Economic Thoughts: Macro’s many Battles

It may not always be obvious but SA macro policy is fighting many hard battles with our collective interests uppermost in mind. Not least on how to prevent chaos from overwhelming us. The focus here is firmly on National Treasury & SARB trying to maintain financial & monetary discipline. These entities should be assessed separately from the broader political leadership & its array of micro policies attempting to govern & transform and its many shameful failures.


These macro institutions resist, where they can, unrestrained public spending demands being given free rein. Irresponsible, even corrupt, practices being favoured. The wrong priorities being pursued. Wastefulness in all its many guises. Misguidedly lowering interest rates (much) lower, inviting unrestrained credit behaviour. Allowing inflation to lose its firm moorings. Loss of credit rating to (below) junk status.


This is a far more complicated effort than everyday headings suggest.


The caricature is a spendthrift government out of control, eager to borrow to the limit & raise taxes to get its hands on more resources. Reality is more nuanced, not because of the good intentions of politicians but because of public servant gatekeepers maintaining high standards and resisting where possible.


Treasury is fighting many battles that only imperfectly shine through.


In a macro sense, it tries to maintain discipline through restraining public spending ceilings while limiting borrowing & taxing inclinations, determined to protect the country’s credit rating.


In a micro sense, when it comes to allocating funds, there is an unwillingness to accommodate bankrupt entities. There is active resistance to ideologically inspired wasteful handouts that won’t accomplish anything worthwhile. And when it comes to favouring interests, it is a fine art to suggest to friends of government of having access to the feeding trough, yet to mainly favour entities known for their excellence.


These are mainly hidden, unsung battles, even as their evidence can be surmised piecemeal from anecdotes & isolated news events.


Much of our tax & borrowed money is not well spent, as we know from too many instances. But have you got any inkling how much worse it could be, yet isn’t?


There are the rearguard actions against misguided public projects not serving the national interest, there is the fight against corruption & wastefulness, there is the unwillingness to favour the mediocre for their political connections, instead preferring to channel the money to those that can be trusted to deliver.


Some of this resistance is long running (counting in decades), some of it relatively new (counting in years). With backs often against the wall, running out of resources and being forced to ration as rationally as is still feasible.


The main point here is that this is happening on a wide front, not as an incidental afterthought. The populists, traditionalists & ideologues may have captured the political high ground, entertaining us daily with their grandstanding & illogical tales. But the tide is being prevented from overwhelming us by dedicated civil servants defending limited resources in the face of unrestrained, often limitless calls on the state.


A similar bulwark can be observed at the SARB in a monetary sense, and for that reason a thorn in the flesh of many populists. It was no accident that one of the many demands in last week’s marches & petitionings was that SARB let go of its disciplining inflation targeting framework. This is something that has been heard regularly in the past from organised labour ranks. But with it today disorganized, it is rising populist parties that have taken up that baton, imagining there are magic wands that can at a stroke eliminate all misery (and give all a job, a house & a farm).


Reality is far more complex.


For decades we have been consuming more than we should have, with as a main consequence too little saving relative to our investment needs. Thus a very high dependence on supplementary foreign capital inflows, due to our risk profile very short-term in nature rather than driven by long-term risk capital inflows.


The resulting balance of payments deficits and short-term profile of our external capital exposure make us vulnerable, worsened by our traditionally inadequate forex reserve buffers.


This is a lethal combination in a world steadily becoming less accommodating, with first the Chinese leg giving way (2011-2015), and now the American leg about to become a whole lot less accommodating than what it has been for a decade as the Fed contemplates liftoff (December just went live as Yellen made strong hints in a speech yesterday) in its attempt to normalise interest rates. We got an early taste of what that could mean during the Fed’s instigated bond taper tantrum in 2013.


Bigger storms could lay in wait, and just around the corner, when the Fed finally commences with its interest rate liftoff, determined at some point to complete its policy normalisation in a by then right-sized US economy.


Nobody can say with certainty how the larger world will react to higher US interest rates, but the past remains instructive, and isn’t encouraging. Especially the taper tantrum episode of 2013 highlighted the plight of the many EMs with large balance of payments deficits & low forex reserves in terms of the increased currency volatility (weakness) encountered by them.


Since then it has been observed that reforming EMs (like India), which lowered their external exposures by improving their trade deficits & forex buffers, have incurred less volatility on account of Fed actions compared to those (like SA) which haven’t reformed at all (or kept backsliding in crucial dimensions).


These features aren’t without significance. For the free-floating Rand, our main adjustment mechanism in a violently changing world, can in turn inject, if becoming unbalanced, high doses of imported inflationary impulses.


These in turn have the potential of unhinging wage demands and inflationary expectations generally, setting in motion an accelerating inflation drift of an eventually uncontrollable nature.


With a structurally misshapen society & economy, in which less than half are prosperous, participating insiders, but the majority are mostly poor to dirt poor non-participating outsiders getting by on minimal handouts, accelerating inflation needs to be seen as collective enemy Number One.


For the skilled, the talented, the organised, the wealthy have negotiating power allowing them in many cases to stay abreast of a gathering inflation wave. But the elderly on fixed incomes, and the poor with little income and no negotiating powers (except the political vote), are fully exposed to the inflation tax eroding away the little grip on daily life they do have.


This is our main revolutionary potential to overthrow everything.


Thus the determination at the SARB, mandated by government, to keep the inflation wolf from the door, as much through restrained credit use at home, as through inflationary expectations responding via major mechanisms such as a volatile Rand in thrall to adverse global events.


While one notes such macro policy dedication, one also notices the aim of others to nullify such efforts. Not only political populists & ideological Labourites but also pockets within the civil service, working at variance to such aims. There are for instance certain government departments offering of all things courses financed with tax money to carefully selected individuals on how alternative macro policies could be crafted to achieve different ends, clearly aimed at undoing present macro efforts.


Not all public wastefulness is seemingly at an end. Doing more about it would be in order, indeed is overdue. An understatement of the first order and shameful, but blame it on the unprofessional politicians, not the technocratic gatekeepers.