LUKANYO MNYANDA: Ace Magashule is probably beyond reach as he seeks the Venezuela way

“What we’ve got here is failure to communicate. Some men you just can’t reach.” These words were immortalised in the 1960s classic Cool Hand Luke, one of Paul Newman's most memorable roles.

Watching the events of the last couple of days that have caused so much damage to SA’s standing in financial markets, I couldn’t help thinking that ANC secretary-general Ace Magashule, the highest-ranking official at Luthuli House, is probably one such man, and is probably surrounded by men and women like him.

So we got what we had on Tuesday, which may or may not be the way he wanted it, at least with regard to the destabilisation in our financial markets, which caused the rand to post its biggest drop in a week.

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Utterances since the elections have definitely put paid to any optimism that the elections would be followed by another round of Ramaphoria. From being among the best-performing currencies in the period immediately before the announcement of the outcome of the May 8 elections, the rand is now the worst performer among emerging-market currencies, having lost almost 4% since May 10.

If the plan is to undermine President Cyril Ramaphosa and faith in his reform agenda, it’s working. And this raises the question of whether it’s worthwhile trying to communicate with Magashule and his followers. Is there a point in explaining to him what quantitative easing is?

Following the ANC’s national executive committee meeting this week, Magashule released a statement that included such gems as the need to expand the mandate of the SA Reserve Bank, and for the government to be instructed to explore “quantity easing measures to address intergovernmental debts to make funds available for developmental purposes”.

After some confusion about what this could possibly mean, a search on Google seemed to confirm that what he was talking about with his reference to “quantity easing” must have been quantitative easing (QE). A clue was in the statement that this was consistent with practices in some developed countries. He went on to say that this would deal “decisively with the triple challenges of unemployment, poverty and inequality”.

The last part of that statement is deeply ironic. One of the reasons QE has been so controversial in Europe is the perception that it mainly benefited elites, who tend to own assets such as shares and property, contributing to rising inequality. That’s one of the factors behind the wave of populism that brought about the Brexit vote in the UK and the election of far-right political parties in countries such as Italy.

QE was first introduced by Japan in the early 2000s when that economy, the second biggest in the world at the time, was battling persistent deflation, which can be roughly defined as a sustained drop in consumer prices.

Deflation creates a vicious cycle where falling prices motivate consumers to wait for things to get even cheaper, which then causes prices to fall further. This discourages investment. To deal with this central banks try to reduce the price of credit to encourage spending, and only when interest rates are so low —and in some cases negative — that they are deemed to be ineffective do they resort to unconventional measures such as QE.

They buy up government bonds and other assets, thereby directly injecting liquidity into the market. With interest rates and bonds giving negative returns, the hope is that commercial banks will use their excess reserves to lend to businesses and consumers, boosting economic activity and investment.

After the financial crisis almost caused the collapse of the banking sector a decade ago, Japan was no longer alone. Central banks from the US, UK, euro area and a few others such as Sweden followed suit.

The inequality controversy comes because the lack of return in bond and money markets pushed holders of excess cash such as pension funds to seek higher returns in riskier assets. So if you have a stock market portfolio or own property you get richer as the value of your assets rises. If you are a young person trying to get into the housing market, the higher prices make things more difficult.

Of course, central bankers such as Mario Draghi, the head of the European Central Bank, dispute this and argue they helped save the world economy and boost employment. Ironically, Magashule finds himself on their side.

SA in 2019 looks nothing like Japan in the 2000s or the euro area in the middle of the 2010s. The annual inflation rate is more than 4% and the Bank’s repo rate is 6.75%, which means it would be complete madness to argue that it has used up its conventional weaponry.

Printing money will just mean a collapse in the rand and skyrocketing borrowing costs. We’ll be more like Venezuela than Sweden, though the former has obvious fans in the ANC.

There’s probably no point in explaining any of this to Magashule. But it’s worth a try.