Twenty Third Floor
Technical Business Advantage

Looks like my money is safe – Reserve Bank cut rates as predicted. Thinking about trying to predict for each MPC meeting then tracking my performance over time so I can be held accountable. Will mull over this first I am not that sure I’ll be sufficiently confident to stick my neck out in future!

Brian Richardson, CEO of mobile banking company Wizzit doesn’t understand the monetary policy, or so it seems.

He claims there is approximately R12bn of money outside of the formal banking system, or “under mattresses” as I believe he put it. This may be true.

Then, and this is where I have a problem, states that “It would have a massive impact if that money came into the market” with the implication that this would be a good thing. This reflects a broken understanding of monetary policy.

Putting this un-banked money into banks would allow it to be re-loaned, applying the multiplier effect and effectively expanding the money supply. Whether expansion of the money supply by R120bn (assuming effective multiplier is around 10) is a good thing or not is a question of fact, yet to be resolved.

Of course, if this were a good thing, the Reserve Bank could achieve the same thing through a combination of open market purchases of bonds (released cash into the money supply), weakening reserve requirements (allow the same money to be relent more times) or printing bank notes and dropping them from helicopters. They haven’t yet done this.

So it’s not really a good thing for the economy as a whole. It is a compelling argument for mobile banking though. Just saying.

It’s clear some people just don’t get that deflation is catastrophic from an economic perspective. You would have though that Japan’s lost decade (is it still only a decade?) would be sufficient warning.

Michael Pento from Euro Pacific capital writes about the options open Bernanke to stimulate the US economy through open market purchases given that interest rates are up against the zero bound.

He’s right about the options, but horribly misguided when it comes to wishing for deflation:

By keeping prices from falling more that they would have naturally, Fed intervention has created a burden.

The US public (and private) debt is such a significant portion of GDP, the correct answer cannot be to increase it as a percentage of GDP by deflating prices and keeping the nominal value of outstanding debt the same. Moreover, what the US needs is economic activity; encouraging everyone to leave their money in the bank because it increase in value every day and “nobody else is spending so deflation will continue” doesn’t sound like a success story to me. Downward price stickiness, particularly with wages (yes, even in the US) would add to the catastrophe.

Pent also raises the risk of hyperinflation:

…investors would be forced to once again abandon savings and chase runaway prices.

I don’t know how we went from fears of deflation to “runaway prices”. The challenge with this policy is to credibly promise moderate inflation for several years (depending on how strong your Ricardian views are).

Runaway prices are much easier to control than deflation. With inflation, we actually have a range of tools to use.

It’s unreal how many people have views on the economy that aren’t rooted in any economic theory at all.

According to a Fin24 story this morning, the FSB is probing smaller unit trusts.

The economics of a fund manager depends entirely on growing funds under management so that revenues (based on assets under management) grow to be larger than costs (significantly fixed and at most semi-variable). Details of performance fees and the second order impact of investment performance aside, a successful fund manager must attract positive net client cashflow, and lots of it.

Half the 960 available unit trusts have less than R100m in AUM. Some of these may be rapidly growing new funds, but many have been stagnant with slow growth for several years.

The FSB’s attention presents opportunities for consolidation between funds and should place larger funds in a stronger position competitively. Total Expense Ratios (TER) for these funds with significant scale should already be lower than smaller funds. Maybe it’s time the larger funds made more if their size and cost efficiencies. If they are going to take the heat for being too large to be nimble, they might as well reap the benefits too.

It will be interesting to see what this means for white labelled funds and whether the economics of these convince the regulator that they should survive.

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Sharemax appears to be spiralling to its doom. Multiple stories today report that they are late on dividend payments to investors and may not be able to pay dividends in the forseeable future.

Cash has run out. The overvalued, over-geared properties cannot support the income stream that was demanded from them.

No surprises here then.

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The ongoing public sector strike has raised several interesting points.

Not least of which is what teachers actually earn. A full-page advert in newspapers last weekend gave some very respectable figures  for teacher salaries.  A teacher just starting out, with a 4 year qualification has a total cost to employer of around R229,000 per year. This includes 13th check, pension, medical aid and housing allowance, but is a surprisingly high number. It also included the then-proposed 7% increase (versus CPI at 3.7% at the moment).

The offer was increased to 7.5% since the original advert, but the numbers below are the unadjusted numbers in the advert. These are annual basic packages excluding benefits. (It’s unclear whether the before Total Cost to Employer columns include or exclude the 13th check, which is definitely included in the TCE column).

This advert prompted an immediate outcry from teachers writing to complain that they earn nothing close to that figure. This was followed up by government affirming that the figures are correct, noting that many teachers may not add up all the non-cash benefits. (more…)

I haven’t played Monopoly in a while (preferring Settlers of Catan, Carcasonne, Tigris and Euphrates and even Cranium), but after a recent conversation I started thinking about the game dynamics. There is surprisingly much that is relevant to the current story of our economy.

1 The Competition Commission is necessary

Monopolies serve to increase prices for consumers. In Monopoly, the “rents” charged are instantly higher as soon as a player has a monopoly on property in a certain area.

Worse than the increase in prices and decrease in supply, the additional profit for suppliers is not equal to the cost to consumers from higher prices, resulting in an overall “dead weight loss of monopoly” or an overall cost to society. (more…)

From Stats SA

The headline inflation rate in July 2010 (i.e. the Consumer Price Index for all urban areas in July 2010 compared with that at July 2009) was 3,7%

The official inflation rate (i.e. the percentage change in the CPI for all urban areas in July 2010 compared with that in July 2009) was 3,7% at July 2010. This rate was 0,5 of a percentage point lower than the corresponding annual rate of 4,2% in June 2010 (i.e. the Consumer Price Index for all urban areas in June 2010 compared with that in June 2009).

From June 2010 to July 2010 the Consumer Price Index for all urban increased by 0,6%

CPI Headline July 2010 = 3,7%

So this is close to the bottom of our 3% to 6% inflation targeting range. Economic growth is struggling, unemployment is high, but we haven’t reduced interest rates? Something here is a little odd.

I’ll put another $100 in Kiva, to be “microlent” to businesses and people across the world, if the next monetary policy committee meeting doesn’t cut interest rates.