It has been decided in the US and in Europe that citizens need to spend themselves out of recession and to borrow their way out of debt. Their governments will lead the way in this endeavour by spending and borrowing lots more than anyone else. The thesis is that this program will gain momentum and accelerate to the stage where sufficient real actual wealth will be created to discharge the debts and absorb the new money that has been minted. Scouts have been posted to signal the appearance of so-called green shoots of recovery that are confidently expected to result from this clever plan. So far they have reported house prices falling slower than before, fewer people losing their jobs and discount stores reporting higher revenues. Dead and falling leaves are ignored. Thanks to the generosity of the taxpayers, bankers have received bonuses and car manufacturers have staved off bankruptcy for at least a month. Even the stock market is perky.
However, numbers released this week suggest that the US government will, over the next few years, spend twice as much money as they expect to collect through tax. They will borrow the difference. And it is a very very big difference. Long bond rates world wide (including here) are tending upwards as lenders edge for the exits. What happens if they disappear altogether? Then watch for the best stunt of all. The government instructs the central bank to print more cash in return for hurriedly scribbled IOUs. Where is the large notice warning that these tricks could be bad for your wealth and ought not to be tried at home?
A kind reader alerted me to the fact that our new government has immediately tackled the matter of job creation. The hugely enlarged cabinet will provide gainful employment for dozens of folk who would otherwise battle to find work. Already busy and happy office furniture suppliers are preparing workplaces for all these newcomers and their staff and families. The gleaming new laptops are set to link immediately to the webpage detailing the methods revealed by the British politicians for fiddling expenses claims. It is rumoured that moats are already being dug around several homes in some of Pretoria’s leafier suburbs.
Governor Mboweni has been wagging his finger at the local banks for lending money at 12% when the repo rate is just 8.5%. This spread, he implies, is too wide, and presumably therefore too profitable. The banks tap into the Reserve Bank’s repo facility only as a last resort and always first try to raise most of their cash requirements at even lower interest rates from you and me. Their profitability is perhaps therefore much greater than he suspects. The market has clearly failed to appreciate this great piece of financial analysis and bank shares are priced quite modestly. Alternatively, investors are alarmed at the Governor’s grumbles and wonder if he is about to offer some less than friendly advice about how banks should run their businesses. After all, elsewhere in the world governments are getting really involved in their banking industries and we would not like to be seen as laggards in following international trends. However, this threat does not yet deter those brave foreigners who are fleeing their own near zero yields to send their money south for the summer. The rand remains pretty robust.
The kingdom is buzzing this week with debate about the strategy for the encounter with the Bulls. Unless they wish to be treated with the same suspicions about match fixing that has made the IPL suddenly so forgettable, local rugby will be best served if the Sharks win. After all aren’t two away semi-finals better than a single one at home?
James Greener
15th May 2009
