Tuesday, July 21, 2009

When the economy's stuffed, call the white madam

No matter what the spin doctors say,Tito Mboweni’s tenure as Reserve Bank Governor was in the balance as soon as Jacob Zuma took office – not to say that Zuma wanted his head – his close ally Zwelinzima Vavi of COSATU did and these days, what COSATU wants, COSATU gets.

For once in my life I find myself on the same side of the fence as Mr Vavi – perhaps it’s a rub off from my late dad’s involvement in the Trade Union movements of old, when he was a Shop Steward and he used to take me to secret meetings in dark buildings on the wrong side of town – but that was 50 years ago!

Tito Mboweni fell victim to his own dogmatic following of Inflation Targeting and the use of Interest Rates as his only weapon to fight inflation, something which was destined to create unemployment and hardship for millions of South Africans.

I make no claim to being an economist but I have been schooled at the University of Life and learned a few useful lessons along the way. When you have an economy that is growing at a healthy rate of 5 to 7% per annum, you are going to get inflation unless your currency is stable, you have control over unrealistic price increases and your job market is sound – none of ours are.

There are a number of influencing factors which are uncontrollable like the Oil price rising to $140 per barrel and the price of staple foodstuffs like Wheat, Rice and Maize rocketing on world markets with local producers demanding international prices for locally produced goods.

All of those factors make for wage increase demands, which in turn are passed on to the consumer at the till so you have “cost push inflation” Most of these cycles tend to work themselves out in time, if you leave them alone.

To control inflation you can do one of four things: Control Money Supply; Increase Interest Rates; Control Prices of locally produced goods or Nothing and it work itself out! Tito and his MPC chose option 2 and that was the beginning of his demise.

The moment you increase interest rates to curb inflation, without first determining the reason for that inflation rise, you create panic in business and the higher you increase the rate, the worse it gets until it becomes a self fulfilling prophecy of doom and gloom!

The first thing that happens is retailers cut back on orders because they are afraid of having too much stock on hand and restricting their stock turn ratios, this results in smaller production runs from manufacturers which in turn results in layoffs and the eddy starts to suck you in.

The objective of Tito and his team was to reduce credit spending but they forgot the simple basic rule – if you haven’t got cash CHARGE IT – and who really worries about a half a percent interest, it’s the old “softly, softly catch a monkey routine” each little bit doesn’t really matter until you add up all the bits and realise that you’re screwed!

That is the problem with slowly increasing interest rates over a protracted period, nobody really curbs spending until the poor bugger who bought a house last year can no longer pay his bond or pay for his car.

What has happened is a functioning stable economy has now been thrown into turmoil, to try and curb the rate of inflation and keep it within a target range of 3 to 6%.

Thousands of people become unemployed – usually at the lower end of the scale, where it affects the most people, thousands more can no longer pay their debts – which they could 18 months earlier, because they have been penalised for enjoying a healthy economy 2 years ago and that is why raising interest rates is such an unacceptable method of cooling the economy.

You did nothing wrong but end up losing your home or car because of Inflation Targeting.

With rising unemployment and the economy now stuffed, Tito and Co were forced to rethink their stance on interest rates and start to bring them down in an effort to stimulate the economy which their policies had brought to its knees, so little wonder that the likes of Patrick Craven and Zwelenzima Vavi were calling for Tito’s head on a plate.

His policies had not reduced food prices, in fact they continued to rise and still do. ESKOM came along with a ridiculous demand for a 34% tariff increase and got most of it, so the scene was set for a Union based wage demand onslaught which is now coming in waves that will gather momentum.

I don’t envy Gill Marcus, she has to appease the Unions on one hand and big business on the other, while trying to stimulate the economy without creating spiralling inflation.

Good luck Gill!

by David Blood

7 Opinion(s):

Vanilla Ice said...

Tito was never a real central banker. He assumed the position, and simply followed the mainstream belief that inflation targeting was appropriate. This is not to say that it isn't, just that Tito would have been incapable of devising an original approach. Tito was prudent, it must be said. Good luck to the "white madam". This belief that ANC stalwarts can wear many hats, will come undone eventually.

Ranger Tom said...

The very same things are happeneing here in the States...

Anonymous said...

Tito being replaced by Marcus? I would rather have Tito than that woman!

Dachshund said...

@VI: If you want to curb inflation, then print less money and tax consumption. The increase in money supply to the year ended December last year was 14,53%, which is the sort of growth you would expect from a banana republic. If you want to tax consumption, then increase VAT.

So, no, I don't think Mboweni was prudent and I agree, he's incapable of lateral thinking. He was both heavy handed and slow witted in the way he implemented the interest rate hikes: a little at a time, like Chinese water torture. Mboweni was insufferably arrogant, he was disdainful toward the financial press, and they'll be glad to see him go. His constant public bickering with Trevor Manuel went down like a lead balloon as well.

Anonymous said...

The psychology behind it is simple, in boom times give the job to a black man, as t will make him look good. In times of depression give the job to a white, so that you can blame whitey.

Dachshund said...

@Anon 8:03 PM: Oh absolutely. But blacks can stuff up whole economies in good times too.

Anonymous said...

Marcus the Jew - since when does a Jew and money work??

Joke:
How do you kill a jew? Throw a 10c piece on the highway.