Vol.6 No.26, 19 July 2006
Interest Rates: A Need for Some Economic Nationalism
Tito Mboweni did warn South Africans that the credit /consumer / import binge cannot last. He has now fired a shot across our bows, a 0.5% rise in interest rates. This move punishes all of us for being so short sighted.
Some kind of brake was required. Was this interest hike all that he could do to correct the dangerous position the economy was in, essentially living, like the USA, on growing domestic and foreign debt?
The Governor (and government) might have considered how blunt are the sole goal of targeted inflation and the use of a singular instrument, interest rates.
While he warned and then punished us for unbecoming economic behaviour, the Governor could have considered widening his monetary goals and instruments. Rather than just inflation, why not also savings and greater citizen financial competence? Instead of using the banks to follow his lead with interest rates, why not 'partner' citizens and businesses in managing the economy?
With computers, it is possible to require that a related savings account be opened with each loan. With each repayment, usually monthly, a set percentage of the interest charge flows into the savings account. This is good banking practice: loan repayment plus a savings deposit. Some 50 million Credit Union members worldwide follow this practice: accept the double discipline - borrow and save!
With such a simple scheme in place, the decision to raise the interest rate by 0.5%, to contain consumer consumption and reduce imports, could have been implemented as follows: -
1.Increase the interest rate 0.5%.
2.Divert all of the 0.5% increase into related Savings accounts. This is essentially a 'forced'savings by citizens and business rather than a direct cost to borrowing.
3.This would have avoided punishing South Africans, built up their Savings, strengthened the domestic economy against foreign speculation, and would have blocked the ability of banks to hike profits upon higher interest rates.
The last four years of declining interest rates have seen the resultant rise of house prices, greatly increased debt, higher consumption, and greatly burgeoning imports. This has left the economy exposed to the whims of international speculative capital and jumpy world markets.
The Reserve Bank could have cut rates on loans, as it did, but it could have redirected all or part of those cost savings into individual and company savings: i.e. it could have split the lower cost of money, from lower interest rates, into Savings and into lower borrowing costs. The South African interest rates were, for a start, some 3% to 4% higher than our competitors. We could then have reduced interest rates more boldly than we did for remain in the shadow of the Stals era of national interest flagellation.
If the related Savings component was in place over the last four years, South Africans might have built up their savings by up to some R120 billion. That could have reduced our false reliance on foreigners to do our saving whilst they buy our country.
Citizens and businesses would today enjoy considerable additional income from that large savings that would substantially help them to overcome the punishment now meted out by a Governor lacking imagination and a Government unable to link the price of money to savings and thereby to citizen and business well-being. A little bit of Economic Nationalism, of putting South Africa ahead of global players, is highly desirable and completely possible.
© South African New Economics Network 2006. Page generated at 17:15; 24 September 2006