Bread, not bullets!

How the SARB can hold our ailing households, economy, businesses and nation together through the Corona Crisis By Buddy Wells

Just like humans need air to flow easily to our lungs to breath, so economies need money to flow into communities to function efficiently.

Money is oxygen for economies.

When we get over-excited or distressed we can hyperventilate, when economies get over-excited or distressed, they can hyper-inflate.

Central banks are first responders and doctors for economies when they get into difficulty.

Like holding a bag over the mouth of someone who is hyper-ventilating in order to slow down their intake of oxygen, when economies suffer from too much inflation central banks slow the supply of money into the economy by increasing interest rates. This sucks money from our bank accounts so we have less to spend.  Economists call this reduction in spending power “lower demand” as there is less demand for goods and services because we can’t afford them.

When the opposite is the case and we can’t get enough air, doctors do all they can to increase the oxygen flow to our lungs. Similarly, when demand for the goods and services our companies sell is too low, central banks step in with the oxygen mask, increasing the money supply by reducing interest rates.

Our economy has been sick for a very long time.  It is being starved of air.  

About 20 years ago, the decision was made to change the SARB’s policy framework to purely inflation targeting.  It set itself the goal to limit inflation to a narrow band between 3 and 6 %.  The SARB also religiously limited the instruments it uses to achieve this inflation target to basically just one: adjusting interest rates.

Twenty years later there has been no change in SARB policy or instrument, and SARB pats itself on the back for keeping inflation within its target even though we’ve struggled through decades of extreme and worsening unemployment and near 0% growth.  Yes, inflation expectations have been low, but what of the low expectations our people have of escaping poverty, low expectations of finding employment, and low expectations of growth?

We have social unrest and political uncertainty due to lingering, extreme poverty and inequality.  Businesses’ profit expectations are low, as there is insufficient local demand for the goods and services our companies sell and the costs of production is high, so we have insufficient productive investment.

In short, we suffer from low expectations.

Our vital signs are so low, the chart hanging on our hospital bed says “junk status”.

Our doctor, the SARB, keeps diagnosing “structural problems”, and recommends we change our behaviour in order to grow healthy again.  We are told we must sell our SOEs, remove labour regulations etc etc

Because we trust doctors, we believe what the SARB is saying, but not all doctors give you good advice, even if well intentioned.

When my grandfather was a little boy, growing up on a farm in the eastern cape, his brother ate an overripe watermelon and got diarrhoea.  Back then the doctor’s didn’t know that much, and the doctor told his mother “Whatever you do don’t give him any water, even if he begs for it”.  She didn’t and he died in her arms, begging her for water.

Much as we need them, doctors, like most experts can make mistakes.  And the SARB is no different.

SA has been suffering from too little air.  Our inflation is not because we have too much money in our bank accounts.  Instead, our inflation is through the years been driven by cost push factors like Eskom tariff hikes, fuel hikes and drop in supply of goods like increased food prices due to drought etc.

Unfortunately for us, SARB policy is just to keep inflation between 3% and 6%, solely by adjusting interest rates.  This means that even though our inflation is not caused by too much money, but by cost push or a drop in supply of goods and services, it raises interest rates in response, slowing down the flow of money into the economy when the flow of money is already too low.  Our doctor is putting a bag over the mouth of a patient who already doesn’t have enough oxygen.

What’s worse, is that by raising interest rates, the SARB is driving our cost pushed / low supply inflation higher.

Higher interest charges push our household, government and business costs higher, and reduce our money supply, leaving consumers with less money to afford the products our businesses sell.  This lowers demand for our goods and services while increasing the costs of producing them, so our businesses become less profitable, leading to less investment and in turn lower local supply of goods and services… all of which increases prices again.

A more astute doctor would long ago have realised that they need to take the bag off our mouths to allow more oxygen in our lungs, so we can reduce the energy we are spending on just trying to breath.  We have been begging for air and the doctor has been saying to the nurse “whatever you do, don’t give him any air”.

And then the coronavirus hit, and lockdowns spread through the world’s economies and when it got to us it sent our economy into the ICU.

