Economist & Founder: ETM Macro Advisors
A self-professed Austrian economist, Russell Lamberti, provides fascinating insight into how a recession is a necessary and healthy process.
CIARAN RYAN: This is CFO talks and today we’re joined by RUSSELL LAMBERTI: , he is an economist and founder of a company called ETM Macro Advisors, which does economic research and consulting to the fund management industry and what it does is it looks at the big picture, macro picture, so that it can advise fund managers on how they should invest their funds. I hope I got that right, Russell?
RUSSELL LAMBERTI: Sounds good, Ciaran, yes , it’s great to be here, thanks for having me.
CIARAN RYAN: Welcome. One of the interesting things about your company and you in particular, you are what they call an Austrian economist, I think you better explain what that means.
RUSSELL LAMBERTI: Well, so that we don’t get into too much inside baseball on this for your listeners, the simple way to explain the Austrian school is what we would call an unorthodox approach to economics. It certainly diverts quite substantially from the mainstream, as it would be known these days, it’s a descendent of the classical school of economics, it was developed through the course of the 1700’s and 1800’s. It really came into fruition in the late 1800’s and the early 1900’s through the work of some very influential Austrian nationals, people who lived in Austria and were Austrian economists, so that’s how the school gets its name, Carl Menger, great economists like Ludwig von Mises, and then that tradition was carried on by Friedrich Hayek and there are numerous other scholars in the tradition. I guess it distinguishes itself from the mainstream in numerous ways but I suppose if you really had to break it down to its simplest differences from a macroeconomic perspective, we don’t believe in the Austrian school and we think that there’s good theoretical underpinning for this that you can spend your way out of a problem, we don’t think that government’s can borrow their way out of an economic problem, we don’t think that printing money creates wealth, we don’t think that printing pieces of paper creates real wealth. Believe it or not, a lot of your mainstream schools that derive from the work of John Maynard Keynes, the Keynesian school and even Monetarist school from the great Milton Friedman, there are vestiges in these schools that essentially believe that you can stimulate economic activity through consumption and through the creation of new money, and the Austrians reject this vehemently. There are various other things that we could go into but that, I guess, sums it up and believe it or not, that creates very, very substantial differences in economic analysis and the implications of what we see in the economy.
CIARAN RYAN: Well, that was the question I was going to ask you, as an Austrian economist how do you see things differently to, say, a Keynesian? Now, I know that the Austrian school has a very, very strong theory on the boom and bust cycle, that very thing that you’ve been talking about now that when you start printing money you get these artificial boom periods, inevitably followed by a bust, whereas the Keynesian school is very much in favour of that very thing, of promoting that artificial boom, without really acknowledging at the end of it that it all ends in tears and a bust.
RUSSELL LAMBERTI: I think that the most profound practical difference in the way that these schools interpret the world is that for the Austrian a recession is a necessary and healthy process, a recession is a restorative process. Painful indeed but painful in the same way that perhaps coming off a drug is painful, but it’s necessary. So we don’t think of recessions as things that have to be fought and battled to get out of, recessions restore themselves naturally, they are corrections, in fact. Whereas the Keynesian economist can’t abide a recession and every time a recession or, let’s say, a withdrawal symptom emerges, they want more drug to prop it back up. So this just creates diametrically opposed approaches to not only economic analysis and the implications of boom and bust, but also policy responses, and most of our policymakers come from that Keynesian school. That’s why in 2009 when the world economy fell over and it affected South Africa significantly, our finance ministers ramped up deficit spending dramatically and, quite frankly, have never looked back since and we’ve had a decade of gargantuan deficits with very little, if anything, to show for it. The Austrian approach would have been radically different, and I think far more constructive.
Lessons to be learnt from Zimbabwe
CIARAN RYAN: I found out quite recently that Zimbabwe, believe it or not, the country which is famous worldwide for having a million percent inflation, actually ran a budget surplus in the last year, I don’t know if you know that?
RUSSELL LAMBERTI: I didn’t know that specifically because I haven’t been following those numbers closely of late but it stands to reason because it’s very difficult for them to borrow money, it’s very difficult for them to get anyone to buy Zimbabwean government bonds, who would. So the only alternative they have is to print money, now that’s a terrible alternative to take and it’s really an illegitimate alternative when you think about it because you’re simply destroying the value of everyone’s currency in order to fund this greedy and hungry government. But, amazingly, they’re doing it again, they’re creating another high inflation cycle in Zimbabwe, they’ve banned rands and dollars from circulating, they’ve abolished their legal tender status to try and monopolise currency creation again, which is simply a way to try and fund the cronies in government again. So, amazingly, Zimbabwe hasn’t learnt from the awful experience of 1999 to 2009, that terrible decade that essentially destroyed Zimbabwe, it continues to repeat those mistakes.
CIARAN RYAN: And sucked the savings out, if you speak to Zimbabweans who’ve spent their lives working there over decades, their savings have been stolen by this inflationary cycle, it’s worthless.
