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The slow nationalisation of the Reserve Bank

Vultures are circling the bank. The omens are not good.

The South African Reserve Bank (Sarb) is a clear target for capture by politicians intent on spending their way out of trouble.

This much is clear from the debate within the ANC over expanding the Sarb’s narrow mandate to curtail inflation, and growing pressure from more radical elements in the party that want the central bank nationalised.

The reality is that the Sarb is already on the slow path to nationalisation, says Russell Lamberti, economist at ETM Macro Advisors, speaking at a recent Free Market Foundation debate. It started in 2010 with amendments to the SA Reserve Bank Act, which effectively gave the state a swing vote on the board of directors. Prior to that, the board was weighted 7-7 between state-appointed directors and shareholder representatives.

The Reserve Bank Act already allows the central bank to purchase equities and properties, and to authorise gratuities and other benefits for Sarb employees. It can also make rules and delegate powers to any of its officers.

“As we have seen in Zimbabwe and Venezuela, central banks quickly become a honey pot for politicians,” says Lamberti. “Vultures are circling our central bank. Fiscal decay is a reliable predictor of monetary corruption. As things stand, the Reserve Bank could push Ctrl-P and start printing money. It has been rather restrained in recent years, but as political pressure builds, this is a very real threat.”

Former Zimbabwe president Robert Mugabe printed money with abandon when that country was unable to tax its way out of calamity. The same is happening in Venezuela.

When governments start down the path of money printing, it is highly addictive and difficult to stop, adds Lamberti.

“Inflation is running at 4.5%, but should be at zero. The goal of economic progress is to make things cheaper. That’s what the free market does.

Printing instability

“There are plenty other examples of where central banks have caused huge damage. In 2013 and 2014 the Ghana currency, the cedi, lost half its value when the central bank went on a printing spree, creating huge instability for the country.”

None of the Sarb’s new and expanded powers are particularly unique: the Swiss central bank is buying Apple and other stocks; the Japanese central bank is likewise a relatively new stock investor. What this means for SA is that the Reserve Bank is now perfectly within its rights to acquire private companies and other assets, leading to slow nationalisation of the economy, says Lamberti.

Theoretically, the bank could come under political pressure to acquire mining stocks as a form of nationalisation by stealth.

Or it could purchase Discovery Health as a way of capturing its cash flows and redistributing them to a national healthcare system.

Powers

The Reserve Bank’s powers are breathtaking in their scope. It is empowered to nationalise any payments system it chooses and can make unsecured loans. It can issue credits and guarantees, borrow any foreign currency, and set reserve requirements for commercial banks as a way of limiting their loan-making capabilities. It can also fine bankers for breaking rules, and investigate any company it suspects of being a bank.

These are very loose and broad powers that, if fully exercised, would be disastrous for the country.

The exercise of these powers would be a radical departure from the Reserve Bank’s traditional role as printer of notes and coins, and arbiter of interest rates – which it is constitutionally mandated to do in defence of the rand.

Fortunately, there are market restraints such as those imposed by the rand exchange rate (too much money expansion would devalue the currency and kill off businesses) and the commercial banks’ natural aversion to too much inflation and interest rate risk.

Commercial banks are empowered to create money through fractional reserve lending, but they generally do so prudently so as to avoid excessive bad debts. The only other source of money creation is the central bank itself, which creates physical notes and coins and creates reserves in the banking system using digital ledger entries on computers.

Current Sarb respected globally 

The Sarb is venerated among its peers around the world as a beacon of transparency and independence, and Reserve Bank Governor Lesetja Kganyago has stood his ground with wayward politicians. When an ANC official called for a team to be established to look into quantitative easing (QE), Kganyago fired back that QE can only be considered when inflation and interest rates are virtually at zero.

As the graph below shows, the last great venture into a kind of QE was between 2004 and 2011. The graph also shows a high correlation between money supply and inflation.

Soure: Macrobond, ETM Macro Advisors

The perils of QE are less obvious: the Sarb purchased almost US$40 billion worth of US bonds by creating extra rands in the banking system, sparking a credit expansion that eventually resulted in the failure of African Bank.

Lamberti argues that the Corporation for Public Deposits (CPD), which holds roughly R70 billion in public sector deposits, is already functioning as a quasi-state-owned bank. Its directors are appointed by the minister of finance, and it is empowered to accept deposits from sources outside the public sector.

The Sarb should be increasing rather than decreasing interest rates, says Lamberti. SA offers marginally positive real interest rates on bank deposits. Contrast this with the rest of the world, where there an estimated US$15 trillion is invested in bonds at negative interest rates.

Central banks gone wild

“Central banks everywhere are behaving in an unconstrained fashion by keeping interest rates as close to zero as possible, and often below zero,” says Lamberti. “That is an invitation for capital misallocation and overconsumption, which never ends well.”

He adds that there is no immediate concern in South Africa that money supply and inflation will rise. “The problem with cutting interest rates now is that it removes a barrier to credit and money creation. This discourages savings and raises consumption, which diminishes growth potential. Moreover, 4.5% inflation remains too high and hurts poor households. What households now need is deflation, not inflation.”

SA’s measurement of money is also skewed: it measures deposits in the banking system, but excludes government and foreign national deposits in SA.

Inflation measures are also prone to bias. For example, if something gets too expensive, stores stop stocking them, and these items will no longer be counted in the Consumer Price Index (CPI).

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Printing let to booming country’s with names like U.S/E.U. Possible by digital tech and high on discipline. Key core companies, in problems, are helped via stock buy up programs. This affect trade. Impossible to compete with. Requiring deals of trade. Can only be done by a united Africa we stand. Alone impossible. Old Africa, the South part, was successful by printing. Competing worldwide as result. The envy of especial Australia. No more. This road is closed, forever by freedom first.

