PARTS 1 & 2

PART 1 – “SAVINGS: more important than the unstable money that measures it”

I am typing this in the SAA Business Lounge of Durban airport, awaiting a call to board a flight to Johannesburg, where we are due to take the last flight to London before all international travel is stopped. But in this dystopic nouveau monde, captivated by Covid-D 19 advice and warnings, we can be sure of nothing. Indeed, anything I write on that subject will be overtaken by new developments before the proverbial ink has dried.

In such surreal circumstances I shall try to focus instead on the anchor of transcendent economic principles, and put together a few observations that might, for a time, distract me and my readers with something different.

Cash money or digit money?

Eliminating the use of cash in society, for example. You can see it happening of course, but not necessarily what lies behind it. There is no need for money in any of its familiar physical forms when people are able to load their i-phones with digital symbols and pay for real goods and services by touching plastic against plastic or by entering a code. This is the entry to an alien world in which the gratification of real needs is increasingly divorced from people’s actual finances.

Grand model – cashless society


We have inadvertently become complicit supporters of the Treasury’s grand model of a cashless society that has no need to hold anything tangible. Government sets the example: if the Treasury can resort to the simple device of printing money to pay for fantasy projects that no private entrepreneur would touch, why should citizens not do likewise with a piece of magic plastic?

The Bank of England supports the cash-averse syndrome by shrinking the size of successive issues of new notes, coincidentally reflecting their shrinking purchasing power. The latest edition of a £20 note is similar in size and colour to the older £5 note – they get closer to postage stamps with each issue! And although we refer to this stuff as “paper” money, paper it is not. The notes are made of an indestructible synthetic see-through material you can bend but not fold, and they adhere to each other as if magnetised.

Saving? That’s important

The Treasury’s determination to create a cashless society in a digital age enables banks and large businesses to reduce the costs of administering, recording and accounting for complex payments systems, while avoiding the obvious security risks associated with holding virus-prone media like cash and cheques.

Saving – the fundamental discipline


But this transformation in attitudes to money has a price. The fundamental discipline of saving was until recently instilled in junior family members from an early age, and many can remember the satisfaction of feeling the piggy-bank’s growing weight as cash saved reached the point when it could be used to buy something to be treasured.

That experience reflects one of the most important principles of economics: nothing new can be acquired, or created, without something saved from past production. The word we use for those savings is capital – the initial investment without which there can be no new production. You can start a new factory with borrowed money, of course, but where did that come from? Still savings, albeit someone else’s.

Here we learn the very essence of capitalism. Capital, together with the factors of land and labour, is the source of everything produced – which is why it is so dangerous to conceal the role of savings from the younger generation – and implanting, by default, the illusion that money simply “pre-exists” as a means to gratification. This “disconnect” between an object bought and the factors that created it is the source of the fatal notion that demand, on its own, is the spur that will get production going.

Look at the poorest nations


But look around. Look at the world’s poorest nations. Do you see any lack of demand? What they miss is the means of satisfying that demand: private savings, labour and land availability – plus an entrepreneur to orchestrate them into production. No wonder that each generation must discover, the hard way, that all the “rights” and “entitlements” promised by left-inclined politicians amount to nothing other than an obscene diversion from the hard truth that, to quote John Cowperthwaite, Hong Kong’s erstwhile Financial Secretary, “in this hard world we have to earn before we spend”.

Fudging the figures

From government’s point of view, the chief advantage of insulating the communal psyche from Treasury-led subterfuge is that it enables state-appointed statisticians to fudge the inflation figures they feed to the gullible financial press on a daily basis. The “baskets” of products and services that make up the Retail Prices Index and the Consumer Prices Index (and their overseas counterparts) are continually “adjusted” with a view to arriving as closely as possible to “the figure they first thought of”– namely, the 2 per cent mandated by the Treasury as their “target” rate of inflation.

Even though that rate would cause prices to double every thirty years it has the advantage of “sounding” quite low, and can therefore serve as a bulwark against deflation – which, for every Keynesian macro-economist, implies a fall in demand and therefore represents the very devil.

Question: But might citizens not actually benefit from lower prices? That consideration simply has no place in the Treasury’s Keynesian modelling.

Question: But what if the detested fall in prices is actually a consequence of improved productivity that quite naturally leads to higher demand? The laws of supply and demand are far too entrepreneurial for a socialist workbook in which only state-controlled demand management can revive a sluggish economy.

You can’t fool all the people all the time

The greater the effort to delude the public with contrived inflation figures, the less are they believed by anyone living in the real world. People have far greater trust in their own “gut-index” of living costs and know that the true level of price inflation is closer to 10 per cent, incidentally confirmed by the independent Chapwood index, as Alasdair Macleod regularly reminds us.

Don’t believe the inflation statistics


The situation soon reaches a point where no official figures can mask the effect of unbridled inflation of the money supply, inflicted by central banks everywhere in complete ignorance of the difference between cause and effect. The fact that they are now compelled by government decree to create money by buying newly printed government bonds – with the best of motives, such as the emergency funding of virus-related handouts – will not lessen the economic consequences.

The Treasury and the Bank may pretend that the fiat-flood they have created is money, but as the printing frenzy gathers pace you can’t ignore its real effect on prices.



