Whether or not South Africa’s interest rates are cut by another half a percentage point when the Reserve Bank’s monetary policy committee meets on Thursday – or in the months ahead – is probably irrelevant.
There are limits to what monetary policy can do to boost economic growth. This has been vividly demonstrated in many advanced economies, which are still limping along despite near zero interest rates and repeated injections of liquidity since October 2008.
Monetary policy is often overrated as a stimulus and an agent of job creation. And, in the present economic context, it is even less potent than in normal periods of slow growth and no growth. Businesses will only expand and households consume more when they have a measure of certainty about how their lives will unfold. And we live in particularly insecure times.
It needs more than cheap money to make firms invest in the real economy – factories, plants and machinery – and hire more workers. They have to be reasonably sure their ventures will be profitable enough to pay back the loan. Or, if they already have their own cash resources, they need to believe they can use the cash better by expanding their productive capacity than they would if they invested the money in financial assets.
Unfortunately, over the past few months, as global financial stability has become increasingly precarious, South Africa’s ruling party has been tearing itself apart – using economic policy as a political football. Particularly unsettling is the game of semantics and the sense that proposals are often entirely opportunistic.
Even unproductive policies are better than policy chaos.
South Africa is not alone in this predicament. Certainty is elusive always and everywhere. And in the current climate its absence is particularly dangerous. Risks posed to the rest of the world by the largest economy, the US, are scary.
Financial markets, already punch drunk after five years of constant pummelling, face another round of volatility as the US approaches its fiscal cliff. The CNN Money website explains what the term means: the simultaneous onset of tax increases and spending cuts that will be triggered at the start of next year unless the US Congress acts.
Combined, the policies would take $7 trillion (R58 trillion) out of the US economy over 10 years – about $500 billion of which would be in 2013, CNN says.
The reason for the tax increases is that concessions, put in place by former president George W Bush, are due to expire. And spending cuts are needed to reduce the US debt load, likely to reach $16 trillion by November, according to Nedbank Capital.
CNN says the Congressional Budget Office predicts a recession if the measures all kick in at once. It seems inconceivable that US legislators will not extend the life of some of the tax concessions to stagger the impact.
But US politicians hate to agree on anything. In August last year, rating agency Standard & Poor’s stripped the US of its triple A sovereign debt rating as political wrangling almost caused the country to default on its debt. A deal was eventually reached. But investors were rattled by the irresponsible political brinkmanship and financial markets took months to recover from the consequences.
A presidential election campaign, with its usual posturing and empty promises, has only made things worse. And the world seems to be headed for the edge of the cliff, courtesy of US politicians.