Rand ‘freeze’ proposal

The Rand headed sharply lower this morning, reportedly on the back of a Fin24 report which stated the government has plans to fix the value of the Rand exchange at a pre-determined level to another currency.

Fin24 states that:

“Ebrahim Patel… is preparing to propose “radical” economic policy adjustments…[which] include a controversial proposal to freeze South Africa’s currency at a predetermined exchange rate”

Off the bat it may sound radical, but it certainly isn’t anything new. The Free Market Foundation’s Eustace Davies suggested pegging the Rand against the precious metal gold so SA could be first out the blocks to bring monetary policy sanity back onto the global agenda.

But the peg against gold may be clipping the wings of the government a bit too much, and will most likely remain a dream of the proponents of economic liberty. To examine the most likely effects of the proposed policy we need to know against which currency unit the value of the Rand would be maintained. If the Rand were to be maintained in a fixed ratio against the US dollar, the SARB would basically need to follow similar monetary policies as the US Fed in order to maintain the peg. SA would be importing US monetary policy, and as a result, importing inflation. Depending on the tools used, policies may need to become as reckless as those of the US to keep the currency peg in place. If the Rand were to be pegged against the proposed new Super Sovereign Currency of the Chinese, Russians, and Gulf countries, it would signal a very clear policy realignment of SA with the BRICs. This could be very positive for SA’s investment and trade prospects with and amongst these nations, who are most likely to be the drivers of global economic growth over the coming decade, and possibly even longer. But this does not deter from the fact that the Rand will still only be pegged against a basket of fiat currencies, which are all being debased to keep the monetary regime of floating fiat currencies in place. The one positive may be if precious metals and commodities account for a large portion of the Super Sovereign Currency basket. The final possibility – however unlikely – is for SA to peg the value of the Rand in a fixed ratio with the value of either a basket of precious metals, or one of them, for example gold.

Dawie Roodt was quoted as saying the government’s policy proposal indicates “a definite shift to the left.” In the sense that the Rand is pegged to a fiat currency this is quite right. A shift to pegging against a new Super Sovereign Currency, of which the ultimate currency – gold – has an important share of around 50% is, however, one step closer to a state of economic freedom.

Alan Greenspan explained this relationship between gold and economic freedom very well. In his article entitled: “Gold and Economic Freedom” in 1966 he explained:

“This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” [Ed. The reading of this article is highly recommended.]

Roodt also states that “inflationary pressures will eventually get us in the end.” Once again, this depends on particulars of the peg. A peg against a paper currency such as the USD, GBP, JPY, RMB, etc. remains inflationary. Only if the peg were to be against a hard currency such as gold or silver, would the policy not be inflationary, as money supply and credit growth would be checked by the incremental supply of gold into the banking system.

Fin24 concludes that the proposed “plans involve greater government interference in the mineral and energy sectors.” Although this might be true, if the Rand were to be pegged against a reserve currency, such as the IMF’s SDR (special drawing rights), in which commodities have no share, it would mean a shift of monetary policy making to external authorities.

I do, however, fear that the government may be looking at purely keeping the Rand at a weak level in terms of the currencies of major industrialised economies, in order to stimulate exports and avoid job losses. This will bring numerous challenges to implentation and most likely be negative for job creation over the long-run, as job creation will not be driven by productivity gains and efficiency, but rather by an artificially low currency, which leads to even more income inequality.