South Africa needs to appoint a person accountable, properly empowered with an office properly staffed and equipped to deal with the issue of employment.
This official must report to parliament and who is measured on his success of lowering unemployment.
This Minister and his/her deputy must have seats and voting rights at the Monetary Policy committee meetings.
Their inputs must be considered, and a risk approach should be followed, giving an equal weighting to inflation and employment management.
Across the globe dark clouds are gathering, it may amount to more than mere winds of change. Jamie Dimon the JPMorgan Chase CEO is predicting an economic “hurricane” caused by the war in Ukraine, rising inflation pressures and interest rate hikes from the Federal Reserve.
Inflation traps people in an endless loop of running fast and falling behind, unrelated to effort or input.
This is true for the unemployed and employed alike, it also affects government institutions, companies, and even non-profit organizations. It is also true that not everyone is affected equally.
The Federal Reserve Reform Act of 1977 promoting maximum employment and stable prices.
At its core, the Federal Reserve has two main jobs: keeping inflation low and making sure maximum number of people are employed in America. This is known as the Fed’s “dual mandate.”
However, the Fed is currently being challenged in a way it has not been in over 40 years.
And as it tries to do one part of its job it is hurting the other. In a way, the two parts of its dual mandate are starting to duel with each other.
The U.K. is also battling inflation at a 40-year high, with many households buckling under the pressures of the deepening cost-of-living crisis. Currently, the Bank of England’s objective is to keep inflation “low and stable” at 2%, according to its website, with the aim of keeping the U.K. economy in a healthy state.
There has been speculation about the U.K. adopting a U.S.-style mandate. There are more and more voices concerned about employment fallouts due to stricter monetary policies.
The South African Reserve Bank’s (the Bank) primary purpose is to achieve and maintain price stability in the interest of balanced and sustainable economic growth. Together with other institutions, it also plays a pivotal role in ensuring financial stability.
There is an obvious difference between primary purpose and merely “playing a role” At present South Africa has no one at the steering wheel regarding employment. We have a finance minister, we have a minister of water affairs, of education, of Police, a Minister of Sport, and a Minister of Post and telecommunication (but not much is left of the Post Office) and various other ministers. The Minister of labor has administrative duties and therefore we do not have a minister of employment. This Ministerial position must rank equal to the Minister of Finance.
The Ukrainian invasion has added significant risk to the world economy which was already suffering from the after effect of governments in their dealing with Covid.
The world seems to have split into two major groups. On the one hand the USA and the European countries and on the other grouping we see Russia, India, China and even Africa as a continent.
It is noteworthy that China has forgiven debt owed to them to 17 African countries. The first group has their currency based on financial assets as it’s collateral, whereas the latter grouping is evolving into a commodity-based currency.
The Russians has already stated they will sell their oil and gas to their European clients provided they get paid in the Russian Ruble as opposed to USD. On paper it sounds solid but keeping a not so homogeneous group together in a new asset base currency may prove more difficult.
The ramifications will be extensive, and it is not easy to predict. One aspect that the new grouping will find difficult to compete with is the tax rate applied in China of 13%. In addition, the home/property bubble in China is adding significant additional counter party risk for countries dealing with China.
Internal demand for goods and services in China is low and that makes the country very dependent on exports to keep their economy in a growth phase.
The lack of trust is all too clear after the U.S. felt the need to act swiftly to keep powerful semiconductors out of the hands of the Chinese government by banning the export of these products to China.
A situation that spells disaster, is when the funds are low, and the debt is high! This well-know phrase is now applicable to many governments and their citizenry alike.
An interesting economic lesson lies in the Japanese central Banks handling of its mandate. Japan’s Central Bank has vowed to keep the 10-year Japanese Government rate at below 0,25%. South Africa’s similar bond trades at 10,4%. It is little wonder that the yen is on such a hiding. Whereas the yen is down 26% against the USD the Chinese Yuan Renminbi is down only 8% against the USD measure over the last two years.
When the Fed decided to print excessive dollars two years ago China anticipated the inflationary effects that may be experienced by their own population.
They started accumulating maize supplies and rice etc.
Their population may be 20% of the world population but they are sitting on 70% of these food supplies. The rapidly rising inflation in the USA, UK, Germany, and other European countries will drive interest rates substantially higher.
Inflation in these countries is already at 40-year highs. This in turn will no doubt lead to a drop in value of the financial assets held by the Western world financial system.
Such a drop will have a disastrous effect on the various economies. And the future looks even worse with the winter month’s additional demand for energy we can expect fuel and food prices to rise even faster.
The turning point for inflation in these countries may well be in excess of 16% with some analyst even predicting the peak at 20%.
The dilemma is that investors and governments tend to invest in Dollar denominated bonds both short and long term. As inflation edges higher these assets diminish in value. We know trouble lies ahead as the Yield curves have now entered an inverse trend in various countries.
This has always been a good leading indicator that a recession is close.
All the above warns us that the Reserve Bank will continue to hike interest rates upwards.
The balanced approach between protecting jobs and inflation is not equally guarded.
Mandates need to be changed. It is not about a battle of preserving Capital interest over that of the workforce. It is about creating a just society.
Corrie Kruger is an independent analyst.