I wonder if the folk who run Wal-Mart are used to seeing everyone rushing about screaming that the sky is about to fall whenever they try to open a store in a new area? Many people seem to have no doubt that when they begin to operate in South Africa, our way of life will come to an end. Perhaps, but why not let Wal-Mart risk their money and see if there are people in SA who are prepared to work for them and shop with them despite the dire predictions of calamity.
The world’s economy is the net result of several billion individuals trying to make a living and almost two hundred governments supposedly helping but mostly not. It is therefore unsurprising that that such a large system has so far proved impossible to model and make reliable predictions about. One particular string in this skein has been making headlines and goes something like this. Citizens Janet and John have spent less than their income and so amassed some savings. Dutifully but reluctantly they pay tax and note that, unlike themselves, the state almost always spends more than it collects and so needs to borrow money. This it does mainly by selling government bonds. Janet and John are disinclined to buy these bonds because they reckon the government’s spendthrift ways suggests that it is not a good risk. They choose instead to place their money safely in their bank where they hope it will even grow a little.
The banks, however, do buy those bonds. This is because a) they use Janet and John’s money b) they often collect a large fee from the borrower when they arrange to issue the bonds and c) they are undoubtedly smarter than Janet and John at assessing risk. Even better, they are often smart enough to buy bonds from far away countries.
Eventually, however, unless it mends its ways, a profligate government’s debt catches up with it and it has to “restructure” and even “renege”. Restructure is the fancy term for telling people who lent you money that you will not be paying back the interest or the principal as fast as you originally promised. Renege is a simple term for not answering the phone when the folk who lent you money call to see why you haven’t paid them back. Oblivious to all this, Janet and John stroll down to their bank to reclaim their savings only to be told it has “gone” because such and such a government or borrower has restructured or defaulted. Disappointment and anger ensue, followed by demands that the “government do something”. For reasons that have a lot to do with politics and influence and the belief that certain banks were “too big to fail”, governments stepped in with tax payers money to bail out some of those banks who had obviously made dreadful lending decisions. The bank’s own bond and shareholders were thus spared the embarrassment of finding that they were invested in a badly run company which had gone insolvent. Some of us think that should have happened. So if Janet and John were lucky enough to have used a bank that received a bail-out they get their money back but are not sure if they are up or down on this deal.
Recently the voters of Finland instructed their new government not to use any tax money for bailing-out anyone who had lent money to governments who find themselves “embarrassed”. The Germans too have become restive about bailing out those who thought it a good idea to lend money to the allegedly less industrious nations along the sunny shores of the Mediterranean. This week it became almost inevitable that the Greek government will have to “restructure” and this sent a ripple through the world markets as expected cash flows will be disrupted. Even our own All Share index took a tumble. The SARB’s decision to leave rates unchanged had no discernable effect.
Making sense of all this is even harder than being a Lions supporter.
James Greener
Friday 13th May 2011
