I found it fitting to talk about inflation this week because it was the anniversary of the South African Reserve Bank (SARB) last week. The institution turned 100 years old, and the Rand turned 60 years old.
In this time, the central bank (CB) has been independent for 25 years and has spent 21 years targeting inflation.
I’m going to break down what the Governor of the South African Reserve Bank, Lesetja Kganyago, said in his online public lecture, held by Stellenbosch University on Wednesday 8th September, 2021.
Before we look at what he said and didn’t say,
Let’s take a look at what was said
Taken from the opening paragraph of the speech, the SARB is the only one tapping themselves on the back for keeping inflation and borrowing costs lower - it’s clear they are protecting the gatekeepers and not citizens.
Borrowing costs are lower, but far from acceptable. Also, it is indeed a fact that inflation has been trending downwards, as seen in the graph below. They (SARB) have been targeting inflation of between 3-6%.
But not all is what it seems………
There are a few things I want to point out here,
Inflation isn’t necessarily only defined as a rise in prices, but it can also be defined as the erosion of purchasing power, too.
Inflation makes things more expensive, so it allows me to buy less because prices are rising, right?
Then what is taxation?
Taxation is also the erosion of purchasing power because you have less disposable income to buy the things you usually buy. If tax is rising it is taking money out of my pocket - just as inflation does.
Therefore, taxation is a form of inflation, too. Its role is to suck capital out of the system and limit aggregate demand. (Also a reason for lack of investment)
Below are two graphs illustrating what I mean.
Personal Income tax has increased 5%, from 40% to 45%
VAT has increased 1%, from 14% to 15%
Bracket Creep - pushing someone into a higher tax bracket, but not adjusting the bracket threshold higher for inflation.
Personal Income Tax (above) VAT (below)
What we see here is a magician’s act, of course inflation will be lower. Taxes are transferring wealth from the working class to the state, then they are deciding where to spend it. However, if we had higher levels of inflation that was truly targeted, we the working class, could also benefit from this redistribution of wealth. We’d be taking from the lender and giving to the borrower because inflation lowers the real value of nominal assets and liabilities. (You’d be able to pay debt back with cheaper money in the future (remember, inflation destroys money).
This is why I say the SARB protects the banking cartel. It’s why our economy is so finance focused, and why so many are excluded from sharing in the country’s wealth.
Keeping Inflation lower is beneficial for society, yes, but also benefits the banking cartels because it protects the future value of their assets and the debt that is owed to them.
The Illusion
Taxation is still higher for us, so no net-gain for us at the end of the day. This leaves the same net-effect as if we had inflation, we still have less money to spend.
Taxation is also a monetary tool to reduce the threat of inflation. It permanently removes purchasing power and reduces spending and saving. It brings down aggregate demand because there is less M1 money (cash) flowing around in the economy. This is clearly what they want, they want to limit access to capital for the many.
Shuffling a 52 card deck still leaves you with 52 cards. What we see here is akin to a magician showing us his right hand while we should be watching his left hand. The only causality here has been the economy, which has flatlined.
While the SARB celebrates their great work for keeping inflation lower, we have still lost purchasing power in the process because of taxation. It’s difficult to rejoice in their own praise - please forgive me.
There is a disconnect between Government and the Central Bank, and the biggest problem, in my opinion, is that these two entities don’t work together for the common good of society - South Africans.
Looking Ahead
We can expect more of the same going forward because the SARB is targeting lower inflation, while government believes in austerity. (higher taxes, and less spending).
The act of spending less money in the economy (austerity) and sucking Rands out of the money supply (taxation) is deflationary/disinflationary in nature, the latter being the most common.
The velocity of money slows down because there is less money to spend and less investment, this then leads to the obvious - less employment. It is pretty obvious as to why inflation has been trending lower. I really don’t know why the SARB is celebrating this fact, especially when millions are hungry, unemployed, and desperate for opportunities.
Take a look at what I mean below, they are more worried about inflation (protecting the currency) rather than job creation and economic growth.
Now, I’m no expert and I have a lot to learn about economics still, but I don’t fully agree with Lesetja’s statement about inflation.
For many people looking at this graph, it may be frightening to think of inflation rising, you may even actually commend the SARB for keeping inflation low. But, in fact, it hasn’t done anything for our economy especially when people don’t even have money to buy bread.
