For Mboweni's growth plan to succeed the ANC has to give up certain dogmatic positions that were formulated when 7% growth was the status quo, writes Adriaan Basson.
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US President Donald Trump and Chinese President Xi Jinping. (Photo composite: AFP)
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In the initial module of Growing Foxes, we introduce
students to the art of identifying drivers/flags which can turn the world
around them upside down. Think of the first domino as the driver or flag. If it
is toppled, all the other dominoes in the row topple too.
We not only want our students to improve their ability in
scanning the horizon for the equivalent of the first domino to fall; we also
want them to trace the causal chain linking it to the other dominoes before
they fall too. That demands foresight to play the relevant scenario in advance
and the imagination to work out the best strategy to handle the potential challenges
posed by the new narrative. Then, like the scouts, they are prepared for the
best and the worst.
Let me give an example before getting on to the real purpose
of the article. In April 2006, I was asked to go to the Central Party School
just outside Beijing. It is the inner sanctum of the Chinese Communist Party,
developing its future leaders and formulating the five year economic plans
which drive the nation forward. They wanted to understand how the methodology
of scenario planning could be used to road-test their five year plans.
So I asked them what their real fear was at the time. It was
an American financial crash because China already held in excess of one
trillion dollars of US treasury bonds. We played the scenario of a US crash and
what they would do internally to compensate for the loss of exports to America.
But then I asked them what flag would indicate the scenario was about to
materialise. They went into a huddle and came up with a fall in property prices
Their reasoning was that the principal asset of an American
consumer is his or her house. If it fell in price, this would depress consumer
spending in America which represented two-thirds of its GDP. That would trigger
a recession which would then put pressure on mortgage markets as borrowers
would have less income to service their loans. The difficulties faced by the
mortgage providers would flow over into the banking industry with the stock
market being the final domino to fall.
Even though the actual cause of the 2007/8 crash was
sub-prime mortgages and the failure of the rating agencies to recognise them as
such, the flag chosen by the faculty turned out to be brilliant. In the last
quarter of 2006, US property prices levelled out after having risen for 20
years, and in the first quarter of 2007 they started to come down.
The probability attached to the crash scenario by the
faculty therefore leapt in early 2007 because in their eyes the first domino
had fallen. Yet the American stock market only turned down in September, 2007.
In other words, by selecting that flag, China’s principal economic strategists
were ahead of all the so-called wizards of Wall Street in anticipating the
I have related this story in detail because a second crash
may be on the cards for different reasons. The scenario is entitled 'Forked
Lightning' as lightning usually strikes more than once. The flag in this case
is the rise in global oil prices since the middle of 2017. Brent Crude sits at
$82 a barrel now compared to $47 then. That amounts to a 74% increase. Moreover,
if the disruption caused by Donald Trump withdrawing America from the Iran deal
has even more serious repercussions for the oil market, we could see the oil
price over $100 again.
All of this may constitute the first domino to fall in a
lethal chain. The logic is that America and Europe have lived in a world of
virtually zero interest rates set by their central banks since the crash of
2007/8. This has been possible because annual inflation rates have remained
remarkably low too. While a policy of plentiful cheap money was supposed to
restore long-term economic growth rates to the level achieved in the last
century, this has not yet happened. Meanwhile, debt held by governments,
companies and individual households has boomed to a colossal amount in excess
of the figures preceding the last crash.
Given the last statistic, the surge in the oil price could
upset the apple-cart, along with the fact that the US unemployment rate is at
its lowest in many years. The latter could signal a significant rise in real
wages following a lengthy period where they have remained almost flat.
If these two dominoes cause the inflation rate to rise
faster than expected, central banks will be forced to put up interest rates
quicker than planned. The cost of all variable-rate loans taken out in the good
years of minimal interest rates will overnight become much more expensive to
service. New loans will cost more too. The risk of defaults will therefore jump
and so will the chances of another crash. Indeed, some countries with high national
debt-to-GDP ratios may go bankrupt.
Right now we have upped the probability of Forked Lightning,
or a repeat of 2007/8, from 10% to 20%. It is still an outside chance but the
flags in the chain outlined in this article must be put on a constant watch
list. These include the oil price, the inflation rate in America and the
10-year US government bond rate.
It is also worth
remembering that a diversified savings portfolio is what helped most people
survive the last crash and the same will apply if and when the next one happens.
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