TALK in financial circles in Europe and the US is about what is being called "financial repression", a political process through which governments disadvantage savers and oblige investors to take on risks they do not want to assume.
Quantitative easing, for example, involves an intervention by a government or a central bank through the increase of the money supply by buying securities, usually government-issued paper, from the market. The idea is to pump money into the economy, so stimulating it. A major disadvantage, however, is that while there’s a lot more money swilling about, the quantity of goods available hasn’t changed. The result is an increase in inflation.
The repression takes effect when investors who are "long" on otherwise safe government bonds start losing money when taxation and inflation are factored in. Assume the R157 bond is returning a market rate of 5.5%. Tax at, say, 30% in the hands of a private investor reduces that to 3.85%; inflation at 5.6% turns that into a loss of 1.75%.
Why bother? Because if you are clever and your assumptions are right, you might just score a significant capital gain on the price of the bonds you purchased. But that game is risk with a capital R.
Then there are those rapidly expanding regulations for the financial community, beginning with the latest international regulatory framework for banks, Basel 3 (rejected by the Americans), which means banks must keep lots more money sterilised to save for riskier investments. And companies are now being required to take account of pension funding requirements three years out and more.
That means finance directors must presume the possibility of losses and hold back increasing amounts to satisfy regulators that commitments to pensioners three years later can be financed.
Some commentators believe a quite deliberate attempt is being structured to erode savings. Interest rates in Hong Kong are about 1%. Those in Japan are either zero or negative. Rates in Germany are negative. This may be wonderful for governments, which can service their debt for practically nothing, but it is really bad news for those living on fixed incomes. Money market rates in the UK range between 0.1% and 1.79%; inflation is at 4.6%.
In a seminal work (The Future of Finance) published by the London School of Economics (LSE) in September 2010, contributors argue that a growing moral hazard is present in the "too big to fail" syndrome. This occurs when a lender thinks that if a debtor gets into trouble it will be bailed out. An example is the relationship between Abu Dhabi and Dubai and specifically with Dubai World.
Creditors advanced more than $100bn to Dubai, despite knowing very well that Dubai possessed very limited oil reserves. They presumed Abu Dhabi would come to Dubai’s aid so they kept right on lending.
They were right. When the markets got into a lather over Dubai World’s ability to redeem a $4bn bond in December 2010, Abu Dhabi stood in for $10bn in its third loan in the year.
According to the LSE, the International Monetary Fund (IMF) is another major institution that presents moral dangers. It has about $1-trillion to lend, and is looking for more so it can lend to wealthy countries that are a bit strapped. But all that does is encourage creditors to lend more too, knowing IMF bail-outs are definitely on the cards.
Among a depressing list of ailing countries take just one, Ireland, once called the Celtic Tiger. Its three main banks built up loans three times the country’s gross national product. When the global crisis hit, the banks, like Humpty, fell off the wall. Property prices fell more than 50%. People stopped repaying loans.
The government’s response was to pump funds into the banks and guarantee their liabilities. All this means Irish taxpayers are now the holders of these huge debts.
The shape and form of the next boom is now visible. So is the outline of the next crisis. Good times will luxuriate in easy credit; growth and surplus capital will characterise emerging markets. Major international banks, already backed by taxpayers, will pour money into emerging economies.
There are many "ifs", but if we misread the boom we may also be at "the end of our fiscal and monetary ability to bail out the system". Think about that while you sip your piña colada on a windy beach.
IT ISN’T that I think tobacco smoking is a good thing — I don’t — it’s just that I am increasingly exasperated with the manner in which governments everywhere think they have an inalienable right to interfere in the way people choose to live their lives. They have no such right, but their attitudes and approaches increasingly signal the creep of Big Brother.
Health Minister Aaron Motsoaledi was certainly quick off the mark in his desire to mimic Australia’s recent order making the marketing of cigarettes virtually impossible. As in Australia, Motsoaledi has devised regulations so extravagant as to make them risible. Cigarettes must be exhibited in a certain manner, packets must carry specific wording, drab packaging is to be used, the font to be used and the size of the wording must be just so, and so on.
If people want to damage their health isn’t that their prerogative? So long as they don’t interfere with anyone else’s rights, so their rights should be equally sacrosanct.
If the state wants to preclude providing health services to those in need and who might smoke, it is likely to be on dangerous ground. If private medical aid institutions want to do the same, they’re probably better positioned, provided they’ve made themselves clear in advance.
This is an argument that is really about choice. Private individuals should not be dragooned into accepting limitations on their rights of personal behaviour, so long as these do not transgress acceptable social boundaries.
Australians long ago accepted the rights and limitations of their cradle-to-grave nanny state. But I want it to stay over there — far away.