Rand has lost 90% of its purchasing power since '91

This is a quick analysis of the purchasing power of the Rand today compared with 17 years ago. One Rand today is only worth 10% what it was worth in 1991. We expect the Rand to continue losing purchasing power into the foreseeable future. Eventually it’ll be worth nothing, but we haven’t hit the crack-up boom just yet. We expect the purchasing power of the currency will rebound in terms of oil in 2010, and remain flat against gold, before the decline accelerates in 2011. We’ll leave this techinal explanation for another post. 

Would you want to save money in a currency that in ten years from today can only buy 10% of what it could today? Why not just save your money in gold or another commodity currency? Besides, the interest payments on a savings or money market account most likely won’t make it worth your while to save your money there. Rising consumer prices (CPI or ‘inflation’ as it’s become commonly known) will eat away at the value of your money, eliminating the gains of interest payments. And if there is a run on the banks, your money is gone. Bank runs ain’t nothing new. 

In 1991 the gold price was R970/oz, the oil price was R48/bbl. Fast forward to today, the gold price is R8,200/oz and the oil price is R570/bbl. The price of each is up ten fold over 17 years. With R1, you can now only buy 12% and 9% of the amount of gold and oil (respectively) that you could buy in 1991. This data is from Reuters and are year-end prices. See the chart below.

What’s happened? Firstly, link this up with what I had to say about the main drivers of the exchange value of a currency over the past couple of months in my post the other day. This dynamic of money printing has also been in play for the past decade, but I won’t back the latter statement up with data right now. A quick glance at the South African Reserve Bank’s books shows exactly this.

The SARB’s balance sheet has expanded ten-fold since 1995.This is just about the same multiple that gold and oil priced in Rands are up. This isn’t coincidence. Total assets on SARB’s books equalled R33 billion in September 1995 and today total assets equal R313 billion. Their website doesn’t make available data going back to 1991, so I can’t check this right now. The crux of the matter is this: Rands have been created out of thin air and the SARB has expanded the money supply. Their balance sheet shows that the amount of gold they own in fact has gone down from 4.5 million ounces to 4 million ounces in the period. They have been exchanging freshly created Rands for other assets (majority of it government debt). This increases the money supply. Through a very surreptitious process of money and credit creation (read: money printing) the Rand loses value. The Rand is debased, debauched, whatever you wanna call it.

The supply of gold and oil is not increased at the same pace, and therefore the price of these commodities goes up when priced in the Rand. The value of the Rand goes down relative to these commodities. In plain language, the Rand becomes worth less. This process is inflation, not the rising prices. Rising prices are the effect of inflation, not the cause of it.

Any questions? Comments below please.