Pain is gain in world of stockbroker economics

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‘The Thai baht… the Malaysian ringgit… the Mexican peso…” This is part of my friend’s guided tour of the wealthy horse-breeding midlands of Ireland. As he points out heavily gated entrances to palatial properties he explains the source of money used for their purchase by bookies turned currency speculators.

“Why would you bother trying to make a living from gambling on horses when you could pick up really big money by joining a hunting pack of currency speculators,” said my guide, more in the form of a statement about the wonderful and righteous power of markets than some sort of ethics-based question.

The tour took place years after the Asian currency crisis that set back the Tiger economies for several years and caused devastation to the lives of millions of people across that continent. It was also after the December 2001 crash in the rand, which at the time prompted my 11-year-old Irish nephew to offer me his pocket money so that I would have something to spend during my Christmas holiday in Ireland.

But it was before the 2008 financial meltdown that caused devastation across the globe, including the loss of 1 million jobs in South Africa.

The devastation that is an inevitable part of a financial or currency crisis is regarded as an important aspect of the disciplining function of markets. It’s seen as the pain that countries and their citizens have to endure as they learn how to better manage their resources. And powerful currency traders play a key role as the teachers in this painful learning process.

You’ve probably seen these so-called market experts, steeped in what one commentator described as “stockbroker economics”, explain just why it is that a currency crash or recession is not only to be expected but is absolutely necessary, that in fact it will be good for all of those who suffer its consequences.

The underlying presumption that currency speculators could not damage the currency of a well-managed economy attributes more scientific precision to the work of speculators than is deserved or appropriate. To be sure, in the long term, this presumption may be accurate but it fails to acknowledge the massive amounts of money that are available to speculators looking for short-term gambling profits, which makes every currency other than the dollar or the renminbi susceptible.

Of course the sad reality is that we South Africans have been living beyond our means; that millions of near-destitute people have been receiving meagre government grants the government can’t fully afford and that we’ve all been buying stuff that the country can’t fully afford. To fund all this “excess”, the country has relied on billions of dollars of hot money created by the US Federal Reserve’s trillion-dollar stimulus programme.

The Fed gave notice months ago that it was going to “taper off” its stimulus programme but things remained reasonably stable… until they weren’t. The past week’s trading sees the rand 20 percent weaker against the dollar over the past year. This will cause considerable pain for those millions of near-destitute people who rely on government grants.

It will not only restrict the government’s ability to continue paying the grants – such restriction is referred to as “discipline” in stockbroker economics – but it will put upward pressure on the cost of basic goods such as petrol and maize.

And if any of these apparently feckless people have actually borrowed money, they will face higher repayment charges on that money as interest rates are increased to protect the rand. By subduing economic activity, those higher interest rates are likely to reduce the already slim chances of the millions of unemployed South Africans getting a job.

For those of us with jobs, life will get a little tougher, and if you’re planning to travel overseas you will need the support of a generous nephew.

Being in an election year it is very possible the government will try to resist this market-induced discipline. No doubt it will continue to make promises that eventually spark service delivery protests. While South Africans must not expect support from the Americans or Europeans, who are not threatened by our predicament, this time around the Chinese might be prepared to shelter us from the worst ravages of gamblers looking to make a killing in the currency markets. Of course, that shelter will come at a market-related price.


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