Economic bloodletting

In relatively recent times it was considered standard policy in the [then] emerging modern medical profession to bleed their patients, by opening the veins in order to drain out the disease that was slowly killing them.

That was when we discovered that there is a point at which further bloodletting will cause the veins to collapse and resuscitation would become perilous.

With Mr Mboweni’s shock suggestion that we stop the flow of money through the financial system by advancing rapidly to a 2% hike in the rates, rather than suffer the death of a thousand cuts through inadequate small ‘bleedings’, or in this case, applications of pressure; he could bring us perilously close to the point where the veins either rupture or collapse.

In reality monetary policy is an inadequate tool for managing the financial affairs of a country… in particular controlling inflationary trends. It is rather like using a tourniquet on the ankle, to deal with bleeding from the femoral artery [in the thigh], by slowing down the blood flow returning to the heart and hence onward back to the damaged artery. It is slow and uncertain.

To start with monetary policy can have minimal effect on negative externalities like imported petrol prices and imported food inflation. It can also have only a minimal impact on negative internalities like, supply concentration issues in the overall consumer distribution chain; and the increasingly dominant role of rampant administrative price factors, like electricity tariffs, property assessment rates, stealth petrol taxes and fixed line telephone calls that are also external to the control of the commercial financial system.

It can at best slow down, or rather skew, the rate of consumer spending and cripple those who purchased on credit in the past, in blissful ignorance of the scourging effect of rising variable interest rate patterns.

Mr Mboweni’s previous bout of gung ho interest rate management early in the decade brought the country to a grinding halt in about six months. [My contribibution: Citizen 30/9/2002 refers]. By this time therefore the actions taken by the esteemed reserve bank governor should be manifesting in a dramatic slowdown in the rate of credit extension. The fact that it isn’t, and that he wants to whack us with another two percent jolt, indicates that the real problem is not being dealt with, and is perhaps not even being regarded.

Reviewing the battery of reasons for our alarming inflation spiral, put forward over many months by reams of economic specialists, one possible source of rising inflation is consistently missing from the analysis. Yet this missing ingredient is, potentially, a malignant brain tumour, and on the rare occasion its contribution is raised it is either “treated with the contempt it deserves”, or is resolutely ignored, as though someone had impolitely farted.

So I apologise in advance to my racially sensitive readers for introducing such an inherently uncongenial set of images into what some may choose to regard as a racially charged observation: offence is not intended. I believe that we need to raise this question.

Is it not time that we seriously interrogate the contribution to our economic decline made by the present [apparent] tidal wave of so-called “empowerment deals” that proliferate the pages of the business press?
Presumably these “deals”, that often seem, to this reader, to be the ‘only game in town’, to the extent that they are now viewed as “value propositions”, rather than as “redress and equity” elements of socially responsive behaviour, are all financed through credit related instruments. That much of the finance needed is ‘dodgy’ is evidenced by the alleged decision, by those framing the new companies act, to jettison [for better or worse] the former regulation that precluded companies from extending credit to their prospective shareholders; in order to finance the purchase of their own shares. This idea was always [previously] regarded in much the same way we regard holding oneself up by one’s own shoelaces: impractical at best and larcenous at worst.

Presumably too, for a range of vested interest associated reasons, we are choosing not to notice a funnel of money pouring out of an opened wound and sloshing its way about: money that has nothing to do with the credit act, the motor or furniture industries or any of the normal pressures that prevail in an ordinary western model economy of the type for which monetary policy is designed. One could argue that monetary policy is rendered nugatory by socially motivated State interventions that fly in the face of conventional market related practices.

In effect we are witness to an open funnel of new ongoing credit formation in the form of an unprecedented surge of unlocked corporate capital being realeased into the econ omy. In a practical sense State policy and applied pressure is driving us at an escalating speed to the advanced, albeit early stages, of the eventual complete takeover of the existing, highly concentrated economy, by what increasingly appears to be an emerging rentier class.

It is hard to see just where the ‘People’, who are increasing in numbers and spilling into and over the margins of extreme poverty, are really benefiting from all these empowerment deals that make some ‘chosen’ people rich beyond the wildest dreams of avarice. We do know that the ‘People’ are restless.

In this empowerment game of ours we seem to be replicating the infamous Bumaputris of Malaysia. The very existence of this supposedly “empowered” class has become an indirect tax on Malaysia’s competitiveness, and has done little to dent the poverty problem in that country. It is an unspoken source of rising social discontent in that country, as recently revealed in a shift in the electoral pattern in that country for the first time in decades. I won’t refer to the rising tide of social discontent in our country, which has recently disgraced us with its extremities, but which has been simmering for years.

Our inflation rate is dramatically higher than that of nearly all our trading partners and where it isn’t, as with China for instance, then we are effectively importing deflation from those quarters: thus indicating that the true gap between our rate and that of the Euro zone or the USA is even greater than we imagine. We are effectively a shrinking economy: 2.1% growth versus 12% inflation equals backwards sliding faster than going forward: equals shrinkage on an alarming scale. And the inflation trend is up while the growth prognosis is constrained.

There is only one classic reason for such a disparity… we produce far less than we consume… in other words we seem to have stopped working hard in the interests of hard “dealing”.

Now if Mr Mboweni decides that the only way to impact on that flow of “deals” is through the inadequate medium of dramatically tightening the tourniquet to the ankle, then I would have to agree with him that such drastic action may well be necessary, given the fiscal constraints under which he has to manage the financial affairs of the private sector, the moral imperatives of the ‘redress and equity’ programme: and the denial with which it is all associated.

However we should all realise before it is too late that we are proposing to induce a brain haemorrhage and a possible rupturing of the jugular vein, in an increasingly desperate effort to improve the overall health of our patient. Like those bloodletters of old we are in all probability using the wrong instruments to deal with a [possibly?] misdiagnosed cause.

Happy blogging
The Blogospherian.