The big news over the past few weeks has been sovereign debt and the poor economic health of countries such as Greece, Spain, Portugal and Ireland.
Of course, there should still be lots of concern about the highly indebted US and UK economies. We should also be concerned about the South African economy because fears about sovereign debt will affect us. Our economy remains fragile and is as vulnerable to contagion as ever. We live in a world where what counts is not how hard we work or how well we manage our finances. Instead, the stability of our eco- nomy depends on the sentiment of a relatively small number of people working in global financial markets.
Their sentiment and, often, their ignorance, greed and irresponsibility have a bearing on how events in other countries affect us. These people use financial instru-ments for short-term speculation. They spread their risk across many different countries. They are extremely sensitive to breaking bad news and will pull their money out of South Africa when there is bad news elsewhere. Our society’s future wellbeing depends on our policymakers choosing to regulate and protect our economy from these irresponsible speculators.
The relation between finance and the real economy is summed up in the metaphor ‘the tail wags the dog’. Most economists think that events in the real sector have a greater influence on the economy than finance. However, they fail to understand the way in which widespread neoliberal deregulation of financial markets has changed the world. The extraordinary growth of the financial sector, uncontrolled debt creation, free-flowing international capital flows, outsized currency markets and the quantum growth of speculation in all kinds of exotic financial instruments over the past two decades have changed the global economy.
The uncontrolled creation of debt – and not rising wages – drove up household demand for goods and caused increased inflation and speculation in the real-estate and financial markets. The huge growth in the use of exotic financial instruments, rather than increased productivity, drove up liquidity and increased the amount of available debt. The rampant speculation in currency markets did not ease foreign trade but made it more expensive because it caused volatility in exchange rates.
Today, even after the global financial crisis, South African banks can continue to use exotic financial instruments to increase the amount of debt available to the private sector. We could easily have a repeat of the past few years, where increased debt led to more consumption and rising economic growth.
The increased levels of debt also allowed increased speculation in financial markets, which pushed up share prices and house prices. These rising prices gave people the impression that the economy was doing well. Rather, increased levels of debt inflated bubbles in these markets. When people thought the economy was doing well, they took on more debt for consumption and further speculation.
The increase in car repossessions and home foreclosures is the result of this behaviour. The loss of one-million or more jobs in the economy last year was a result of this behaviour. Financial speculators are even more jittery than usual, and South Africa is looking relatively vulnerable to a surge in negative sentiment in global financial markets.
The way to build our eco-nomy and create jobs is to build industry, improve education of our population and reduce inequality by improving housing and services to the majority of South Africans.
The fragility in our economy caused by jittery financial speculators works against all these goals. It stifles investment, training and employment crea-tion, and makes life really hard for exporters. The only way for South Africa to achieve economic stability is to reduce the negative effects of these financial speculators on our economy by regulating financial markets and capital flows.