| By Gavin Chait,
on 06 March 2008
|
 Jacob's attitude to interest rates The queues in Zimbabwe, that shopper's paradise, were extra long this Christmas. Ordinary people were withdrawing their maximum daily allowance of Z$ 50 million while business owners were shunted to the back. Their allowance is a substantially more generous Z$ 750 million and Zimbabwe Reserve Bank Governor, Gideon Gono, said that they could wait. The queues were compounded by people attempting to swap their old Z$ 200,000 notes which are being discontinued. Those Zimbabweans must be really, really wealthy. No, they're not. Z$ 50 million is equivalent to less than US$ 7. Anyone attempting to swap more than their daily limit of Z$ 200,000 notes will be arrested for currency hoarding. In Zimbabwe, possession of "too much" of your own money is now a crime.
Welcome to the world's fastest shrinking economy where the currency degrades in value faster than it takes to type down all the zeros; where inflation is no longer calculable, since few of the basket of goods used to calculate it are available. It is against this backdrop that Jacob Zuma – the African National Congress' newly elected president – declares that he finds South Africa's high interest rates unfair on the poor. When you borrow money from your bank what you are really doing is purchasing future money. You are promising that you will use that money to improve your life and pay off your debts. If the promises people make about their future wealth don't come true then the money in circulation does not represent the value of the economy. Money that has been created and is in circulation cannot be removed unless it is physically destroyed. Too much money supply leads to a fall in the value of money. This is called inflation. To get a sense of how far off our promises about the future are from our reality in South Africa, consider the following numbers: money-supply growth is 22.2%, but real economic growth is only 4.5%. It should be no surprise that inflation is running at 8.8% as the value of our money falls to reflect the real value of the economy. There are a few ways in which governments can counter inflation. The first is simply to destroy some of the money in circulation. Governments don't normally like to do that because they have to buy that money back and, in so doing, run the risk of increasing the fiscal deficit. Zimbabwe has found a nice way around this by discontinuing $Z 200,000 notes and threatening to arrest anyone attempting to swap too many of them for new, valid notes. This robs people of their savings as their money becomes worthless in their hands. Another way is to raise interest rates; the price attached to borrowing future money. Our Reserve Bank has raised interest rates by 4% over the past year and prime lending rates are now 14.5%. This is where Zuma gets it wrong. Inflation is what robs everyone – rich and poor – of the value of their savings. High interest rates are the tool used to counteract inflation. For savers – especially the retired on fixed pensions – high interest rates are good because it allows their money to maintain its value. It is only those who are making too many promises about what they can afford that find themselves in pain. It is moral that those responsible for making promises be held to account for those promises. If interest rates are dramatically lowered before inflation is brought under control then the impact on the poor will be significantly more painful than a few months of high loan repayments. Lest we start calling Zuma an "Inflation Denialist" he may wish to visit the long queues in Zimbabwe for himself. He can then find out first hand what happens when the promises governments make outrun their capacity to deliver. |
