How to stop the recession and save jobs

[Dave A]

So how is government going to stop the predicted recession and save jobs?
Why - the private sector, of course!

Investment by the private sector in the country's infrastructure development plan has emerged as the core of President Kgalema Motlanthe's plan to save South Africa from slipping into a widely predicted recession.

In tandem, Motlanthe has called on development finance institutions - including the Industrial Development Corporation and department of trade and industry (dti) agencies that provide support for business - to underpin private sector companies that are showing signs, or are already in, financial trouble that would inevitably lead to these companies closing or downscaling staff.
full story from Business Report here

I must admit I'm missing something here.

Gov reckons it is ploughing ahead with R600 billion worth of infrastructure development over the next few years and this will ensure our growth moving forward rather than us heading into recession. This would prop up the private sector through its current woes and grow jobs.

Critics have questioned how this can be financed in the current economic climate. Easy! The private sector, of course!

Errmm. Wasn't gov supposed to be propping up the private sector?

Can anyone help me get my head around this?

[garthu]

Errrmmm... i think thats well put.... Don't know hey, doesn't make sense. Think the critics are right... HOW? Can the private sector even get into this, doubt it... 600 billion invested.. lets get serious right now also. Honestly i think it's electioneering. Talk first, think last, never act

[Martinco]

I have already sent my banking details to Dept. of Finance to deposit my share into my account !

[Dave A]

It's not all electioneering. The capital intensive projects mentioned so far were in the pipeline already. The only electioneering in it is emphasising the plans that were in place anyway.

(As a cynical side note: The rather massive amount of cream waiting to be skimmed with this lot might explain why JZ's run to President is seen as so important in some parts.)

There was a rather stunning program on bonds on BBC Knowledge last night. Did anyone else catch it?

Bottom line - money doesn't grow on trees...
Or printing presses for that matter; the surest road to financial collapse as seen in Zimbabwe and Argentina.

Realistically they are probably going to have to go to the bond market if they are going to plow ahead regardless and pull it off, but it is a terrible time for new capital formation.

[Dave A]

Not local, but

US President Barack Obama was set on Wednesday to unveil a plan to stabilise the troubled housing market, a main cause of the economy's deepening slump.

Fresh from signing into law a sweeping $787-billion fiscal stimulus package, Obama is turning his attention to the housing market, where foreclosures have continued to climb despite earlier initiatives aimed at halting that trend.

The Obama plan will involve government subsidies to mortgage servicers and lenders to encourage them to lower payments for borrowers in distress.

The aim is to bring mortgage payments to a more affordable range of about 31% of borrowers' incomes.

The Obama administration has closely guarded the details of the roughly $50-billion plan but sources familiar with it have made clear it would be bolder than prior efforts to stem foreclosures.
full story from M&G here

May I draw your attention to the price tag. Relative to what has been pumped elsewhere, this is peanuts - and probably the most likely to give best bang for the buck!

Food for thought.

[duncan drennan]

I often wonder what the right approach to this is. The Republicans would (theoretically) preach a free market system, while the Democrats tend to be interventionists and regulators.

Given our own regulatory framework I tend to lean towards the free market approach. Sometimes I think all the meddling just supports a system which is already broken, and will eventually fail.

[Dave A]

I see governments' role with intervention is to be a moderator. The objective is to ease things to their natural balance, rather than shift the natural balance itself.

If we bear in mind that all this GFM nonsense started with the sub-prime market problems (and this initiative strikes directly at that root cause) you have to wonder about those really big numbers being thrown at problems that essentially are downline consequences.

It's quite a lesson in leverage. If you put the money in the right places, the benefits compound through the system. Or in firemans' terms, you put the water at the base of the fire, not the top.

[IanF]

The Stimulus Bill

I got this from a guy in the states, it explains this so well.

Shortly after class, an economics student approaches his economics professor and says, "I don't understand this stimulus bill. Can you explain it to me?"

The professor replied, "I don't have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I'll be glad to explain it to you." The student agreed.

At the agreed-upon time, the student showed up at the professor's house. The professor stated that the weekend project involved his backyard pool. They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, "First, go over to the deep end, and fill your bucket with as much water as you can." The student did as he was instructed.

The professor then continued, "Follow me over to the shallow end, and then dump all the water from your bucket into it." The student was naturally confused, but did as he was told.

The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.

The confused student asked, "Excuse me, but why are we doing this?"

The professor matter-of-factly stated that he was trying to make the shallow end much deeper.

The student didn't think the economics professor was serious, but figured that he would find out the real story soon enough.

However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, "All we're doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you'll really have accomplished is the destruction of what could have been truly productive action!"

