A post,
THE MADNESS OF INFLATION TARGETING , first appeared on SAFTU.
SARB MUST STOP PUNISHING THE WORKING PEOPLE FOR INFLATION
The South African Federation of Trade Unions (SAFTU) notes that the Monetary Policy Committee has left the repurchase (repo) rate unchanged for the 4th consecutive time, at 8,25% and the prime lending rate at 11,75%.
The decision to retain the repo rate elevated at 8,25% is premised on a misguided instrument of interest rates for inflation targeting. Inflation targeting is premised on a pro-capitalist analysis that assumes too much money is always the cause of inflation. The madness of this analysis is shown by the fact that even if the technocrats admit the current bout of inflation is induced by supply factors, they will still target aggregate demand to fight inflation.
Clearly, this method is not concerned with the real causes of inflation. It is concerned with ensuring the order is conducive for profitability. The downside of inflation is not only the decline in the buying power of workers’ wages, but the reduction of profitability for some parts of industry. So, by hiking interest rates, the central bank is not only fighting inflation to restore profitability for those industries but also incentivising the financiers who make profits from the financial assets and liabilities.
This fact is illustrated by the big profits that have been garnered by banks in their last financial year. Instead of crediting the Reserve Bank for “enabling the environment for their profits”, ABSA bank misleadingly praised their “resilience.” It was Standard Bank that was honest on the factors that boosted its profit margins and correctly credited the high interest rate regime. So far, the four major banks have recorded increases in their profits for the latest financial year. It is our contention that the main driving factor has been high interest rates, not “resilience.”
Meanwhile banks raked profits from high-interest rates, the middle class and ordinary workers have recorded greater losses. The recent credit stress report by Eighty20 records that the costs of servicing credit have increased as a result of the interest rate hikes since 2021, which took the repo rates from their lows at 3,50% in September 2021 to 8,25% today. Given that banks add several percentage points to different types of credits, the real percentage increase is higher than the prime lending rate.
Consequently, the report shows, that an average of “47% of income for all credit holders is spent on installments.” In addition, middle-class workers – a section of professionals made up of healthcare workers, educators, lawyers, etc. – spend 79% of their income on servicing credit through installments.
The Debt Index by DebtBusters – which shows not only the cost of credit but the cost of all debt from accredited financial providers – has painted an even grimmer picture. The 2023 fourth quarter debt index shows that the total debt exposure to annual net income ratio was 106%. The sections of the working class that earn over R35 000 monthly have an annual net income to debt ratio of over 171%, an increase from 164% in the 3rd quarter of 2023. Those earning between R10 000 to R20 000 have an annual debt exposure of 110% to their net incomes.
The comparison of the profits of the financiers and the debt exposure of the working people proves that we are not thumb-sucking when we argue that high interest rates shift wealth from the poor to the rich. Lesetja Kganyago’s monetary policy is thus not only restrictive to the money in circulation but an instrument of class war against the working class for the super-rich in financial institutions.
The history of hyperinflation in the Weimar Republic and Zimbabwe has proved that the problem is not too much money chasing too few goods as Milton Friedman and his ardent followers at central banks believe, but a collapse of production.
SAFTU insists that we should turn Milton Friedman’s dictum on its head; from “inflation is always and everywhere a monetary phenomenon” to ‘inflation is always and everywhere a production and profiteering phenomenon.’ On the one hand, too few goods indicate a collapse in production, and on the other, high profits often reflect price mark-ups for profiteering purposes. Hence our proposed solutions to inflation are 1) power the idling industrial capacity, 2) expand production of consumer goods and services, and 3) exercise price controls where oligopolies engage in price mark-ups to enhance their profitability. SARB should stop punishing workers for inflation.
