Dude, I've seen it happen at the coalface and its scary. I said to people 5 years ago, shortly after I left the bank, that there was going to be a BIG bump in the road. That bump is happening now and to be honest I don't know how this country is going to survive it. I think the wheels may come off completely this time.
South Africa has too much reliance on debt. Interest rates MUST go up in order to attract real investment from abroad and deter people from over-extending themselves with medium and long term debt. Tito is between a rock and a hard place, all because of his own doing.
Higher interest rates do not attract the right kind of foreign investment. If you base FI on interest rates, you risk the following:
1. Attracting speculators, who will dump their investments at the slightest sign that they will get a lower return, or see another opportunity in another country as more attractive.
2. Unstable currency - either over or under valued. Purely speculative foreign investment leads to higher demand for the local currency which in turn makes the local currency artificially more valuable. This is not a good thing because it reduces our export competitiveness and generally overvalues the currency - leading to currency instability in the long term.
3. Shifting the basis of the economy to one of financial derivatives as opposed to one based on resources or manufacturing. For any economy this is really dangerous, but for one with a relatively small pool of consumers it is deathly. While Japan, the UK and the USA can possibly survive in this kind of regime due to the spread of wealth in the country amongst the population, it is unlikely that SA could survive it.
So, while I agree that the money supply should be controlled, and interest rates are an important way to achieve this, the Reserve Bank has to think globally rather than just locally. In addition, I've always felt that using interest rates to control inflation is always self-defeating. By increasing interest rates, you will almost always also increase the cost of doing business - if costs go up, then so do prices - which is inflation. Alternatively in areas where it is impossible to increase prices, businesses will look to reduce costs, usually by increasing efficiencies - read productivity- which often means fewer jobs and a corresponding lower economic growth rate.
I'm not an economist but I think that it is really important not to look at these problems in isolation, or you risk throwing the baby out with the bathwater.
PS: I didn't read the rest of the thread after the quoted post, so if I'm repeating anything - sorry
Thanks.
