Gill Marcus Recognises the Imbalances the SARB is Creating

But does she actually know that the SARB is creating them? On August 2 I wrote that:

If the Reserve Bank continues down this path of lowering interest rates, aping other global central banks, they are going to destabilize the South African economy in the same way that the Greek, Spanish, and Italian economies are destabilized today.

Where are these economies today? Drowning in debt that was used to pay for consumption spending.

South Africa will get there in the following way. By lowering interest rates below levels they would otherwise be in a sound money, free banking economy (where interest rates are determined by the supply and demand of savings, and not by central bank money printing), the Reserve Bank stimulates consumption spending over savings and investment. This is straight out the Keynesian playbook. This results in credit growth and an economy living beyond its means. The first place this reflects is in the trade balance. When you live beyond your means you consume more than you produce. You borrow the money from abroad to pay for present consumption. You don’t produce the products which you exchange for foreign products. Somewhere down the road, foreigners stop lending you money to buy their goods and you are stuck with no productive base to repay the debt. The consumption based economy collapses, and you must live well within your means for several years to make good on your debts. That’s where Greece is today.

Governor Gill Marcus seems aware of this. In a speech at a fund raiser yesterday she said that:

“Since the [global financial] crisis, what growth we have had has been mainly driven by consumption expenditure. However, sustainable economic growth needs to be driven by investment. A reliance on consumption as a driver of growth is neither sustainable nor desirable: it implies a lack of savings and a build-up of imbalances, notably unsustainable and widening current account deficits.”

Could it be that Gill Marcus is not connecting the dots to identify the cause of the developing imbalances in the South African economy? Because the SARB lowered interest rates again,this might be the case. Furthermore, she does seem to place a large emphasis on external factors that the SARB supposedly cannot do anything about. But this is not external driven, but determined by interest rate policy.

While the SARB cannot do much about foreign governments who continue to fuel their economies’ debt financed consumption spending, by cutting interest rates further and further, the SARB can allow the Rand to strengthen and raise interest rates to increase savings. This is the most effective way to correct a savings deficiency,  and prevent SA from ever having a Greek moment.