The Reserve Bank’s interest rate hike is surprising to say the least. It can be understood only within the monetarist paradigm, which puts low and declining inflation above all other considerations — including employment and growth.
But even within that paradigm the calculations — always problematic — are hard to understand. Even monetarists acknowledge that supply-led inflation cannot be cured by interest rates. Our current inflation is clearly supply-side. It is rooted in the effects of the rise in the price of oil; our undervalued currency that puts up all imports’ prices; and the fact that most basic foodstuffs, including wheat and maize, are denominated in dollars. All of these are out of our control, since we choose to allow global market forces to determine our economic prospects.
To the extent that there is a demand side to inflation it comes from the top income earners, whose consumption is largely unaffected by changes in interest rates. Their consumption patterns are best dealt with through taxation; yet they are rewarded each year with a cut in taxation.
That being so, the interest hike can only make inflation worse. For a start it will raise the price of housing, most painfully for the poor and the lower middle classes. The fact that bond costs are excluded from the index is no comfort to borrowers: they do increase living costs.
Most important, increased interest rates will reduce investment, and that translates into unemployment and that into poverty. And that into anger, despair, misery, child neglect, non-payment of school fees and utility dues and crime. And all that translates into denying the majority of our people the fruits of our political liberation — a failure to extend that political advance to the economic sphere. And, compassion apart, that translates into the greatest danger to our democracy — political revolt.
A year or so back one might have concluded that so rigid is the monetarist ideology that objecting to the governor’s decision was a waste of breath — he had no choice. But today everybody’s doing it! Even the Americans — let alone the Japanese and the Europeans — are reducing interest rates to encourage investment and growth. They have put aside the obsession with inflation — even acknowledging that a bit of inflation is no bad thing. So why are we hanging on to yesterday’s orthodoxy?
I wonder if it has something to do with the marking last week of ”national savings week”. We were told we are among the worst savers in the world. Well, we would be, wouldn’t we, with some 40% of the population unemployed. That apart, however, we are failing to update our theory. The conservative mainstream will still tell you that people have to save in order to create capital in order to invest.
Not true. Capital is not created by savings. Capital is created by commercial banks through the loans they give out. These are not, contrary to sedulously fostered myth, the savings of other people. These loans are created by banks out of thin air, based on nothing more than their calculation of the loan-worthiness of the borrower. They have nothing to do with savings.
One example. The Americans are the most indebted people in the world. Both as a country and as a people they are deeply in hock. By the savings/investment theory the Americans, who do not save but instead borrow, must have very little capital and very little investment. Anyone noticed that about the United States economy? I rest my case.
Our government needs to pull out all the stops to encourage growth and employment. That means putting into mothballs every injunction that tells them to restrict, to close down, to be careful, to put on the brakes. Low inflation by itself will not, contrary to old theory, create growth. It will snuff it out.
Margaret Legum is an economist and member of the South African New Economics Foundation