With the recession biting deep, some 200 000 to 300 000 formal jobs being lost rather than being created this year, informal work opportunities being lost as money is tight and public service delivery in many areas struggling to bring its side, Mr Zuma provided us with his vision as to how these things will be addressed.

The President crafted his speech around two distinct topics, namely addressing the immediate consequences of the recession, and in a broader context offering a Medium-Term Strategic Framework through 2014 for addressing public sector shortcomings.

Unsaid was the expectation that government spending will continue to increase in real terms, that growing tax revenue shortfalls will be funded through increased borrowing and that as a consequence the national debt will be allowed to cyclically rise before subduing it once again in later years once growth revives.

Besides such direct state support for the economy, the SARB has lowered interest rates, with probably more cuts still to come, thereby also providing crucial support for the economy.

In the final instance, South Africans will be dependent on the rest of the world to similarly take corrective action everywhere, ultimately collectively pulling us out of this deep morass globally.  

This reality makes the public sector and the construction sector (between them one-sixth of GDP) probably the only areas in the economy where there will still be vigorous employment gains this year.

With this as background, Mr Zuma favours minimizing the impact of the downturn on the most vulnerable, whether in formal employment (likely to be retrenched) or out of it.

Besides many of the most vulnerable enjoying access to social grants, with 13.5 million recipients so far but with this tally likely to rise further, Mr Zuma envisions a much expanded Public Works Programme, putting money in the hands of those with minimal safety nets.

In contrast, formal sector job losses will be addressed through various mechanisms, about which few specifics or quantification was forthcoming.

There was mention of encouraging ‘training layoff’, with retrenched workers kept in employment for a period while being re-skilled.

Hope was expressed that the Commission for Conciliation, Mediation and Arbitration could find legal alternatives to retrenchment with the various role players involved.

There is the intention of government buying more goods and services locally (reminding of Obama’s Buy American).

Pride of place was given to the IDC funding companies in distress, apparently meaning otherwise viable companies brought fatally low by recession, but not blanket sector-wide support or support for businesses beyond saving.

There was furthermore mention of a Scaled Up Industrial Policy Action Plan, involving mainly manufacturing (specifically motor industry, chemicals, metal fabrication, clothing and textiles, light manufacturing), but also forestry, services (tourism and other) and construction.

It is not clear how these various action plans will prevent job losses or create new work opportunities. By the time these actions are taken, the economy may well be past its recessionary low point, with labour layoffs mostly completed.

Still, some job losses may be prevented and new jobs created in time.

Much bigger ambitions seem focused on the expanded Public Works Programme, where it is hoped to help half a million people during 2H2009 and up to 4 million people through 2014. This presumably will benefit especially the lesser skilled person with few chances of finding deployment in the formal sector.

Though some of these initiatives are new or may appear ambitious, Mr Zuma was careful to stress these actions will be undertaken within currently constrained budget realities, given the global crisis backdrop and the recession. Still, with government expenditure set to keep growing smartly in real terms, there is obvious scope to do at least something, if only to do existing things more efficiently as every Rand counts, something that was also very carefully stressed.

Whether that means less ‘bezzle’ (an old Galbraith concept meaning a lack of organizational discipline and easy largesse in good times expanding costs unnecessarily) remains to be seen.

Beyond the short term, the Zuma ambition is one of improving public service delivery, both as a service to the people but also in support of growth, in this respect continuing the Mandela and Mbeki agendas.

It is an intimidating list:

• Undertake comprehensive rural development linked to land reform, agricultural reform and food security.

• Improve education

• Improve public health care

• Fight crime and corruption while strengthening the judiciary

• Pursue African advancement

• Ensure sustainable resource management

• Utilise state levers to achieve many things through procurement, licensing, financial support to assist small/medium enterprises, broad-based BEE and affirmative action (its implementation recognizing the need to correct past imbalances)

• Reduce regulatory burdens on small businesses

• Promote National Symbols (sport, names, anthem)

 There can be little doubt that these visions will be guiding the country in coming years, even if our future is primarily shaped by global forces.

It remained unstated, but the recession will eventually end and the country will embark on a new economic expansion in which the national income will again rise substantially, employment will expand anew and the resources will be found for yet more public services.

As such Mr Zuma is catching the cyclical wave at its very lowest point. With him we can look with confidence to the years ahead in which much should be achievable, if not always without a squabble or two.      

