In three weeks time we will be treated to another TV appearance by Reserve Bank Governor Marcus who will announce whether or not their spell of agonising over tea leaves and economic charts has resulted in decision to change the price of money. The markets seem to think she might as there are now distinct signs of rates edging up in certain areas of the money market. Clearly the prices of plenty of important stuff like fuel and food are on the move and that would suggest that consumer inflation will also rise. And Chapter 4 of the Central Bank Governor’s Text Book suggests that rising inflation is often best dealt with by making money more expensive. My own analysis of the alleged relationship between these two parameters has always failed to detect any sense or effect in the suggestion. In America they have followed the recommendation in the appendix of the same Book and removed from the inflation index those things whose price tends to go up.
But that is not the only place where uncertainty and volatility are putting in an appearance. Share markets world wide are jittery and off their highs of both price and sentiment. The US dollar has seen some outflows and in most other currencies (except the rand) the gold price is setting records. Oddly one of the presumed most sensitive markets – the US 10 year bond yield – is holding steady so maybe this time the smoke is without a fire. It is puzzling, however, that the world is content to lend money the world’s most indebted nation for 10 years at just 3.5%pa.
Except for the R114 bn in social grants and the R76bn in interest payments to the folk who have lent the government money, virtually every other cent that the state spends (R790 bn) goes to individuals (or the businesses they represent) who are expected to deliver either goods or services. Most of the individuals are state employees who have only their services to offer; which crudely means turning up for work and doing something useful for about 8 hours a day. An astonishing number of “civil servants” are actually “on suspension” which means that they are required to do nothing! The critical job-creating portion of state expenditure lies in paying private citizens to deliver goods which in turn should trigger a cascading demand for durable and consumable items out into every corner of the economy. Even a small party to celebrate a new presidential spouse should ultimately involve a wine farmer, a jeweller and a band. A large piece of yellow machinery that is used to build a dam or a road will need drivers, fuel, parts, mechanics and someone with a red flag behind it. But a growing number of tax eaters are discovering that they can pocket the cash and deliver nothing, thus cutting off the cascade. This results in the lack of service delivery that voters and taxpayers (by no means identical groups) are increasingly unhappy about.
From the perspective of the share market it does explain the profitable consumer goods sector and the deeply troubled heavy construction sector. It is better to be selling premium whisky and cavernous luggage for shopping trips to Dubai (just avoid Tripoli on the return leg) than providing the equipment and supplies to build and operate schools, hospitals, libraries and sewage plants. It is also worrying to see that the banks are continuing to battle, with earnings in some cases going backwards. Despite the suspicion that many of us have about the banking business it must surely be true that if they are not making money, then it unlikely that any other growth is going to be sustainable.
I was in a pub on Wednesday night where a gathering of good old boys of the kingdom suddenly began ordering Guinness and speaking funny. After Ireland scored the winning runs against England the situation deteriorated By tomorrow, however, they will all be Sharks supporters in black and white with not a shamrock in sight. Funny game cricket.
James Greener
4th March 2011
