degree of alienation with rank and file membership. This alienation is exacerbated by unrealistic expectations created by the power mongers themselves.

There are clear signs of a fragmentation of centralised power in the support base on the political and labour fronts. Even capital globally is experiencing a strengthening wave of resistance to the centralisation of economic power in big corporates. The chronic civil unrest that has given South Africa the dubious title of “protest capital of the world” rests on a litany of broken promises and unrealistic expectations.

Disillusionment with power and fragmentation of support amongst workers has created a vacuum that has quickly been seized upon by rival and more radical unions such as AMCU against the NUM and BAWUSA vs. FAWU in the farm-workers protests.

But even here, despite their growing membership, these alternative players no longer have the absolute support of workers, leading to an increasing number of spontaneous, wild-cat, and illegal stoppages. In response, the rival unions are again at war with their most important weapon being false promises and the further entrenchment of unrealistic expectations. In a clear attempt to out-trump AMCU, the NUM’s current wage demands in the gold and coal mining sectors must rank as one of the more outrageous leaving its mark on the financial markets.

Current labour trends, including unemployment are clearly untenable and are challenging many of our long held assumptions about collective and centralised bargaining, the Labour Relations act itself, but the most important of all, this obscene haggling based on an assumed adversarial and competitive relationship between the three economic estates of labour, capital and government – a stance that is jealously guarded by vested interests in those groups.

All of this rests on a flawed understanding of the true nature of power, which is at the core of the onion. People submit to power willingly when it is seen to have their interest at heart. That is the key condition that makes power legitimate and sustainable, and distinguishes it from control based either on seduction or coercion which is mistakenly seen as synonymous with power.

The only group that can exercise legitimate power in the workplace on a day to day, minute to minute basis is management itself. They have ultimate control of those factors that forge employee trust and loyalty. The Chamber of Mines knows this. They have the results of extensive research done in the gold and coal mining industries in the 80’s that showed that trust in the workplace was based on the care and development of subordinates at all levels of employment. In turn a key element of that was dependent on the relationship between the subordinate and the immediate supervisor.

Trade Unions and their shop-stewards simply don’t have the ability to replicate that trust. They are mere surrogates whose primary weapons are false promises, seduction and coercion. These are instruments of control, not legitimate power.

This is the messy, difficult and complex aspect of industrial relations. South African business has generally failed dismally in applying it. The pillars of power in the workplace rest much more on engagement and involvement than on incentives such as pay. The latter is seduction, not power. Threats of lay-offs are coercion not power. They are control instruments that give Trade Unions their succour.

The World Economic Forum ranks South Africa’s labour relations as the worst in the world. Large employers may have found it expedient up to now to work within a commodity expression of labour, and an assumed adversarial relationship between labour and capital. After all, with layoffs being its final nuclear device in part to protect profit maximisation, it has been dealing with labour on familiar and uncomplicated terms.

“Labour relations are at a crossroads”, says Finance Minister Pravin Gordhan. Employee engagement and involvement are the only real and tangible instruments left that can restore legitimate power in the workplace. It may be a long and hard slog, but it has to start with acceptance that the current system is simply inappropriate, untenable and unsustainable. We need reminding perhaps of how Germany and Japan were able to create sustainable and exemplary participative industrial relations out of war trauma and deprivation.

Despite its frightening features, a labour power vacuum creates an opportunity for management to reclaim legitimate power through sound servant leadership practices.

And they can do so independently of the big constituents.

The Power of caring in business.

How the profit motive inhibits wealth creation.

 

Earlier this month, I challenged a long held assumption that has been deeply entrenched for decades in the Anglo-Saxon capitalist model: that human beings are by nature selfish. Indeed, the economic model we have constructed is not only based on that assumption, but encourages and thrives on that behaviour.

Without repeating my earlier arguments, I have always found it interesting how the undeniable logic that benevolent intent is a far more appropriate and sustainable driver for national, company and individual prosperity and well-being, is so readily accepted in discussion with groups of informed people.

In my workshops as a consultant, I found this to be readily so, even amongst hard line capitalist sympathisers.

Watch this excerpt from one of those workshops, and you’ll see what I mean.

http://www.youtube.com/watch?v=SWFihHm5ZVc&feature=youtu.be

Unemployment: Back to basics.

Are we becoming increasingly detached from the plight of the unemployed?

Every quarter the statistics confront us. Every quarter they are met either with some comfort or concern. For a brief while, they linger in the headlines, capture some sound bites of ivory tower pontificating and then get reconciled with the “grand plans”, the NDP, government action, and company and labour cooperation and involvement.

