Growth requires steely economic realism
What shape will the global economy take after the lockdowns are fully relieved? How fast can it grow when something like normality returns? There are those who argue that the major economies have entered an extended period of economic stagnation, that demand will have difficulty keeping up with even modest extra supplies of goods, services and labour. That monetary policy has shot its bolt because interest rates cannot go much below zero.
We should dismiss such underconsumption theories. Monetary stimulus comes not only from lower interest rates but also occurs directly as excess supply of money is converted into demand for other goods, services and assets. Higher asset prices and greater wealth also have positive effects on spending. There is no technical limit to the amount of money central banks can create to stimulate more spending. The only limit is their own judgment as to how much extra is necessary to get an economy running again.
Stagnation will be for want of willingness to supply goods, services and labour. If demand remains weak we should expect ever more injections of cash until demand increases enough to make inflation, rather than growth, the problem for central banks. This is unlikely anytime soon, and global interest rates will remain low until then. Such policies can be reversed when the time is right.
These low interest rates encourage a flow of capital to those parts of the world where real interest rates are highest
— as in SA, where the market still determines long-term interest rates given the clear unwillingness of the SA Reserve Bank to monetise government debt on any significant scale. The government has to offer nearly 10% for 10-year money. Adjusted for expected inflation of about 5% this provides a very attractive expected real return of about 5% per annum over the next 10 years. The average private firm contemplating investment in plant and equipment in SA would have to add a risk premium of another 5% to establish the returns required to justify such an investment. These would therefore have to be about 10%
per annum after inflation, a requirement that is prohibitively high and explains in large measure the lack of capital expenditure in SA.
It also reinforces the prospect of a permanently stagnant economy and explains the depressed value of SAfacing companies on the JSE. For faster growth in capex, interest rates have to come down or, less happily, inflation must go up to reduce required returns on capex.
Improving our growth prospects requires a steely economic realism. It necessitates more central bank intervention to lower long-term interest rates and far more reliance on short-term borrowing, which will be much less expensive for taxpayers. It calls for still lower interest rates at the short end, money creation and debt management of the kind practised almost everywhere else as a temporary stimulus.
The blowout in the government s borrowing
’ requirement, because revenue has collapsed with incomes, is best regarded as unavoidable. Realism means no increases in tax rates on expenditure or incomes, since doing so would further slow the economy, and revenue collections with it.
Higher expenditure taxes and charges would also raise headline inflation, depress spending on other goods and services and raise the pay levels public sector unions demand.
Demands for improved employment benefits for comparatively well-paid and protected public sector employees must be strongly resisted. This will help demonstrate the government can spend within its capacity to raise revenue over the longer term. The debt trap is avoidable. It calls for sound policies of a market-friendly nature to attract the capex necessary for faster growth.