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics

How to save the world?

It is a fundamental question. But instead of growing convergence in thinking and policy prescriptions around the world, there appear crucial dimensions in which there is growing disagreement about what to do next.

If such disagreement were to go too far, it could have fatal consequences.

We note disagreements between central banks (serious), between governments (very serious), between academics (serious for future historians), between forecasters (serious for current reputations) and probably between husbands and wives (watching too much or too little telly, depending).

Central banks seem to have started to criticize each other. There isn’t any blatant name-calling going on, but there seems to be this high-road low-road business, one party claiming we-will-do-this, with another saying quite succinctly we-will-never-do-that.

Does it matter? It could.

Anglo-Saxons, along with the Swiss (and Swedes), seem joined at the hip about taking interest rates down to near zero, and to move next to quantitative easing, described by some as basically credit easing.

The aim is to get lending going again. In the case of the Swiss (and the Swedes), there is the additional aim of getting a strong home currency to weaken, protecting the home economy under increasingly dire circumstances.

These central banks have lowered interest rates to near zero in the hope of pulling effective interest rates in the economy to low levels despite very wide spreads.

It also has induced certain central banks to start making credit markets of their own (for commercial paper, auto loans, credit cards, student loans) where such markets have ceased to exist.

As to quantitative easing, large quantities of fixed income bonds (publicly and corporate issued) are held in private institutional hands. By buying such bonds on a large scale, Anglo-Saxon central banks could be doing various things.

They will drive up the price of such bonds, lowering their yields. And they will inject a lot of cash into the financial markets, increasing the cash holdings on banks balance sheets.

With banks still very distrustful and not really wanting to lend out money to risky customers, but with bond yields still attractively high, any increase in their cash holdings would induce banks to buy more bonds.

By reducing bond attractiveness (falling yields), while loading the banking system with cash (the Bank of England for instance wanting to expand the British monetary base very quickly by 80%), with no low-risk reasonable return investment alternatives available to them, the idea is to prompt banks to start lending again to more risky but also higher return borrowers.

Initially, this won’t quite work as banks will prefer to safely hoard cash/liquidity rather than start lending. But as the cash mountain grows and grows (a rising tide), watch out for a gradual breakdown in hoarding as banks get pushed to do something with what is ultimately still relatively expensive cash.

And so the Fed and BOE are starting to buy bonds, although there could be leakage.

Many bonds are held by foreigners, and buying from them could inflate the cash deposits of their home banks, while putting downward pressure on one’s own home currency (Sterling, Dollar, Swiss Franc, Swedish Krona).

Ideally, all major central banks would undertake such actions at the same time, neutralizing such leakage effects on each other, while collectively pumping up the global financial system.

But the ECB specifically doesn’t want to go there, or so it is still saying today. Some of its leading elements see it more like an invitation of blowing up the world. Not for them, it seems.

The Anglo-Saxons see the danger of Europe not repairing its credit-lending processes fast enough, becoming an ever greater drag on the world economy.

The Europeans seem to fear too much money creation and new types of financial instability.

This doesn’t seem to face the Anglo-Saxons. Credit has to start flowing again, and any involuntary unwillingness among private banks needs to be forcefully addressed.

This is aside of bank capital adequacy needing to be improved and impaired (toxic, reduced-value) assets needing to be written down. This is being addressed separately through bank nationalizations (partial and otherwise) and public capital injections (which are issues for national treasuries and their governments to address, mobilizing their tax bases).

In the short term, even more serious is the apparent difference between governments concerning their roles and what they need to do most urgently.

Some (especially Europeans with some emerging markets in tow) want to focus on getting financial market regulations tightened as soon as possible (along with governance changes to international lending agencies).

Others, especially Americans, seem to think this very important but not an immediate urgency (Heaven Can Wait).

The immediate priority for the latter is to keep effective demand in the world economy sufficiently high even as households deleverage (cut spending in favour of saving) and many corporates defensively cut inventories, fixed investment and labour forces.

Thus, the US government wants fiscal emergency packages everywhere to maintain global spending, consumption as much as investment, imports as much as exports.

Others, with histories of painfully restoring their national finances to health after wide irresponsible detours, often ideologically induced, aren’t so keen. One example is Germany, but many smaller countries hold similar views.

