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The Moment of Truth

It is becoming very evident that South Africa is now facing a “moment of truth”. Following the mini-budget of end-October, it is clear that the fiscus has exhausted most of the normal and politically acceptable methods of dealing with its growing debt problem. Taxes are at an all-time high and borrowings are rising steadily to untenable levels.

Various highly-respected experts have pointed to the fact that we are now entering a national debt-trap and that radical action must be taken. CEO of Sibanye, Neal Froneman recently pleaded for the government to adopt investor-friendly policies to attract investment. He pointed out that many aspects of South Africa – mostly within the government’s control – have the effect of scaring investment away. These are things like the interference in visa regulations, the third mining charter, the uncertainty around land redistribution policy and the high crime rate. At the same time the recent paper by Michael Sachs, formerly of the Treasury, calls for immediate action to avoid further debt – mainly through the reduction of the civil service and privatisation of various state owned enterprises. But the government is unwilling or unable to take these measures because of their fear of a union backlash.

This pattern has been followed by many countries in Africa to the North of us. Government spending runs out of control while tax collections become less effective and less efficient. Then, once the country’s borrowing capacity is exhausted, it comes to the cross-roads. Either it must radically reduce government spending – which usually has negative political implications – or resort to expanding the money supply. Most of the African countries that have reached this point have opted to engage in what is euphemistically called “quantitative easing” (Q/E) resulting in the rapid debasement of their currencies and the complete loss of their international credit ratings.

Inflation, in the final analysis, is really a subtle, undisclosed form of taxation. And it is not a new idea. The Romans invented it. They would periodically call in all the gold coins in the realm on the pretext of reminting them with the new Caesar’s image. They would then melt them down and add 20% of lead before re-minting and handing the new coins back to their citizens. Of course, when they were done, they were left with 20% in the bottom of the pot – which they used to finance the next Punic war. In those days it was known as debasement and today we call it inflation – but it is the same thing.

The only organisation that can significantly increase the money supply is the government. So, if they “print” 20% more money, then we will have 20% more cash chasing the same goods and services in the economy – in time, that means that the prices of those goods and services must increase by 20%. So, the government prints more money which they then spend – and the rand in your pocket goes down by 20% in terms of its purchasing power. That is taxation – subtle and undisclosed – but taxation, nonetheless.

Resorting to this type of increase in the money supply to solve South Africa’s immediate problems (such as Eskom’s runaway debt) is very tempting. The problem is that it is very addictive. Once the government has relaxed its control of the money supply once, it will be that much easier to do it again – and the “cold turkey” of radically cutting government expenditure will be conveniently avoided.

Over the past 25 years of ANC government, the Reserve Bank has managed to keep a very tight control of the money supply – despite the vigorous efforts of Jacob Zuma and the Guptas. Together with the judiciary, it was one of the very few organs of state that avoided state capture. And the relative stability of the currency has been one of the great achievements of the ANC during that period. It would be a great pity to abandon that now – and yet the storm clouds are gathering. The only alternative is radical and unpopular actions which will bring the government into direct conflict with the unions and the residual of “rent-seekers” still holding sway within the ANC.



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