SA displays profound misunderstanding of macroeconomics
There are no economic reasons for the Reserve Bank’s failure to intervene to serve and save this economy at such a crucial moment
As SA awaits the government’s next economic move there is considerable disquiet about the efficacy of the existing R500bn relief package and what will be announced next. Finance minister Tito Mboweni puts the package at R800bn.
However, reading through macro-economic lenses of both the president’s R500bn economic package and the combined noises made by the National Treasury and the Reserve Bank, one finds a horrifyingly contradictory and intellectually incoherent approach to the macro-economic management of this economy.
It is clear from these lenses that the president is captaining an adrift, listing and rudderless ship which macro-economic compass has long been lost, or being directed remotely.
A look at the composition of the package shows that the main question focusing the government’s mind was “Where do we get the money?” and not about the current state of the economy; the Covid-19 shock’s likely impact; its transmission channels; the interactions between the channels; and how to financially contain both the recession and the pandemic’s economic fallout in one fell swoop.
Elevating the financial constraint question is strikingly telling about the government’s understanding and practice of macro-economic policy. Only a colony — not an independent sovereign nation — would bumble about where to get the money.
Facing what the Bank of England calls “an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries”, Brazil, Czech Republic and others, having already responded boldly, have still had to make constitutional changes to their self-imposed central bank restrictions for more firepower. You would expect a far more devastated economy such as SA to do same — or even more.
As there are no economic reasons for the SA Reserve Bank’s failure to boldly intervene to serve and save this economy at such a crucial moment? Could its resistance be ideologically innocent? And why does SA permit this?
Mboweni’s statements seem to give it away.
History shows that international organisations appear very aware of what provides the widest opportunity for increasing foreign ownership in a country
In his unrelenting efforts to defend the Bank’s dismal record, on April 14 Mboweni said that “to support the real economy the following steps have been taken by the Bank: regulatory requirements are expected to release lending of up to R550bn into the economy...” Is this claim valid and, if not, what could have prompted it?
The claim that capital buffer relief (1%) to banks and/or the reduction in liquidity coverage ratio (100%-80%) release money to be lent out in the real economy is wrong, with far-reaching, macro-economic implications. It is not only erroneous at many levels, it also shows an incredibly poor grasp of central banking, macro-monetary science and macro-economics in general.
Is it intended to deliberately mislead the president, the ANC and the country?
First, the statement presupposes that banks lend pre-existing money (savings). Second, it assumes that such released money (reserves) lead to and are a source of lending in the economy; and third, that lending in the real economy is reserve constrained such that the release will help ease the constraint. All this is fallacious. Mboweni does not realise that the Bank’s interbank money circuit (reserves) and the public money circuit (bank money) never mingle.
This erroneous thinking is based on the long-discredited loanable funds theory, the financial intermediation theory of banking and their linked credit or money multiplier model. That these have no empirical foundation is well established in critical literature.
Indeed, recently, prominent central banks in the world (the Bank of England, European Central Bank, Deutsche Bundesbank, US Federal Reserve, Australian Reserve Bank, Swiss National Bank, and many more), including the International Monetary Fund (IMF), have had to confirm the irrelevance of the theories on which SA’s macro-economic policy position is built.
What is more, the central thesis of the Treasury’s economic strategy paper revolves around pre-existing savings funding investment, the absence of which, in SA, leads to dependence on foreign savings (debt) to finance economic and social development. And, as I have argued before and will again in a forthcoming paper, there is no macro-economic basis for this Treasury argument, which rests on dead theories and their associated noises for the need for structural reforms.
The coronavirus-induced crisis and the recession should not be used as a welcome opportunity for government to deliver what would ordinarily be difficult to justify to the public: structural reforms that seek to dispose of national assets and entrench foreign ownership of the SA economy. Going to foreign institutions for money while domestic firepower is readily available is one such opportunity.
History shows that international organisations appear very aware of what provides the widest opportunity for increasing foreign ownership in a country. Indeed, in the 2001 World Bank report, bank staff argued that “a crisis can be a window of structural reforms” and it can be “an opportunity to reform the ownership structure in a country”.
Doesn’t the disposal of state-owned enterprises and the surrender of Eskom to private finance, when they can easily be bailed out by the Reserve Bank, resemble the reform of the ownership structure and control of SA economy to foreigners?
National interests dictate that monetary financing by the Bank is critical and urgent. The use of the Bank’s asset side of its balance sheet is critical for the conduct of monetary policy. For the Treasury, bonds issuance should be stopped and focus put on the use of domestic bank loan contracts, which also helps strengthen the banking system. Market-based finance should be avoided at all cost.
Some of the key reasons why advanced nations deploy, with great speed, their central banks, state and non-state banks in the face of such shocks is that such injections are macro-economically proven to be not only highly growth-enhancing but prevent hysteresis from causing permanent damage to the economy. Macro-economic science further reveals that macro-economic stabilisation is easily and quickly achieved on deployment of monetary finance.
These macro-economic ideas are also used by the IMF in its modelling, though not made publicly available, as that would contradict its political mandate. What is known instead, and used by both the Treasury and the Reserve Bank, are the resource-extracting models supplied by the World Bank, IMF and the Organisation for Economic Co-operation and Development (OECD), that perennially vacuums SA into macro-economic instability so as to remain dependent on them.
• Nkosi is an executive director and research head at Firstsource Money and founding executive board member of London-based Monetary Reform International.