This is in part a free rider problem, with little and not so little guys wanting to do as little as possible, hoping to keep their finances healthy and limiting future burdens while the big guy does the heavy lifting and pays the potential long term price of impaired finances and competitiveness.

There is a touch of righteousness here (the Americans created this problem, let them catch the falling knife), but it is more than this.

For some it is ideological, not wanting to sacrifice one’s long term financial health for uncertain short-term gains. Yet it is precisely the Keynesian insight about all being dead in the long term that prescribes focusing on the short term if one wants to prevent enormous economic pain from being incurred for a very long time due to inadequate demand settling in and not easily being budged.

These tiffs extend into academia but also along the political spectrum.

In the US, the Republicans are the righteous defenders of the neo-classical faith, whose mantra is a simple one – stability is the central assumption, and any investment mistakes should be allowed to be washed out, so that the system can rise off its own bat, purged, lean and mean and roaring to go.

But as Larry Summers puts it, “this notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times ……… there is a need for extraordinary public action at those times”.

The philosophical divide extends deeply into academia.

Both neo-classical and New Keynesian macroeconomic frameworks depend on rational expectations, fed by the Great Moderation of post-WW2 decades in which there ultimately no longer proved to be space for uncertainty.

Philosophically, information is freely fed into these models from the outside. In the neo-classical case it is the Walrasian Auctioneer and for New Keynesians it is the information generated by the model.

Effectively this is the same thing, if subtly different.

The bottom line in both approaches is that uncertainty cannot exist. It isn’t possible to encounter something as is currently entertaining the world daily.

Both approaches advise that the financial and economic system will recover by itself under all circumstances.

In contrast, government intervention is seen as always fatal, being castigated as a source of instability.

Yet sometimes enormous shocks can develop, coming from the outside, so big that uncertainty becomes an overwhelming reality from which it is difficult recovering, as Summers put it so succinctly.

It is at such moments that the only party not usually subject to uncertainty and its paralyzing fears is the state, it not being guided by commercial considerations. At which point the state can play saviour if it understands the situation and the contribution only it can offer when all have withdrawn to the sidelines, refusing to dance.

Thus, the contrary view to both neo-classical and New Keynesian offerings is that reality isn’t mostly stable. The opposite is true. Real life per definition is unstable. If events reduce risk-taking and effective demand, these reactions may ultimately prove large enough such as to induce paralysis, both taking very long coming back under their own steam.

A global majority today favours being proactive and supportive rather than standing back. Still, it is an important divide, and may prevent as much of a global effort, and soon enough, that would limit the transition cost of getting fully back on stream.

This feeds reputation risk for legions of forecasters reading the tealeaves and advising their clients.

Will the world descent into depression and deflationary feedback loops as all fall down and little can be done to prevent it happening, taking years if not decades to fully come back from such disaster?

Then there are those who are simply skeptical about financial repair efforts (it takes oodles of time sorting out banks), about government actions (getting fiscal stimulus agreed and enacted), about what Anglo-Saxon central banks think they are doing (inflating their balance sheets and potentially laying the foundation for the next great financial disruption via currencies and inflation), and what the huge government debt enlargement will do to private capital markets.

All of this takes time, a lot is experimental, some of it won’t work, and confidence will take time to be restored.

Ergo, don’t hold your breath, as this will take more than a few quarters to get right (more likely years, if not decades).

Finally, there is the simple quarterly forecast modeling inventory drawdowns (always coming to an end), fiscal injections (always showing up, however weak), credit system repair and resumption of bank lending. And, most crucially, the gradual return of confidence (or rather the slow subsidence of fear).

After maximum car replacement delay, big fixed investment cuts, inventory drawdowns and labour force shedding, the economy stabilizes and then starts to respond favourably to lower energy prices, slashed interest rates, huge fiscal injections and major currency changes. And critically there can be observed a change in sentiment as bank repair at some point is seen to be working, led joyfully by equity markets rising. Fear (paralysis) starts to subside.

After writing off a few quarters, admittedly more of them and much deeper than usual, it is time to get back on track. In this fashion, the US entered recession in late 2007, fell of a cliff in 4Q2008, will explore even lower levels of deprivation in 1H2009, and should be coming up for air in 2H2009, positive growth resuming in 2010.

