Politics, South Africa

Op Ed: The politics of the money economy – the power and limits of the central bank

By Saliem Fakir 6 September 2016

In recent times, political sentiment – from some quarters within the incumbent government – would have it that the Central Bank or in our case the South African Reserve Bank (SARB) do something about the floundering rand. And yet others want the powers of SARB to be clipped. By SALIEM FAKIR.

As far as the rand goes, there is little the Central Bank can do because its foreign reserves are limited, and if political governance is such that it either frightens capital to take flight or persuades them to engage in a disciplining mode, the Central Bank is as much a limited sovereign institute as it is victim of circumstance.

The erstwhile politicians are missing a beat: the incumbent government had long struck a Faustian bargain with big money.

Given our political elite – inherited power with no economic power to speak of – they had no full independence from the money economy. To get big capital’s money it had to play by their rules.

It still has to do so, and this state of affairs will remain unless one builds the saving base of the country, enhances tax receipts, curtail illicit flows of capital, or there are strategies in place where the state itself is able to extract a share of capital accumulation from the market economy.

For capital accumulation via state entities to prevail, then they must make sure they deliver a return and not be endless troublesome sink-holes serving the populace the recurrent hangman’s noose for every hard-worked tax that is given over to the state.

The current predatory grab by the predateurs, on various parts of the economy, breaks any hope that even this strategic play will raise the stakes for economic sovereignty and reduce the dependence on big money.

Sometimes the temptation for political populism can be overwhelming.

Political populism can also go the route of the Mugabe option: print more Rands in the hope that it will get you out of a deficit, but very quickly you will see how printing money leads to hyperinflation and loss of value.

If you think it can only happen to countries like Zimbabwe, consider Germany and its extreme hyperinflation in the 1920s, when it too tried to deal with a sluggish economy and deficits following the Versailles Treaty.

Printing money only works in America, as the dollar is both money for exchange and the store of value. We all give the United States this power over the printing machine because we trust nothing these days other than the dollar and gold.

There are lessons from hyperinflation: the Zimbabwean dollar had to suffer the ignominy of having to debase itself and replace itself with the US dollar for the Zimbabwean economy and payment system to function again.

As much as Zimbabwe was beholden to Chinese loans, it also found itself under the control and autopilot of the US Federal Reserve – so much for Zimbabwean national sovereignty over its own monetary policy. It will never again regain fully the power over its own money, go Mugabe and come the Messiah. It is a stark lesson and warning to our incumbents to be careful what they wish for.

Even in esteemed countries of big capital like the US, the Central Bank can be the subject of political interference, as Governor Arthur Burns quickly found out when he took over the reins of the Federal Reserve during the Nixon era – a rocky episode which he was eager let steam off in speech (or an essay he titled most aptly “The Anguish of the Central Banker”).

Or ask Raghuram Rajan, the MIT-educated and high-flying central banker, seen as a leading light in emerging economies. Rajan was unceremoniously deposed by the not so regal nationalists of Modi’s party as soon as he asserted independence. With Rajan gone, the Indian Reserve bank is ruled by a council of six experts, all reporting to Prime Minister Modi – and leaving the new governor hamstrung between economic reality and political fantasy of the nationalists.

We will have to see where this experiment goes.

The thing is, there are limits to sovereign independence when sovereigns are so prone to the goodwill of foreign savers and money economies. Foreign savers in turn rely on their intermediaries, such as banks, private equity firms, pension funds, to find places where money can reap more money.

It is for these savers and moneybags men and women that the credit agencies perform their tasks. We may despise the credit agencies, but you can only tell them to take a hike if you decide that you do not want to take a penny from the world’s money economy.

How did we land with the money economy in the first place? In the classic period, the relation between money value and its real exchange was reflected in the metal that contained in money made out of gold, silver or copper. At times rare commodities such as salt, olives or other things could also be exchanged for goods.

It is only when the first central bank was established, the Riksbank in Sweden (1668), that paper money brought into the world a new concept of money. Money which had some backing in a metal could be freely exchanged with the promise that it will be redeemed provided not all depositors suddenly wanted to redeem their money all at the same time (a run on the bank).

The Swedes found they could raise commerce to new heights, given that Sweden was a great regional power, as it could circulate more money relative to how much was backed by its holdings in gold and other metal.

The model of the Riksbank was replicated elsewhere and found great enthusiasm in the creation of the Bank of England. The US, interestingly, only established its central bank in 1914, after several failed attempts because independent states within the US confederacy were reluctant to cede money power to a central government.