The professor put down his bucket and replied with a smile,

"Congratulations! You now understand the stimulus bill."

[Dave A]

Here is an article well worth reading.

Trouble is heaping up, sending the local economy into a nosedive.

Growth is down, jobs are reportedly vanishing and inflation is wheezing towards the target range of between 3% and 6%.

Given the effect the financial downturn and market turmoil are having on the country, economists argue that there is an ever-growing need to frontload interest rate cuts. This means opting for aggressive loosening of monetary policy early on in the year.

But with the release of CPI inflation figures earlier this week, showing a less than expected decline to 8.1%, the market has had to rethink its hopes regarding what action Reserve Bank Governor Tito Mboweni will take.
-----
"The real economy is suffering," says economist Mike Schussler. "We have to get growth going again." This may require additional measures besides government's plans to sink R787-billion into infrastructure, he says.
full article from M&G here

Just a couple of highlights from an article that I think really captures the core issues very well.

[duncan drennan]

This jumped out at me (from that same article),

Azar Jammine, director of Econometrix, pointed to anecdotal evidence that local banks are refusing to lend to customers, even creditworthy ones, despite the fact that South Africa's financial system has remained relatively insulated from the global financial crisis.

Jammine says that in a case like this hasty interest rate cuts will solve nothing. "If the real reason we are not seeing business activity is because banks are reluctant to lend, then cutting interest rates will not give the economy the boost people are expecting," says Jammine.

If there is no money to lend....

[Dave A]

I've had a number of my estate agent clients reporting similar "anecdotal evidence."

Exactly why some clients are being turned down for finance has been a mystery. It seems to be more than just a risk aversion problem.

[duncan drennan]

Exactly why some clients are being turned down for finance has been a mystery. It seems to be more than just a risk aversion problem.

I think the banks are having liquidity issues. I can't remember exactly when, but shortly after October last year Absa removed certain facilities on their home loans. The used to have a reserve option where you could still access the capital and extra payments in your home loan, but changed this so that you can only access the extra money you have paid in, i.e. you can no longer access the capital repayment part.

[Dave A]

Here we have even more of this incredible circle of logic.

The tourism industry should do "everything possible" to protect jobs in light of a "looming recession", African National Congress (ANC) president Jacob Zuma said on Tuesday.

"With the looming economic recession in our country, we urge the tourism industry to do everything possible not to shed jobs," Zuma told the Tourism Business Council South Africa in Sandton, Johannesburg.

"All avenues must be explored to save jobs in our country. From outside we want to assure you that we are serious about tourism, and that we do not regard it as a Cinderella industry. It is a job- and money-spinner and a key player in our economy," he said.

Zuma warned employers in the tourism sector that the ANC government intended introducing laws regulating contract work, subcontracting and outsourcing. This was to prevent the exploitation of workers.

"Provisions will be introduced to facilitate unionisation of workers and the conclusion of sectoral collective agreements to cover vulnerable workers in these different legal relationships and ensure the right to permanent employment for affected workers," he said.
<hr />
On Monday Zuma called on labour and business to "make sacrifices" to avoid job losses in the face of the global finance crisis, Business Day reported.

He said South Africans faced "extraordinary circumstances" and would be required to make "sacrifices" to prevent businesses from closing down and shedding jobs.
Extracts from M&G article here

So let's pick this over.

Business is under severe pressure in a contracting market.
Business's very survival is dependant on aligning costs (including labour costs) to their current means.
Jobs come from business. No business, no jobs.
JZ's solution is to force an even more inflexible relationship between business and employees than exists already?

[IanF]

Business is under severe pressure in a contracting market.
Business's very survival is dependant on aligning costs (including labour costs) to their current means.
Jobs come from business. No business, no jobs.
JZ's solution is to force an even more inflexible relationship between business and employees than exists already?

Dave
Isn't this what the UK went through with PM Thatcher and she broke the unions backs. For the good of the country I wish COSATU would break away from the ruling alliance and we could get more growth friendly labour laws.
I am currently 1 staff member short who is on 3 weeks sick leave for which she gets full pay. It is no use getting a casual in as the training is expensive ito waste and aggro and takes about 6 months before new people are productive.
My answer is to automate an example I gave away 2 duplicators as the labour for collating afterwards is not worth the hassle. So I now print to the copier and it is collated as printed at a lower gross margin but a higher profit.And it is quicker.

[Dave A]

Well, JZ's plan is to strengthen unionism by the looks of things. He's going the wrong way if he wants to reduce unemployment, reduce poverty, etc. When you put more weight on the horse, it runs slower, not faster.