Millions of us suddenly find ourselves without any income, business’ doors have been shut. Money is not flowing into bank accounts.  Without that money, how are we going to afford what we need to survive? How will we keep producing the goods and services we need to stay alive?  How are we going to keep our heart pumping blood through our system if we can’t get air?

Our doctor has been reluctantly forced into action. He grabs another instrument that was available all the time but that he refused to use before: Quantitative Easing (turning up the oxygen mix). But this isn’t enough…the oxygen is not reaching our lungs.  Money is not reaching our bank accounts.  It’s stuck in the banks’ reserve accounts at the SARB…the air passages to our lungs are blocked.

Our doctor must unclog our airways and force oxygen into our lungs if we are to survive, using all and any instruments available.

Luckily for us, the drafters of the constitution of SA and the SA Reserve Bank Act left the SARB with many options.

The SARB Act allows the SARB to loan money to government at any interest rate, or buy shares in any company and loan money to that company at any interest rate.


This opens up a lot of possibilities not only for SARB to fund increased demand (pump money into our bank accounts), but also to fund investment to increase the supply of goods and services to match demand.

One way to get oxygen into our economy’s bloodstream, or leave more money in our bank accounts, is for SARB to reduce its repo rate further and for government to spend money into our bank accounts and to reduce our taxation.

The SARB could go one step further and instruct banks to grant a payment holiday on all SAn household and business debt until the end of lockdown as some other countries have.

But even that will not be enough.  Being in lockdown without any income, will mean most SAns are probably already running out of money, and will still run out of money even if debt payments are reduced to 0.  Forcing people into a sustained lockdown without enough money for food and entertainment will create massive resentment and most likely lead to protest action and revolution.  This will put massive strain on our police and security services, and end up costing us far more than it would have cost to fund a constant supply of food and essentials to all our citizens, and provide them with income to buy those goods.

A ventilator is needed to pump air into the economy’s lungs.

The SARB can issue a 0% interest loan to national treasury so that government can issue grants to all SAn households for the duration of the shutdown.  A grant of R5000 per month to each of SAs 17 million households would add R85 billion per month to our public debt, around 1,7% per month to our normal debt to GDP.  But because it would be owed to our own central bank and the interest charged 0%, the added cost to our debt service charges in future would be 0 and the obligation to pay back the principle can be rolled back indefinitely until we are back on our feet.

Our productive sector supplies our economy’s bloodstream with the nutrients it needs to stay strong.

During this crisis there will be increased demand for essential goods and services and the SARB must ensure that our productive sector gets whatever capital it needs at the cheapest possible cost so that it can produce the things we desperately need to get through this.

To ensure supply matches demand, the SARB can issue credit at 0% to commercial banks on condition the banks lend that money on to our locally owned productive companies at the cheapest possible rate (commercial banks must charge some interest to make a profit).

Increased local production increases local supply, reduces imports and increases exports, all of which leads to less increases in prices, a stronger currency, and less debt.

To ensure that we keep producing as much of the essentials as is possible locally, and to ensure that those goods are distributed to wherever they are needed, the SARB can issue treasury with a 0% interest loan with which government can procure whatever food, goods and services are necessary.  To reduce inefficient spending caused by corruption and extreme pay gaps, Government can either procure only from private sector companies with moderate pay gaps and which share profit with their workforce, or set up SOEs to carry out those tasks.

As the coronavirus crisis escalates, doctors and nurses will need massive amounts of masks, virus test kits, hospital beds, ventilators, gloves, protective suits, sanitiser etc. We need to build hospitals, even if makeshift, as soon as possible.  Treasury should pay for this too.  Time is of the essence.

They say “Never let a good crisis go to waste”.  Hopefully this crisis will shock our doctor the SARB into action.  If not we need to find a new doctor, and fast.  Our loved ones’ lives, and our communities, companies, economy, and nation all depend on prompt action to save them.

The doctors and nurses we will depend on during the corona crisis will all be risking their lives to help us.  Will the SARB have the guts to back them?

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