tippet > what makes you think that higher rates in SA will not reign in inflation?? I don't follow your reasoning
I don't know how long you have been following the thread but I have tried to give an explanation before.
Message 18881318
>>>The foreign money which is causing the rand appreciation is attracted to the high interest rates, particularly of SA government bonds. Not only does this currency inflow cause the rand appreciation, which messes up the export profits, it also has to be paid for by the SA taxpayer at 10-12% pa, which is far higher than anywhere else. Further, this currency inflow contributes to the national "money supply" and thus aggravates the inflation.
... the SA consumer is getting the worst of both worlds --- no exports (diminished profits plus unemployment) and high inflation. But as I discussed above, the situation is extraordinary in that high interest rates actually contribute to inflation, not the converse. So, as I see it, the principal instrument which government can use to diminish inflation, namely raising interest rates, has been screwed up by the SA government --- in its wisdom.<<<
The point I am trying to make is that the raising of interest rates may diminish inflation in a closed economy but not in an open one where foreigners can take advantage of the raised rates by bringing in unlimited amounts of cash. This, in fact, has the opposite effect on inflation than the one intended.
> while the stronger rand has reduced profits it seems to me that it is what happens to the POG that matters most
The revenue which the SA gold mines receive is in SA rands --- and not in US dollars. Accordingly, when the dollar buys fewer rands, as at present, the mines receive less revenue. Meanwhile, they still have to meet their costs, the greatest proportion of which is in wages, which, for political reasons, rise every year.
> I expect that they will be quite effective at bringing inflation down -- which will be much better in the long run.
But at what cost? Closure of mines? Widespread unemployment? Insolvencies? The reason SA has, for the past 23 years, run a policy of persistent inflation and rand devaluation is that there is no other way the limited sources of wealth which the country has can provide for the enormous number of poor people who, today, are more vociferous and demanding than ever. Maybe you are unaware that the percentage of unemployed is something like 40% of the population. Also, one miner, who works, directly and indirectly supports about twenty people. If he loses his job the result is actually catastrophic. Important to remember that it not only gold mines which are affected. In fact, platinum is a more valuable export of SA than gold.
> I suspect that the great recent strength of the rand is a short-lived phenomena -- how long can rates be kept so high??
That's what we all hope, but who knows?
> And how long can rates elsewhere be kept so low
In Japan there are effectively zero and have been so for a few years already. The US rates at 1.75% are not far off. If the US raises its rates, however, then "pop" goes the property bubble.
> due to the small size (relative) of their economy to the rest of the world and all the hot money seeking yield, things have been exacebated much more than they might have.
You have put your finger on it. Unfortunately, the SA government doesn't see it that way. The gov politicizes the situation and regards it as a vote of confidence in it and, consequently, in Africa and considers the strong rand to be a slap in the face for the Afro-pessimists who say that there's no present and even less future for anything in Africa, and especially the currency. |