This debate goes on today in the US. Followers of Ayn Rand and other free market extremists such as the followers of Milton Friedman decry the fact that government must be in charge of money supply and policy.

Nothing backs paper money other than sentiment and trust that the sovereign, which prints such a money, would exchange my money into gold if I wanted it.

Today, this pretty much the world of money, except you will not get gold back thanks to Nixon, who broke from the Bretton Woods agreement – having long delinked money value to the pegged value of gold.

When Nixon broke the accord, New Zealand pioneered the price pegging tool we use today called inflation-targeting (IT). Inflation targeting is used by close to forty countries explicitly and others indirectly to control inflation by setting a band where inflation should remain. In our case, it is around 3-6%. 

Today money value is paper money in its totality. What keeps money value together is the relation each country establishes with the global money economy. And that money economy is the result of the US money empire – it is the Federal Reserve, Wall Street, the IMF and the global financial architecture running through London, Frankfurt, Singapore, Hong Kong and Shanghai.

This architecture is the product of our dependence on the dollar, not only as a medium of exchange but also a store of value. It is what makes the Federal Reserve the central bank of the world, sometimes the bank of last resort if the IMF cannot come to the rescue and will be so for a long time to come because even China is dependent on US Treasury bonds to keep the Renminbi at a competitive exchange and to ensure cheap money in the US enables US consumers to keep buying Chinese goods.

China also has to find a way to quarantine itself from all those dollarised exports to ensure it can retain its status as the cheap factory of the world. It either houses its money in a dollar-rated sovereign fund or holds US treasury bonds. If there is any lesson in this too, China’s own capital accumulation positions it very well to intervene in the currency markets if it wants to bolster its own currency. For this it has a war-chest of close to $3 trillion dollars, if not more.

You have to be China to do what our political incumbent was so frustratingly advising our SARB a week ago.

Our complicity to the dollar is largely the effect of having to succumb to the dollar hegemon, and to displace the dollar would require a change in political economy at the centre of power of the global money economy.

The periphery has no power to change the centre, no matter how much they dream of the bliss of the dollar-less economy, euthanising Wall Street (a phrase coined by Keynes when he talked of greedy financiers seeking excessive economic rents) and cutting the head of their demon, the credit agencies.

Countries that want to win some sovereignty over financial markets can only do so if they act in concert with each other. But even fraternal nations can are often less persuaded by their nominal friendships than their own self-interest.

Self-interest is an internal force that undoes any effort to untie oneself from the global empire of money. You may call it delft politics or reluctant pragmatism, but to maintain sovereign power requires playing astute geopolitical chess-games. At present our own internal turmoil – brought about by a weak incumbency – makes us even more vulnerable to the money economy not less.

On the independence of Central Banks – well, it depends a lot on how those who sit in the Monetary Policy Committees (MPC, and many countries now make their minutes available to the public) manoeuvre between political and market populism.

Central Banks are occupied by humans. Humans have social networks and peer groups. They have a way of looking at the world, as all of us do. They are also driven by mimetic impulses. Lack of innovation comes from fear of stepping out of the sentiment of their peers.

There is pressure to conform, especially if you want to rub shoulders at the annual Central Bank beauty parade in Kansas City called the Jackson Hole conference, where the top minds from all the world’s CBs meet. No wonder critics call this the Jackson Hole Consensus. It is a bit like the Washington Consensus for monetary policy people.

Central Banks can be unconventional, in times of crisis, not only in terms of quantitative easing or the use of “helicopter money”. By and large they are conventional, as it has to do with the history of conservatism that infects Central Banks.

Our conservatism, at SARB, is also the fact that money and fiscal policy are intertwined – bound by our self-imposed regime of austerity. If the state borrows from others, the creditors want to be sure we can pay them back, hence this discipline of austerity.

I have to issue a caveat though: profligacy of spend is dictated by our creditors, and then too, if the delivery arms cannot deliver economic and social goods due to poor performance, austerity is a necessary measure. In South Africa, creditor pressure, corruption and inefficiencies in state delivery arms will always exert a force of restraint on our vanguards of monetary and fiscal policy.

In the end, Central Bank or no Central Bank, to make money do what you want it to do is always a reflection of the power of the political sovereign relative to the domestic and global owners of money economy. The less you have, the more you have to play by their rules. DM

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