Ideally South Africa should have a free market. But that is not the situation and we do have central planning, central banks and government intervention. As pointed out today by George Glynos in Business Day that if we did have a free market ‘Money supply would be stable and determined by market forces and there would be little reason to monitor such things as trade and current account balances, GDP stats, inflation, or other macro aggregates, especially since large and persistent macroeconomic imbalances would not exist. In fact, economic debates such as this would not exist’.
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Warped markets spur econobabble, a letter from George Glynos, MD and Chief Economist, ETM Analytics, was first published in Business Day today and responds to earlier columns by Leon Louw. Here are some extracts.
I FEEL obliged to respond to Leon Louw’s articles on the “econobabble” debates sparked in his recent columns as I believe they mislead and do not reflect reality.
Like the Free Market Foundation, we too believe that free markets are the ideal. In a free-market economy there would be no central planning, no interventions by authorities in government, and central banks would not exist.
That said, the debate is not about whether trade and international finance stats are useful within a free-market context. They are not. The debate on the usefulness of the stats arises because we don’t operate in a free market.
Our interest rates are set by a central bank, our money supply is not stable, credit growth is generated through the fractional banking system backstopped by central bank bail-out guarantees, and we have a government that overspends.
The result is volatile, unnatural and unstable business cycles.
These interventions in the market economy create very real and unsustainable malinvestment cycles and externalise harm to households and businesses if they are misled to act on these unsustainable signals. These businesses are misled into expanding capacity to service a demand that will prove unsustainable.
Mr Louw correctly points out that there is a perpetual tendency toward rebalancing that takes place within any economy and that none of these deficits will ever truly be unfunded. However, to play down the significance of this rebalancing ignores the fact that the distortions that create the imbalances do have a material impact on households and businesses.
We welcome Mr Louw’s contribution to economic debate as he often highlights just what an economic landscape might look like if left to adjust without interference.
We would want to make it clear that while his basic theoretical concept is valid, in everyday reality it remains important to analyse statistical aggregates because we live in distorted markets.
It is crucial to understand these distortions created by government in order to better protect yourself, your business and your wealth.