I am writing this in South Africa, where its currency, the rand, provides a useful illustration of the effects of monetary inflation described in Part 1.

When I was last here, three years ago, the going rate of exchange was around 16 rand to the British pound; now it is 21. That’s a 31 per cent devaluation (against sterling) over that period. Local prices adjust, of course, but that happens only over a period. Meanwhile, on the face of it, we are enjoying a “cheap” holiday.

But note that there is nothing objective about the statement that the rand has suffered a 31 per cent “devaluation”: that measure does not relate directly to its power to purchase actual consumer goods or services, still less a commodity like gold or silver. It is purely a comparison of exchange rates between two currencies at two dates, three years apart.

Currency devaluation


Seen thus, “cheap” is a relative term, and it disregards any devaluation that the comparator currency itself (sterling in this instance) might have suffered over that period, as measured objectively against, say, gold rather than just another volatile fiat currency. My statement therefore amounts to nothing more than that the rand suffered a greater loss of purchasing power than the pound sterling.

Background to the rand

Let’s broaden the picture: when the rand was established as the national currency in 1961, amid the euphoria of South Africa’s newly gained independence, it was not permitted to float and find its own level against other currencies; it was allotted an exchange rate of 2 rand to the British pound – the country’s former currency. As noted, today’s conversion rate is 21 rand to the pound – representing an apparent loss of relative purchasing power of more than 500 per cent since its inception.

But what of the pound itself, if objectively gauged? In 1961 £7 would have bought an ounce of gold, but now you would need close to £1,300 to pay for that ounce – an almost incalculable loss of purchasing power. So we see that the full debasement of the rand, as a currency, cannot be measured by reference to sterling alone – it needs a rock-solid comparator like gold.

Back to consumer prices. As the rand clearly has suffered a greater loss of purchasing power than the pound, it makes sense to say that, as British tourists in South Africa, we are enjoying a cheap holiday. One of the most obvious indications appears when eating out. Dinner for four in a good local North London restaurant would set me back between £120 and £130, including a bottle of decent wine and a 10% tip. Here, in Johannesburg, an equivalent evening out, including a bottle of delicious Pinotage, would cost around half of that, or 1,400 rand.

I’ll refrain from pressing the story much further than this, although clearly there is much to learn from it. It is, however, worth commenting on how that glorious country got into such a mess.

Currency destruction writ large

Looking back at the “apartheid” system under which I grew up, my generation didn’t see it then as we do now: as a scourge and national disgrace. But it is equally clear that the democratic transition to black majority rule did not have to incorporate measures since shown to be fully as destructive and counterproductive as those they replaced. In short, political infighting is hardly conducive to economic progress and in their frenzy to achieve racial equality the new governing class adopted practices such as land expropriation without compensation as legitimate policy platforms.

“Black Economic Empowerment”


Employment opportunities are blighted by reverse discrimination in the form of statutes upholding “BEE” or “Black Economic Empowerment”. The powers have yet to learn the limits of what legislative reform can achieve. While the law can prescribe equality of opportunity, people themselves will never be “equal” – not even in the gulag. It is certainly beyond anything the law can achieve.

As you might expect the new wave of employment legislation facilitated the formation of some of the most powerful trade unions in Africa and, again, as you might expect, the youth unemployment rate of nigh 50 per cent is also among the highest in Africa. Do you think there might be a connection?

State capture and corruption

All the money creation that destroyed the South African currency simply filled the vacuum left by the billions stolen, literally, from its Treasury through systematic “state capture” by President Zuma and his criminal henchmen, including the Gupta family, now holed up out of reach in Dubai. They didn’t take it all themselves, of course, but they established, on a par with their Northern neighbour Mugabe in Zimbabwe, a culture of rampant and systemic theft of state assets now so entrenched that it represents the new norm for South African civil governance. Not merely corrupt, more a way of life.

State-owned enterprises, such South African Airways, energy generator Eskom, military technology conglomerate Denel or the transport monopoly Transnet, all depend on extensive supply chains from mines and imported raw materials through the production stages, whether they are in the business of light and heat or defence weaponry. At every point in the chain valuable resources are “skimmed” whereby cronies, having bribed their way into position, take their rake-off. The final cost finishes up as a huge multiple of the chain’s component elements.

State capture


As no consumers can afford prices that would cover thefts on this scale the entities involved incur massive losses, and virtually all of them are insolvent – as, indeed, is the nation itself. Eskom’s debt now stands at R454 billion and the only discussion centres on the best method of hiding the inevitability of its impending write-off.

On each day of the holiday our “luxury” hotel supplied us with that day’s “load-shedding” schedule – the hours during which elevators will be out of action, appliances and TV will have no electricity, the kitchen will not offer hot meals and there are no functioning traffic lights on the roads. These measures are not primarily designed to save energy – but arise from the many years in which sums earmarked for maintenance have been quietly misappropriated, leaving capital equipment on its last legs.

No correction in sight

An inescapable by-product of corruption on this scale is the legacy of nepotism and gross incompetence in its wake. Although everyone knows the story and talk about it is commonplace, we encountered no seething resentment, still less rebellion – only a marked increase in the number of beggars, including white BEE victims, that ply the pavements and look pleadingly at motorists waiting for the lights to change.

By its nature corruption starts at the top. And only from the top can a transformative remedy emerge.