Until the next set of statistics are revealed. Like the latest QLS figures which reflect a 100 000 loss of jobs in the first three months of this year, bringing the official unemployment rate back to above 25%. If you add those that have given up looking for work, then it is estimated that 4 out of every ten economically active South Africans are without jobs. They have to face a life of hopelessness under the double edged sword of no means and no meaning, of which the latter is the real sharp edge of the blade.

Tragically, most of them are youth who have little else left than political expression and street protests, a far more serious threat to our preciously held economic theories than socialist-capitalist debates in hallowed venues such as boardrooms, conference halls and media columns.

We have to isolate unemployment as our biggest problem, and not divert our attention to other problems related to it, such as poverty, inequality, crime, labour unrest, wage demands, race and class polarisation, service delivery, the Guptas and even education. Most of our problems will be substantially ameliorated by fuller employment. Of course, effective education and skills training will make more people employable, but for many destitute families even free and dysfunctional education is not free.

Some months ago, I wrote about the need for declaring a state of emergency around unemployment. It is worth repeating. The populist call for “economic freedom” may have died down with the demise of Julius Malema, and it has been thoroughly discredited in the minds of many because it has been presented and largely understood as an expansion of hand-outs and dependency in a growing and bloated parasitic state. Yet, convert the intention or understanding of economic freedom from means to meaning, from money to opportunity, and it becomes a very valid ideal.

Only hard line communists and radical socialists would argue that equality can mean anything else but equal opportunity. As such, it is the valued and inseparable companion of liberty and justice, the other main pillars of free and functional societies.

South Africa’s unemployment problem deserves the same urgency as political transformation did in the early 1990’s. It needs the same spirit of compromise and sacrifice that led to political freedom for all. Yet we seem to dither, locked in incessant debate in which the loud wailing of vested interests, collectives, institutions, politicians, power mongers, labour leaders, company executives and others, drown out the murmurings of despairing millions.

Our inertia regarding the unemployment problem must be at least partly due to a lack of real and tangible concern by society as a whole. It is simply seen to be “someone else’s problem” – that “someone else” being government, Trade Unions, or big business. But it is a discussion that should feature in households, at every company board meeting and on the agenda of any collective from any walk of life. Until each one of us can say that we have more than a casual interest in the problem, we cannot be exonerated from the eventual outcomes.

I came to this thought after a discussion with my landlord and farm manager, Adrian Sutton, who has become passionate about trying to uplift the local community. Within the first few minutes we became despondent and overwhelmed by obstacles, yet not totally convinced that nothing could be done. In short, a seed has been securely planted for the establishment of a communal farming venture based on many experiences elsewhere – including rooftop growers in Johannesburg.

Agriculture must certainly offer the greatest opportunity for employment and sustenance. If we can move our attention away from grand plans of land transformation and ownership to communal and co-operative farming, we could make valuable contributions to both food security and employment. Much is already being done. We simply have to build on it.

When one hits an immovable obstacle in any challenge, one simply has to go back to the basics and strip the problem of all of its esoteric niceties and ideological posturing. Unemployment is such a problem.

In creating tangible value and productive employment, sound economies have to ensure freedom of choice, free moving prices, and maximum number of competitive suppliers.

Out of the box, perhaps even outrageous considerations for the three economic estates are:

· Government must be less obsessed with creating jobs and more focussed on creating the conditions for others to create jobs. In most cases, this will mean simply getting out of the way of private initiative, especially small and medium enterprises where, as Ryk van Niekerk wrote recently, it will need to revisit its draconian legislation that is discouraging mom-and-pop ventures.

· Organised labour has to come to terms with the need for less rigid labour legislation, the fact that developing and employing a large unskilled labour pool may require sacrificing developed country employment standards, and forfeit adversarial wage negotiations for flexible pay linked to wealth creation and greater job retention.

· Companies have to let go of their obsession with maximising shareholder value, which is more of a feature in the Anglo Saxon business model than elsewhere including Asia. The advantage to them is sustainability and a lower risk price for capital. Customer and market growth, as well as job creation and retention should be important criteria in executive remuneration.

Of course, there will still be dark clouds on the horizon, such as world economic conditions, slack demand and an unstable monetary system. We are simply too vulnerable to them – a vulnerability caused by structural and behavioural inflexibility.

The above suggestions will no doubt solicit a litany of comments from various ideological standpoints, and I concede that they all need fuller argument. But in the end, humanity’s greatest attribute for survival is caring for each other. This is not a soft, bleeding heart quality. The purpose of care is the enablement and empowerment of the receiver, not the creation of a lifelong dependency on the state or others.

Of course the final litmus test is willingness on the part of those being uplifted. That in turn will rely on three factors that are the crux of any employment relationship – involvement, engagement and incentive.

Of the three the first two are the most important.