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Currency stability

Feb 19 2014 07:40
*Edward Ingram
THE South African rand is far too unstable.

Whenever foreign investors are happy they buy the currency and it leaps up. Whenever they are nervous they sell and the rand crashes down.

DIAGNOSIS

So why are we allowing incoming and outgoing foreign capital to upset the price of the rand?

It makes no sense to have one price (the price of a currency) trying to balance two sets of supply and demand.

This is completely contrary to what the text books are saying.

Neither price will be right – neither the balance of trade nor the balance of imported and exported capital for investment.

There has to be an alternative.

I am suggesting that money coming in for investment should be offset by the export of the same amount of currency to the origination source from which that imported money came. There will then be only one price for trade AND for investment. And that price will be determined by the balance of trade. One price for one pair. The textbooks agree about that.

Investment currency would be free to come and go without impacting either the value of the currency or even the money supply of either nation.

It is just as important not to interfere with the money supply of either nation.

To allow foreign money to come in and create more spending in South Africa will unbalance supply and demand. It will affect interest rates. That will have many knock-on effects. Normally this problem gets dealt with by what is called sterilisation. The Reserve Bank buys the same amount of money as is coming in and the treasury pays interest on it. The process is not easy to reverse and it costs a lot of interest.

How would this new idea work?

The foreign investor will have a bank account and will open a bank account in South Africa. An equal amount of money will be placed on deposit with the foreigner’s originating bank. Both transactions would currently go through the respective reserve / central banks as is the case normally. It could help with monitoring and control and management of risk.

The remaining questions are:

What would the contract be in each transaction?

What risks, currency and other, will be created and might need to be covered and how?

Clear advantages

If this idea can be made to work, there will be clear advantages for South Africa. 

At present about 40% of the nation’s treasury bonds are owned by foreign investors. Any time something in America or elsewhere affects those people’s risk appetite those funds can be withdrawn in a flash. Bang goes the rand.

But if we have this new arrangement those foreign investors will become like domestic investors, selling their investments to and buying from domestic investors as if they were residents here.

Or, whilst the current arrangements continue with foreign investors holding our bonds externally, they may stay external and deal with other foreign investors keeping all of the transactions outside of South Africa. The rand and the currency will be safe. There will be no need to force the treasury to buy bonds or try to sell them.

It has been said that these incoming funds are needed to offset the trade deficit. That would not be needed in future. And that is very important because trade has to balance.

Only if we get the price of the currency right can we have a stable currency and only then can we create safe jobs in the importing and the exporting industries. Only then can we look to creating sustainable economic growth. Only then can businesses invest in importing or exporting with confidence and build their business empires.

With this new arrangement, if we can make it work, it will be unnecessary to have huge reserves of foreign currency. If the plan is adopted world-wide, currency pricing will be done correctly and then the world’s economic (human, mineral, and capital) resources will be better used and the world economy will also benefit.

- Fin24

* Edward Ingram has a strong and growing support base. One American has started a petition asking President Barack Obama and/or his senate committees to look into these ideas. Ingram says: “Why not here in South Africa? The ideas are universal.”


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edward ingram  |  economic growth  |  currencies

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