The price is irrevlant to people who don’t have any money. Inflation remains benign because other’s don’t have money to spend. (velocity of money). You must understand this, If you want to continue having lower inflation/prices over the next few years then others must not eat, others must not have money, and others must not have equal opportunity. This is what the SARB is telling us - well, not telling us.
Contrary to popular belief, inflation isn’t bad for an economy if it’s creating economic growth. In fact, it is needed.
Let me give you an example,
Person (A) borrows money to buy shoes, alcohol, and accessories. On top of this, banks continue to lend out recklessly to a thousand (A)’s who all borrow money for consumption, meaning they will have no return on their invested capital. (This is bad inflation)
Of course banks won’t lend out recklessly, but this is an example of how we get money for everything else easily but not for things that we need to grow wealth.
This is known as demand-pull inflation. It is when too much money is chasing too few goods and services in the economy. This would make one drastically poorer and is what warrants interest rate increases. This is when inflation is bad because it is not creating any new value.
However,
Person (B) borrows money to buy land to invest into a manufacturing business. This business employs more people and it produces extra products or services for the economy. Let’s just assume an extra 100 apples for the economy.
This excess capital is redirected into productive areas of society, although the money supply increases, it creates more jobs and equates to economic growth.
It could also potentially drive down the prices of apples because more apples are being produced, or alternatively any surpluses could be exported out to other countries, thus creating more demand for the ZAR. (This is what we call good inflation - this is what we need)
Government and SARB aim for people (A) and not for people (B). It is easy to see because government is creating a welfare state. They believe in austerity, while the SARB believes in protecting the currency. They (SARB) will keep interest rates above a certain floor to restrict capital for the working class. It is clear they are protecting the wealth of the gatekeepers.
The real gatekeepers of the economy want to restrict capital to the working class to remain in control of the means of production in the real economy. The political elite are bought by those that control capital, and no leader will bite the hand that is their bread and butter. It’s why most political parties wont reveal their funders.
If SARB and Government targeted type (B) people, then we would have higher inflation and the cost of living would begin to rise slowly, but real wage growth would rise quicker than inflation because we are becoming more productive as a country.
At the end of the day, true wealth isn’t measured in paper money or fictitious numbers on a screen, but rather in the amount of stuff we produce as a country. If we produce more, we become richer.
Please don’t get me wrong, I’m definitely not saying we mustn’t keep track of inflation, because it is important. However, we have monetary tools in our arsenal to cool down the economy if it starts running too hot, like raising interest rates.
At the moment, inflation is not demand-pulled, which means we have room to cut rates significantly. We could easily redirect capital into areas that would yield positive economic growth for us. However, If SARB cuts rates it will be futile if government raises taxes.
At the end of the day, we need rates to be cut significantly and taxation to be dropped too. This will stimulate the economy and encourage overall investment. It would drive prices higher, but would be beneficial for the economy at large.
The question, however, is would the gatekeepers allow the value of their assets and debts to be brought down for the common good?
Why Controlling inflation is important
Above is a clear example of why monitoring inflation is important, because it does make you poorer if it is rising faster than than the value of your store of wealth. If you measured the cost of bread in gold in 1960, you’d see that’s it not the price of bread getting more expensive, it’s the value of the currency getting weaker.
This is why investing in the right assets that retain value is crucial for long term wealth creation/preservation.
Check out my tweet below, where I explain why you shouldn’t be investing in currency (RAND) because it’s only meant to be used as a medium of exchange.
With all that being said, there is a lot of work that lies ahead for South Africans, the economy depends on it. We all want to live in a prosperous nation where equal opportunity is ubiquitous.
It’s up to all of us to do our part, and that starts with educating those around us - friends and family. The more people who understand how the system works, the more we can make smarter and wiser decisions. We also need to become more forgiving to those around us. It is really tough out there, and a helping hand, no matter how small, makes the world of difference.
We must also realize that change won’t happen overnight and we should prepare ourselves for a future that is better, even if we aren’t around to see it. It is for the generations ahead.
Because…….
Together we have a greater chance of prospering, but divided, guaranteed we fall.
Have a great week, everyone.
See you next Monday :)
You can download Lesetja Kganyago full speech by clicking here