This is of course a rolling forecast, with every passing month, and quarter, creating new opportunity to extend the forecast yet more as reality is turning out to be a good deal more horrendous than ever imagined.

But then what did you expect?

“They” blew up the world, meaning the banking system and with it a few other things, such as housing, insurance, equity markets, a few pension plans and companies, and much more besides.

It takes time, effort, ingenuity and political will to come back from that. And the world is doing so, though not quite unified about how to do so in the fastest possible time with the least sacrifice.

And so we are still exploring the full extent of this shock and the loss it will impose on us before normality is restored and life can resume its reach for the stars.

As to any cyclical upturn commencing, it could still be before this Christmas, with President Obama having something real to promise this coming Thanksgiving, besides traditionally reprieving one lucky token turkey.

And so we watch Bernanke, King and Trichet with morbid fascination, and with deep skepticism follow Geithner, Darling and a few others, with the orchestra of politicians (Obama, Merkel, Brown, Sarky and a supporting G20 cast of thousands) doing the directing.

Would it have been different under Hillary? No.

McCain? Definitely.

Count your blessings, this coming X-mas. Only 275 more sleepies to go.      

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics

Charlie Bean, Deputy Governor of the Bank of England, has referred to it as a ‘macro prudential weapon’. Something deployed alongside the interest rate weapon.

Be ready to welcome into our global midst sometime soon a new highly potent policy instrument to be deployed in the financial sphere and to be used judiciously and wisely.

Macro policymakers are moving beyond the real economy’s ability to create instability, mainly through under or overheating and the inflation or deflation pressures this can create, directly in resource and product markets, and indirectly over the balance of payments via the currency.

For the financial sphere has (again) shown its ability to live in its own world, and to become too roguish by far if unchecked.

Financial markets are supposed to rationally discount future income streams to fairly valued present asset prices (equities, commodities, properties) using existing interest rates, by their presence and activities enhancing the functioning of the real economy.

But with the irrepressible human spirit nearly constantly wandering off the rationality reservation, what we get too often for too long in the financial sphere are irrational attempts at co-opting the credit process and leverage. Alternatively we see total withdrawal into a whimpering state of deleveraging.

Either way, emotion, be it exuberant hubris or anxious hubris (two sides of the same human medal) rule the roost for too much of the time.

Thus we frequently get rising asset prices that beget more rises which ultimately get airborne on a cloud of positive thinking and leverage, sometimes so wild that we see mushrooming bubbles forming. Only to be followed by descents into the pits of hell as all belief is lost, leverage is unwound and plunging prices beget yet more plunging until assets are ridiculously undervalued, yet cannot find willing buyers.

Such irrational deviations from fair value are damaging to the progress of the real economy, and far too frequently devastatingly so.

The regularity of such episodic disconnect between human emotion and the cold rationality of long-term economic activity, its steadfast increasing cleverness and the income streams attached thereto should be a source of wonderment.

For surely it is possible to do better, having recognized these problems? It is the ultimate optimization problem, reducing excessive fluctuations in economic and financial activity and the feedback loops existing between them.

Both phenomena show up our ultimate limitations as biological specie, apparently equating to laws of nature, forming unbreakable barriers.

Alan Greenspan, former Fed chairman and current non-person, now typified as a kind of failed New York Superman for having apparently single-handedly engineered all recent troubles (a terrible simplification, which is in the nature of all witch hunts), recognized both behaviours.

But while the one law of nature was recognized explicitly the other was more taken as implicit. That’s a huge difference, one that Charlie Bean and others now want undone.

According to Greenspan, 200 years of US capitalism has shown Americans, and by extension the world, capable of 2.5% annual increases in applied knowledge and its technical embodiment in increasing productivity of the labour force. That is, at the technological boundary. Different logic applies to catch-up stories.

Anything less than 2.5% annually over time implies underperformance, probably for institutional rather than any inherent human reasons, something that can be rectified through judicious policy action.

Unfortunately, anything over 2.5% sustained over time at the technological boundary doesn’t seem possible with our present genetic endowment. Our cleverness knows an absolute upper boundary.

We would have to change the genetic endowment for it to be otherwise, something we naturally are working towards, such being the nature of our ultimate cleverness, but that’s another story.

When it comes to recognizing madness in crowds, as much when they undervalue assets as when they overvalue them, Alan’s contribution to knowledge was to recognize that we know this for sure only after the event.

