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Weather the financial storm – or avoid it?

The power of changing some of our economic assumptions.
The universal principle taking shape globally? That instead of having debt drag economic growth, economic growth should drag down debt levels. Picture: Shutterstock

The global trade wars remind one of a see-saw in a park: the one end depressed with a heavy kid and the other, with a much lighter child, suspended in the air. Both could represent trade tariffs – the light one the US and the heavy one its trading partners, mainly China. Along comes papa Trump and, seeing the imbalance, tries to simply remove the heavy child, resulting in the US at the other end coming down with a heavy thump.

US President Donald Trump has good reason to be concerned about import tariff imbalances. They by and large heavily favour America’s trading partners and were founded on more than economic considerations, but political and diplomatic influence abroad too.

Trying to restore balance in a blundering manner has reverberated across the world, coming as it does at a time the global economy is experiencing what International Monetary Fund chair Christine Lagarde describes as a “delicate moment”. Two years ago, she said, 75% of the global economy experienced an upswing. Now, 70% are expecting a decline in economic growth. But she remains confident that there won’t be a recession in the near term.

Decades of unbridled debt creation

That depends on many things, including how long and how extensively the trade wars continue, and the declining influence of financialisation that has been based on low interest rates and unbridled debt creation for decades. It can be argued that this was the key supporting the US in its current record-breaking growth period. Bloomberg writes: “This month marks the 10th anniversary of the US economic expansion that began in June 2009. If the streak continues into July, it will make history, surpassing the 1991-2001 growth cycle to become the longest since 1854.”

But then Bloomberg observes: “In the first 39 quarters of the record expansion of 1991-2001, gross domestic product [GDP] increased 43%. In the 39 quarters through this March, US GDP grew just 22%. And the sluggish expansion has benefitted capital more than labour: workers’ share of national income has fallen from 68.9% to 66.4% over the period. The 10-year run of US growth, possibly nearing its end, will be remembered as a long but tepid expansion. Its slowness probably prolonged its life.”

Financial Times columnist Rana Foroorhar believes financialisation may have peaked. This leads one to question how long debt creation and financial services can continue to support economic growth, and indeed whether the price paid in terms of astonishing debt levels has been worth it. Time was that one dollar of debt would lead to one dollar in economic growth. Now that ratio is between four and five dollars of debt for one dollar in growth.

There are a growing number of observers who disagree with Lagarde that a global recession in the relatively short term can be avoided.

It remains to be seen whether the global economy will experience a crash, or simply slow down to slower if not negative growth. On the one hand most economies (including South Africa) won’t have much room to fall – a bit like falling off a low shelf rather than a cliff, as we experienced in 2008. On the other hand, there is not much room for greater debt creation, further interest rate declines and quantitative easing. With hindsight, the value of a trade-off between growth and burgeoning debt has become highly moot.

This makes the foolish yet consequential debate around “expanding the role of the South African Reserve Bank (Sarb) to include economic growth” dangerously ill-informed.

It makes one wonder whether stupid speech is not more dangerous than hate speech.

Over and above Sarb Governor Lesetja Kganyago’s observation that quantitative easing cannot apply to the South African economy, the global experience above questions the efficacy of unbridled debt expansion to ‘drag’ economies into growth.

The 3.2% decline in South Africa’s GDP and the Sarb mandate debate, precipitating a further fall in the rand, have blurred South Africa’s ability to avoid another ‘technical’ if not real recession. It has significantly compounded President Cyril Ramaphosa’s economic growth problems and leaves him seemingly isolated as the only real champion of meaningful growth orientated reform – a rather lone quixotic figure forced to aim his lance at many of his colleagues in the top leadership of the ruling party.

Real wealth creation has to be the primary force

His hurdles are too many to go into in this column and hopefully his state of the nation address on June 20 will bring fresh clarity and decisiveness to these challenges. But the one universal principle that is taking shape globally is that instead of having debt drag economic growth, economic growth should drag down debt levels. This means simply that in the longer run, the real, tangible creation of wealth through the provision of goods and services to consumers – the so-called ‘real economy’ – has to be the primary force behind economic growth.

There may be no other option if, as Foroorhar argues in the clip above, “financialisation has peaked and companies are starting to experience declining returns” in employing financial shenanigans on paper.

The assumption we need to challenge

Key to that understanding means challenging the assumption that has developed over many decades: that the pursuit of maximum short term profit and wealth accumulation is the cornerstone motivator behind economic growth. That may have worked while monetary discipline was supported by a gold standard. Today, the unfettered ability to expand money supply and the countless opportunities to ‘create’ wealth through financial instruments have broken that link.

It is simply not true, as economics Nobel laureate Milton Friedman may have argued, that “greed is good” for inclusive economic growth.

The driving force behind a healthy economy is creating value in response to and service of demand. It is captured in the value-added measurement that far surpasses any other and which I have unpacked in many columns as the “Magnificent metric“. Because it is stakeholder-neutral, paying allegiance to the ‘creating value for all’ dictum, it is the one focal point that can rouse all into having a common purpose and accepting a common fate. It can happen independently from the grand plans at centralised representative organisations.

The way to reduce tensions in SA

Ramaphosa needs to put out a clarion call to galvanise the nation into engaging in a different conversation from the one we’re having at present. Encouraging ‘Common purpose and common fate principles‘ in companies and all enterprise, and focusing on the all-encompassing value-added metric, the very core of economic performance, could be that call.

The important shift is to change the way we see enterprise – from a money and structural perspective to clusters of healthy, wealth-creating inclusive and participative relationships. People serving people: within the framework of sound and sustainable business principles.

Once that edict takes hold, we not only reduce tensions between stakeholders, but encourage flexibility.

And that is about the only shelter we have against a financial storm.

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Zimbabwe and Venezuela are instructive. When a society collapses it’s currency gets trashed. This is because all governments prefer money printing to hard structural reforms.

The South African rand is giving us a little signal of where we are headed.

So to weather the storm do not hold cash. Gold, crypto currency, and other hard assets should see you through – and might make you a lot of money too.

That should do until the collapse reaches a point where all tokens of wealth have lost meaning. I’m sure this time is coming in the lifetimes of many of us, but it’s still a way off for now.

The wolves are already making noises to change SARBs mandate to print cash. I don’t see the knights holding on to treasury’s key much longer after Pavin G leaves. Sad, very sad

Here’s a simple solution for laymen about Africa and weathering the storm.

No matter what African currency you look at for the last 10-20 years, practically all have depreciated substantially. In financial downturns, the bigger the plunge. Socialist/corrupt African regimes have the worst records.. and we have become a exactly that now.

In this lifetime, you can only be sure of death, taxes and falling African currencies.

Equipped with this knowledge all African investors needs to care about is having most of their assets abroad or in USD. It’s that simple.

This is just a continuation of the age old fight between capital and labour. With QE and the massive increase in debt (read as financialisation), capital has got labour on the floor. The individual capital baron is prospering at the expense of the collective, enslaving the masses and relegating them to a life of misery and struggle, by using debt as their not-so-secret weapon. Unless we go back to ‘creating value for all’, this planet will become one giant slave labour camp.

End of comments.

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