All you have to do is look at the list of people( long retired freedom fighters) making up the ANC NEC and ask yourself if their is anyone on that list that could be trusted to do the right thing and have honest intentions.

Then look at the top 6 and ask yourself the same question.

Our continent is renowned for it’s slow learners.

I have the greatest respect for the work of Russell Lamberti. His book, “When Money Destroys Nations”, explains and predicts our future under this socialist regime.

Although political meddling in the policy of the Reserve Bank is a concern, it is the de facto nationalization of the Reserve Bank that keeps me awake at night. The Central Bank is motivated by both its own mission statement and the constitution, to regulate and stabilize the financial system. The Reserve Bank is the lender of last resort and has no option but to create liquidity, if needed, to save the banking system.

The value of the collateral held by banks depends on the actions of politicians. We see the decline in the value of listed property, private property, farmland, construction companies etc. These assets serve as collateral for loans. The Reserve Bank’s mandate, to stabilize the banking system, acts as an umbilical cord that connects it to Luthuli House. It is by this mechanism that the Reserve Bank is already “captured” and “nationalized” by the ANC.

Ownership of the bank has nothing to do with policy. Gov can allready dictate to SARB. SARB ownership is a massive red herring, much much bigger issues to worry about.

Is the future independence of the SARB a concern, yes of course it is, but having a couple of notional shareholders, with no ability to influence any SARB decisions is not going to stop the ANC from putting the printing press into overdrive.

Extract from SARB’s annual report:

The role of SARB’s shareholders
At 31 March 2019, the SARB had 784 private
shareholders. The shareholders have no rights
or involvement in determining monetary policy,
financial stability policy or regulation and
supervision. Their rights are limited to
considering the SARB’s annual financial
statements, electing seven of the non-executive
directors of the Board of Directors (the Board),
and appointing the external auditors and
approving their remuneration (activities that
take place at the SARB’s annual Ordinary
General Meeting (AGM)).

The board has 15 members and the 3 executive members are appointed by the President of the country. The private ownership of the SARB means nothing

The failing social experiment called AA/BEE as evident in loss-making SOE’s (despite that many are monopolies…which should otherwise make a great profitable business) needs continued funding to survive.

Where will future funding (or better said, willing donations) come from?

It can come either from:
(a) the national pensions (‘prescribed assets’) piggy bank, or
(b) the national reserves/SARB piggy bank, or
(c) for China…pawning of national assets to another country to pay for debt.
…or from (d)..economic growth. But this is mutually exclusive with a socialist govt. So D can be scratched off this list.

WHICH ONE do you as South African citizen prefer to be DEPLETED FIRST? (when there seems to be no other choice for real economic reforms leading to growth). The SARB/national savings OR your own retirement savings?

Accessing national savings won’t be good for SA…but it can buy time for the individual, and allow your money to emigrate. Use the R1mil single discretionary allowance while we still have it.

Well, when you only know one trick, and in in the case of the ANC that trick is to spend other people’s money, then what else can you do ?

Economists arguing is always fun but one observations from my side.

They mostly agree that to really pull a country towards being a fully developed state, you need a high savings %.

In SA, I can’t really see how that is going to be achieved anytime soon. Firstly we have 30% unemployment, secondly we have a highly corruption gov who does not deliver on basic services and therefore this comes out of disposable income along with the high tax rates, thirdly a large proportion of SA’s current savers are sending their funds offshore and lastly, the majority of South Africans have little to no financial education (and perhaps are not overly interested in receiving this education).

And therefore we can talk about monetary policy in imaginary ways like the above, like the prime rate affects savings which in my realistic view, it does not or that rising rates would create more investment, which we have seen it does not or we can file this down to the core problem which is the start and end of everything, the ANC are unable to make any key decisions or reforms which would start the road to recovery. Instead they continue to want to steal or damage the economy through short term power grab moves.

Simple as that for me.

Could people that should know better stop trying to sensationalise this. The fact that the SARB has private shareholders is an historical anomaly. As far as I know not one major central bank has The SARB’s mandate has blue sweet fanny adams to do with who owns it. After all is set and done its mandate comes from government. Thanks to some really capable guys at the SARB it is remained a paragon of virtue in SA.

In an excellent article by RW Johnson he talks about the real issues facing SA, and names the SARB issue together with land, the PP and other issues taht distracts us all from teh real problem – we are close to being bankrupt and our growth rate is way to slow to improve anybody’s lot inb SA.

PS the private shareholders of the SARB ar more like the lifetime debenture holders at your local sportsclub. They get 2% interest on their investment in the SARB, they have no say over policy and cannot appoint anybody.

Please “nationalise” the SARB, pay teh debenture holders, masquerading as sharholders their R50m or whatever the face value of their investment is and lets get on with facing real issues.

and in other news, the ANC has announced that it will be changing it’s name to something that more accurately reflects where it is 25 years after taking over the management of apart-hate – the new name will be: Another National Crisis.

I have no idea why the author believes anything would change at SARB if its shareholders change. They have zero say in SARB policy. They own a share certificate that is worth nothing more than wallpaper or at best the maximum of 10c per share dividend that is allowed to be paid to shareholders so make it worth 300c at a 3% yield. There are 2m shares and no person may own more than 10,000.

The entire issue is noise

It is a concern that the actual rate of inflation is 8-9% and this does not correspond to a concomitant increase in the value of property, which begins to question the longstanding belief that property is the basis of wealth.

Actual inflation? By whose definition? Yours? Using methodically gathered data? Lol – no.

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