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New rand realism

Feb 26 2014 07:24
*Edward Ingram
TRADITIONAL THINKING IS ALL WRONG

Professor Brian Kantor wrote some interesting observations in a Fin24 article Rate hikes will be path to damnation on February 17. But his thoughts are based upon conventional thinking and that is very wrong in many ways.

My apologies to him for the following comments because what he writes is purely the traditional viewpoint. Given the way that economies are structured and managed today, no traditional economist would disagree with most of what he has written.

Three examples

FIRST EXAMPLE

The professor is right to think that interest rates are already high enough or even too high in South Africa – given the sensitivity with which interest rates impact on borrowing costs now. In other words, the Reserve Bank is damned if interest rates are increased and damned if they aren’t.

But of course, the structure of debts is all wrong and needs to be changed. I have written about that many times in these columns so I will not dwell upon that. Click here for a guide to previous essays.

SECOND EXAMPLE

When it comes to mentioning the currency, the professor writes: “SA’s history shows no predictable relationship between the value of the rand and interest rates.”

I find that interesting. But what rate of interest is it? Is it the nominal rate or the rate of transfer of wealth – the true rate – the marginal rate above average earnings growth (AEG)? The true rate is the rate which makes an investment worthwhile.

Most literature does not look at this true rate - the rate of transfer of wealth and so it is difficult to draw any conclusions from the data provided.

THIRD EXAMPLE

Later the professor writes: “Foreign investors look at the fiscal deficit when they look at risk and SA needs a large influx of capital to balance the deficit.”

Here I strongly disagree. Not from the viewpoint of short-term stability for the rand nor because the professor is wrong in the sense of the options we have now, but because it is a fundamentally wrong way of doing things. Importing capital to offset a trade deficit represents a flawed solution.

To ask foreign investment to balance an unbalanced import-export position, is definitely not the way to go. It can work for a while but not for very long and it is a recipe for the kind of instability in the rand that we are seeing now.

In the long run it is far more sensible to ensure that foreign investment NEVER affects the value of the currency / the price of the currency.

As I explained last week, one price can only balance one pair of cash flows – in this case it must either be trade cash flows (imports and exports) or it must be investment cash flows (incoming and outgoing). One price cannot do both of those jobs.

If you try to balance two pairs you will not satisfy either. THIS is the source of the rand’s problems.

If the value of the currency had been correct based upon the balance of trade for the past two decades, if it was NOT influenced by incoming and outgoing foreign capital, then both our import and our export industries would have been strong and healthy by now. There would be very little uncertainty about what the value of the rand should be. It would NOT be a volatile currency.

FINALLY

When the professor writes: “In my view economic development happens when people are left to get on with it and enjoy the fruits of their labour to a large degree…”

Few will argue with that. And that is above all what South Africa and all other nations need.

That is why I am writing about HOW that can be achieved.

We have to take away as much of the financial risk that is currently built into our economies as we possibly can.

SUMMARY

For interested readers I have published a summary of what I am aiming to achieve by way of giving the people financial stability, on this blog.

 - 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.”




edward ingram  |  rand  |  currencies

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