While it is happening we can never be really sure what we are witnessing. A rational response to opportunity, new innovation, underutilization of resources? Or an irrational overreaction?

It is a view of life that he will never be forgiven in this life, given the enormity of recent financial events that sprouted uncontrollably during his terms of office. Even so, only a few did see it coming and in the nature of mankind were outvoted, and ignored as minority views clearly not in tune with the times.

An old problem, that. How to honour the whistleblower. The deviant. The problem child. The social miscreant. Social groupings turf such non-conformers out along with the daily rubbish. And then reap the whirlwind.

So here comes Charlie Bean and many others now saying we need more policy instruments to address these bouts of financial irrationality in an attempt to control more adequately this source of economic instability.

Interest rate management and fiscal containment are two important macro economic stabilizers, as proven in the past. But something else is needed as supplement in the financial sphere specifically.

There has traditionally been the suggestion that interest rate policy need be more anti-cyclical, raising rates as good times heat up, heading off excessive exuberance and destructive speculative behaviour.

But there’s a rub. Interest rates get internalized in any hubris story. Short of genuine killing levels, in the process killing off the high performing economy as well, interest rates have their limitations.

If economic performance will get killed off by 15% interest rate levels, but financial gains are potentially well in excess thereof, a problem exists. How to contain the episodic financial exuberance without having to kill off the economy by crushing levels of interest rates?

Having sensible, disciplined regulations is one answer, but even when playing by the rules one finds human emotion capable of transcending the rational boundaries.

So what’s the real problem? Greed, confidence tricks, consenting behaviour of crowds?

Given a period of strong economic behaviour and lifting spirits, even a good regulatory frame and anti-cyclical policy stances won’t be enough to contain the human inclination to excess, wishing to be set free and roam where its imagination wants to take it.

So what’s the answer?

Probably still regulation, with an anti-cyclical bend, in effect allowing the human spirit to roam free as much as what it likes, but hampered by a simple leash preventing it to soar like eagles on credit leverage.

This reminds me of my mother on the beach when we were toddlers, with a 20 meter rope attached to her one leg, and a forever exploring baby on the other end, happily wandering off among all the closely packed beachgoers and never getting lost, always remaining teetered to mother, to general hilarity.

One can do that by manipulating bank capital. Banks effectively lend out multiples of their available capital. But instead of this being a constant, one often finds in good times erosion of the boundaries. Banks’ own leverage tends to rise, as do those of their clients, again illustrated by the recent global episode. In the process, enormous credit juggernauts can get underway.

It is suggested to raise bank capital ratio requirements in good times, and lower them in underperforming times (when banks in any case tend to become cautious), effectively targeting general leverage.

It isn’t yet clear who should wield such power, central banks or financial services boards. Each country will solve this problem differently.

But if you can’t directly address greed without hampering unduly the creativeness of the economic process, nor completely eradicate confidence tricks through regulatory corsets nor fully contain untested financial innovations, nor will want to destroy performance through excessively high interest rates, there remains one possibility.

Directly contain leverage. Don’t let sources of credit in the economy to mushroom uncontrollably, fueling excessive leverage.

It would require human intervention in market processes, where we cannot be sure about the expertise required to minimize the damage to sustainable economic progress while trying to limit financial excesses.

It is something Alan Greenspan was quite outspoken about, claiming not to know when enough was enough, qualifying as financial excess and potentially damaging to the economic outlook.

But given recent experiences there are enough people around the world now prepared to differ. If it looks excessive, sounds excessive, smells excessive, you can bet your bottom Dollar it is excessive, with a price to pay eventually. Prevention being better than cure (at least in the present episode of financial disruption), opinion favours the creation of a new weapon, most probably some kind of cyclical variability in tightly controlled bank capital ratio requirements.

And of course yet more transparency in financial affairs.

As with the level of interest rates, the judgement required over time where to pitch things will decide the difference between promoting optimal performance outcomes as compared to causing underperformance.

But too much damage has been incurred, too much systemic risk absorbed for it to be different. By living extremely dangerously for a while, incurring grotesque penalties, the world is ready for its next policy innovation.

Charlie referred to it as a Macro Prudential Weapon. We could call it Prude for short. Keeps you short when you want to go long.                

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics