What Shuttleworth’s R250 million Would Be Worth Today

If Mark Shuttleworth manages to get the R250 million that the SARB took from him as an “exit levy” in 2000/01, it would have only 16% the purchasing power that it did back then. In other words, R250 million in 2001’s money is worth roughly R1.5 billion in today’s money.

The easy way to work this out is to compare the rand to a stable measure of value, gold or the JSE All share index.

The gold price is up from R2,000 in 2000 to R12,413 per ounce today – a 6 fold increase. If he had put R250 million into gold in 2000, it would be worth R1.5 billion today.

If Shuttleworth had put the money into the JSE Alsi, it would have grown from R250 million to R1.4 billion, as the index is up from 7,000 points to just below 40,000 points today – a 5.7 fold increase (excluding dividends).

ALSI

The reason the stock market and gold price have climbed so much is because the rand has lost so much value due to excessive money creation by the Reserve Bank and private commercial banks through the fractional reserve system.

Therefore, if Shuttleworth was to win his case against the SARB, to be fair, the SARB should pay him back around R1.5 billion to make up for the greatly debased value of today’s rand compared to the rand of 2001, not R250 million.

#SupportShuttleworth

Von Mises On Capital and Saving

A weakening rand incentivises consumption spending over saving, as it guarantees that consumers will be able to buy less with rands in the future than they could have bought today. Yet savings are needed in order to accumulate capital over time and for an economy to become more productive and grow wealthy and prosper, i.e. for the manufacturing sector to prosper.

Regarding savings and its relation to capital accumulation and living standards, Ludwig von Mises wrote in The Anti-Capitalistic Mentality that:

The truth is that the increase in what is called the productivity of labor is due to the employment of better tools and machines. A hundred workers in a modern factory produce per unit of time a multiple of what a hundred workers used to produce in the workshops of precapitalistic craftsmen. This improvement is not conditioned by higher skill, competence or application on the part of the individual worker. (It is a fact that the proficiency needed by medieval artisans towered far above that of many categories of present-day factory hands.)  It is due to the employment of more efficient tools and machines which, in turn, is the effect of the accumulation and investment of more capital.

The terms capitalism, capital, and capitalists were em­ployed by Marx and are today employed by most people—also by the official propaganda agencies of the United States government—with an opprobrious connotation. Yet these words pertinently point toward the main factor whose operation produced all the marvelous achievements of the last two hundred years:  the unprecedented improvement of the average standard of living for a continually increasing population. What distinguishes modern industrial conditions in the capitalistic countries from those of the precapitalistic ages as well as from those prevailing today in the so‑called underdeveloped countries is the amount of the supply of capital. No technological improvement can be put to work if the capital required has not previously been accumulated by saving.

Saving—capital accumulation—is the agency that has transformed step by step the awkward search for food on the part of savage cave dwellers into the modern ways of industry. The pacemakers of this evolution were the ideas that created the institutional framework within which capital accumula­tion was rendered safe by the principle of private ownership of the means of production. Every step forward on the way toward prosperity is the effect of saving. The most ingenious technological inventions would be practically useless if the capital goods required for their utilization had not been accumulated by saving.

A continued weakening of the rand is what is causing the regression of the South African economy and driving the living standards of the average South African lower, as it results in falling real savings rates and therefore results in capital consumption. A weak or “competitive” currency is not the way to creating prosperity and turning manufacturing in SA around. We need a strong and sound currency that strengthens against the currencies of governments that are recklessly debasing theirs.

Re: Abil and the Unsecured Subprime Market in SA

The share price of African Bank Investments Limited (Abil) is crashing following the announcement that nearly a third of the loans on its loan book are non-performing (meaning people are defaulting on their loans or struggling to repay them). The share price has nearly halved since the start of the year, and is down 21.65% today alone.

Abil

This has been a long time coming. By keeping interest rates lower than they should be – where the supply of real savings match real demand for money capital – the Reserve Bank has created this imbalance of credit supply in the economy.

Coming out of the global financial crisis, the middle- to high income market was saturated with debt, but the low income market was not. As the SARB lowered interest rates by pumping new money into the banking system, it gave banks freshly printed money to lend. Abil (and Capitec) were well placed to aggressively go after the low income unbanked market, which is exactly what they did. The SARB tried to stimulate general economic activity, but instead over-stimulated activity in the unsecured subprime credit market.

More than two years ago in March 2011 I wrote to ETM Analytics clients in a pretty detailed credit market report that [emphasis as in original]:

Within the household credit category, a breakdown shows that “general loans” have risen by just over 50% over the past two years. General loans are mainly personal loans – uncollateralised lending at a premium. The share of general loans as a percent of total household debt has risen from 3.7% in Jan 2009 to 5.4% in Jan 2011.

Under current economic and employment conditions, it is hard to conceive of this increase in personal loans being anything other than household finances being under stress and some expenditures being funded with borrowed money. With the housing market having stalled and home equity withdrawals disappearing as a result, it could mean that households are tapping personal loans to maintain a certain lifestyle and spending habits.

However, the most likely driver here is borrowing by low income earners. A random sample of two established banks and two banks catering more to the lower income segment of the market suggests exactly this.

Absa Bank and Firstrand Group extended personal loans at an average monthly rate of 1.6% and 2% respectively over the six months from July to December 2010. Capitec and African Bank, on the other hand, pushed personal loans to the tune of an average monthly increase of 5.7% and 6.3% over the same period, respectively1. Low income earners are having credit thrown at them, and this is something to bear in mind as it may lead to a category of subprime borrowers in SA that result in a sharp spike in NPLs for these banks in the future.

The original report can be read here. This trend continued until mid-2012, when the credit environment started to change materially, and these short-term loans are now starting to go bad, very bad, judging by Abil’s statement released today.

Although most analysts will say the potential fallout from the unraveling of this unsecured credit market will be small as it is restricted to Abil, I am warning that it could be bigger, and will be likely to ripple through to other banks and then all credit providers serving lower income groups – unless the SARB intervenes.

The SARB will be under a lot of pressure to cut interest rates as this bubble bursts in an attempt to keep the credit structure propped up. A full analysis and insight of the subprime market unraveling, and what this means for the Rand, monetary policy, and various sectors in the economy will be sent to ETM Analytics clients in the Business Cycle Monitor this week.

Zimbabwe Apparently Going to Relaunch Z$ Under Gold Standard

Nahanda Radio reports that the Zimbabwe government plans to re-launch the Zimbabwe dollar, but that to make it internationally acceptable, and to move away from the risks embedded in the US dollar and Rand, will back the new Zim dollar by gold.

Gideon Gono, the man who destroyed the Zim dollar by printing too much of it, said in June 2012 that his interventions that destroyed the Zim dollar

were exactly in the mould of bail out packages and quantitative easing measures currently instituted in the US and the EU…

With regards to the new Zim dollar and proposed gold standard, Gono said

The world needs to and will most certainly move to a gold standard and Zimbabwe must lead the way…The events of the 2008 global financial crisis demand a new approach to self-reliance and a stable mineral-backed currency, and to me gold has proven over the years that it is a stable and most desired precious metal.

Clearly he learnt something from the hyperinflation that he caused.

If the Zim government goes this route it will most likely be successful in relaunching the Zim dollar, as long as the public accept the currency in exchange. If they don’t, the plan will flop despite being backed by gold. Furthermore, a gold standard that is controlled by government is not guaranteed to bring stability for very long, because it is highly likely that the government will over issue paper money relative to the gold that is backing it. It’s very profitable to do this. This will again force the government to go off the gold standard at some point in the future, setting another hyperinflationary cycle in motion.

Who Would Buy A Currency Unbacked By Government?

Asks Tim Cohen in The Bottom Line today. He is referring to bitcoin and finds that quite a lot of people would invest in or buy a currency “unbacked by any government.” I would argue people are flocking to it, because it is neither backed nor controlled by any government.

Gold and silver are also currencies unbacked by any government. In fact, central banks (i.e. governments) buys gold to back up their own paper monies.

Perhaps bitcoin will one day do the same thing. But it still has a long way to go to before it gets there. For a start, because bitcoin doesn’t fit Mises regression theorem, meaning bitcoins do not have a historical objective exchange value before it started to function as a medium of exchange, it needs to find an objective exchange value first before it can settle as a reservable asset, or even serve as a reliable measure of value in exchange.

One Rand as a Per Cent of All Rands in Circulation

The Rand money supply has increased 2,455% since 1988, from R93.5 billion to R2,390 billion in 2013.

In 1988, R1 was equal to 0.0011% of the total supply of Rands in existence. In January 2013, R1 is equal to 0.00004% of the total number of Rands in existence.

Thus, by increasing the total number of Rands circulating in the economy, the Reserve Bank has diluted the value of each Rand. This is why the Rand has lost so much purchasing power relative to crude oil and gold since then. Relative to the total Rand money supply, the Rand has lost 96% of its purchasing power.