Macro Economic Commentary – September 2019

Author: Ntsekhe Moiloa

| Change is inevitable – except from a vending machine. The Wisconsin businessman, Robert Gallagher, is credited with this quip. Circumstances are indeed not invariant, and we ought to be prepared to adapt. Yet even vending machines have to be adaptable or risk obsolescence.

Vending machines are thought to be an example of modern innovation bringing convenience and efficiency to traditional commerce. However, we have seen this story before; some of the earliest references to vending technology date back to the first century. Hero of Alexandria invented a contraption that accepted a coin to dispense holy water. The contraption was calibrated to recognise the weight of a coin upon a balance, actuating a lever that opened a valve, allowing the cherished water to flow. The cherished bounty of modern machines has included everything from newspapers to gumballs to pizza to even life insurance. For two decades from the 1950s, life insurance vending machines could conveniently be found in American airports, for those travellers who needed some contractual last-minute peace of mind, rather than holy water. Cases such as Steven v. Fidelity & Casualty Co. (1962) 58 C2d 86, eventually spelled the end of that enterprise as the courts sided more with the buyers of the policies than the sellers. Why did the courts side with the buyers? Amongst other things it could not reasonably be determined if exceptions to reasonable expectations were highlighted to the purchaser and so the courts felt that as a matter of public interest, obscure or ambiguous contract language should not be employed to the prejudice of the layman. Thus, a variant of the vending machine that failed to adapt, began to fade from the zeitgeist.

Ever convenient, few would guess that vending machines would have to fight for survival. More recently socially-networked variants have come into existence where users could earn rewards for using them. Yet what vending machines often contain has fallen out of vogue, such as packs of sugary treats. Delivery services are more abundant and for longer hours, reducing the reliance of motel guests, for example, on a quick snack from the lobby vending machine.

Could money enjoy a substantial similarity to vending machines? Presumed immutable but in fact under quiet threat?

Could money enjoy a substantial similarity to vending machines? Presumed immutable but in fact under quiet threat?

Silvio Gesell immigrated to Argentina from present-day Belgium in the mid-1880s. In 1890 Argentina suffered a massive financial crash that helped develop in Gesell, some very negative views of money. He saw money as a hopelessly conflicted medium, at once necessary for transacting but also acting as a store of wealth. In a crisis, people hoarded the money such that there was “poverty amid plenty”.

Gesell proposed a medium of exchange with an expiry date. Such money bearing an expiry date could have the length of validity extended, for a fee. With the prospect of incurring a fee, a holder of such a note would theoretically be incentivised to pass it along by transacting. Thus, for those wishing to hold or hoard the money as a store of wealth, there was effectively a negative interest rate. In the 1930s, an Austrian town implemented Gesell’s idea to successfully overcome a business and employment crisis, but otherwise the “miracle of Wörgl” was a rare experiment and Gesell’s ideas receded into the archives of history. Over the past few years there has been a renewed interest in Gesell’s idea as yields in a number of developed markets have dipped into negative territory.

In July 2017 US Fed vice chair, Stanley Fischer, gave a speech in Brazil on “The Low Level of Global Real Interest Rates” that indirectly drew upon Gesell’s ideas by quoting the final chapters of John Maynard Keynes’, “The General Theory of Employment”. It just so happens that Stanley Fischer was not the only Fischer to give a nod to Gesell’s work; the late Yale economist, Irving Fischer, had also endorsed Gesell’s idea with a book in 1933.

Thus, when the European Central Bank cut its policy rate on a Thursday in mid-September, negative interest rates in central banking were no longer a particularly curious idea. President Donald Trump of the United States tweeted: “European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports …. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!” To the layperson, Mr Trump’s final, exclaimed sentence might have implied a newfangled thing, but in fact it was a bit more of something slightly dated. The policy rate had already been minus 0.4 percent. In fact, that same day the Danish central bank followed suit, moving its policy rate deeper into negative territory to minus 0.75 percent. Sweden next door had already been the first developed market to try out negative interest rates.

Negative nominal rates are only a part of the challenge for central bankers. The greater concern for them and academic economists, is negative real rates. A thinning of the ranks of nations offering a real return can lead to asset bubbles in those remaining assets that offer real returns. The government debt of emerging markets has usually offered positive real returns, making them attractive in most periods outside of financial crises. However, with the official Turkish inflation rate at 15 percent and Turkish government bonds yielding roughly 13.5 percent across the yield curve, there is no real juice in that well-known emerging market. On a forward basis, year-on-year inflation is expected to come down to 9.7 percent when the September reading is published, restoring the semblance of normality. Yet as the Turkish president has gone forth to purchase and receive a Russian missile defence system despite threats of sanctions by the United States, it has been possible to focus on the geopolitical narrative and forget the microeconomic effects of these deadlocks. Spare a thought, for a moment, for ordinary Turkish citizens who are resorting to stealing jam jar lids as they prepare for the coming winter. Households are beginning to prepare preserved foods which they keep in glass containers and for whom jar lids are a seemingly ever-present need. No surprise when year-on-year inflation for fresh fruit and vegetables hit 73 percent as recently as April.

Happily, South African food inflation has been much better behaved. And happily, the country’s bonds continue to offer the prospect of positive real returns. It is not obvious that either the country’s bond or equity markets are in the throes of an asset bubble. What troubles investors about South Africa are a slow economy and slow momentum towards addressing burning social and institutional malaise. The SARB’s Quarterly Bulletin reported that in September the economy entered its 70th month of weakening. Such conditions cannot be tolerated for much longer.