RUSSELL LAMBERTI: Absolutely, savings have literally been decimated, they’ve probably been cut 90% and yes, I think, tragically, Zimbabwe has just about run out of capital and savings. There is a solution and the solution is that the state needs to go broke and needs to go out of business and needs to allow for the free choice in currency. That’s a real, sound money system, it’s not so much a gold standard per se or a bitcoin standard per se or a dollar standard per se but a system of free choice in currency, which Zimbabwe had for a few years after the collapse of the first iteration of the Zimbabwe dollar. Now, if you combine free choice in currency with some regulatory reforms and a little bit of freeing up of that economy, you can actually start to rebuild trust and rebuild trade and capital formation and so on. But this is a long journey out of that hole, Zimbabwe probably set itself back half a century in the last ten to 20 years, at least, if not a full century, and that’s assuming that it actually climbs out over the next few decades. If it can get 5%, 6%, 7% growth compounded for the next 20, 30 years, well, that’s great, it can restore a lot of what it’s lost but at the moment it’s just not doing that. There are a lot of lessons to learn from Zimbabwe and I hope we learn them in South Africa.
CIARAN RYAN: One of the architects of this new financial regime that they have there is an MDC parliamentarian from Bulawayo South by the name of Eddie Cross, I spoke to him a couple of weeks ago, and he is working with Finance Minister Mthuli Ncube, and I think what they are trying to do there is a gradient approach to restoring a national currency. They have the Zim dollar or what they call the RTGS dollar, has been reinstalled, which makes everybody nervous because the way that they solved inflation there back in 2013, I think it was, was basically introducing dollars and rands because then, of course, you inherit the inflation rate of the currency that you’re adopting. Now they’ve got inflation running again at 100% and that is like a stallion about to be released from the stable, that thing could really get out of hand very quickly. What do you think about that?
RUSSELL LAMBERTI: Some would argue that that 100% inflation rate is an underestimate at the moment. I know Steve Hanke, the John Hopkins professor in the United States, who does a lot of work on hyperinflation and on inflation and currency dynamics, I believe he thinks it’s substantially higher than that already. So yes, the horse is bolting again, it’s unequivocally true that inflation hits the poorest of the poor the most. It’s just astonishing that these supposedly egalitarian, kind of socialist, regimes so brazenly damage and hurt their poor the most through inflationary policies.
CIARAN RYAN: It is astonishing, isn’t it?
RUSSELL LAMBERTI: So that’s what is going on again and, as I say, they haven’t learnt from the quite incredible hyperinflation of the 2000’s, which was almost world record-breaking, I think it might have just fallen behind the Weimar Republic’s inflation rate. It’s so hard to measure, perhaps it was a world record but certainly just unbridled money printing and the destruction of a nation. I co-authored a book with Phil Haslam in 2014 called When Money Destroys Nations and it was about this very thing, and it really did destroy Zimbabwe. A country can withstand a lot, it can withstand bad policy, it can withstand dictators, these aren’t nice things but it can withstand a lot. But hyperinflation is deeply destructive.
CIARAN RYAN: It’s worse than a nuclear bomb.
RUSSELL LAMBERTI: Deeply destructive and in Zimbabwe it’s led to a subsequent ten years of no liftoff, of ongoing political corruption. In Germany it really led to the rise of the Nazis and everything that that became in the 1930’s and 1940’s, just incredibly destructive stuff. We’re seeing it in Venezuela now sadly, and what you see in this scenario, if we think emigration from South Africa and the loss of skills is bad now, we ain’t seen nothing yet if we start debauching our currency and start debasing the rand, printing money and creating hyperinflation or high inflation rates, we start to lose skills in a very, very strong way.
‘People are the ultimate foundation of wealth’
CIARAN RYAN: I think if you look at Zimbabwe and it’s right on our border, it’s very illustrative of what can happen if this thing gets out of control. There’s a generation in Zimbabwe between the ages of about 20 and 40 that has been hollowed out of that country, the skills have gone, the young people have gone. What are they doing, they are working here, three million people, probably much more in South Africa, working here and repatriating money there for their parents, whose savings, their pension funds, have been stolen by this government, by this regime that is up there. So the social catastrophe that results from this is something that is very seldom looked at.
RUSSELL LAMBERTI: Yes, it destroys a nation in not just the economic sense but it destroys the fabric of a nation. It’s almost like you’ve thrown a hand grenade, a metaphorical hand grenade, into Zimbabwe and you’ve blown it to pieces and you’ve got these ‘Scatterlings of Africa’, if you like, now in Australia, New Zealand, South Africa, Zambia, the United Kingdom, Canada, black and white have just been scattered around the world. Really, if we’re honest, some of the best Zimbabweans have been forced to emigrate. As I say, I say with fair confidence that it has set that country back half a century to a full century. It’s been that devastating, it’s lost its potential tremendously. Resources in the ground are nice to have but they are not actually essential, people are the ultimate foundation of wealth and wealth creation. If you lose good people and you lose that ability to create wealth through human ingenuity, you’re right on the backfoot, it’s very, very sad.
CIARAN RYAN: There is kind of a philosophical battle that’s been going on through the ages, this is not a recent thing, and it really is between the collectivist or the authoritarian and the individual, would you agree with that?
RUSSELL LAMBERTI: Yes, I think that there’s a lot to be said for that. Certainly I think that there’s a battle between the statist and the non-statist, the idea that believes that we can only solve our problems through state coercion is very crass, obtuse and blunt territorial monopolies that get to have a monopoly on force and to force you to do this and force you to do that, versus the anti-state option and yes, it is essentially an anarchist-type position but anarchy has become a word meaning chaos. The anarchist position in this sense, the anti-state position, is to say we can actually order human affairs, we can have authority, we can have governance and, indeed, we must have those things but we can do them in a voluntary and natural way. These things are good things, hierarchies, natural hierarchies, these are good things that create a good backbone and a good structure for society but that we don’t have to use major force and coercion to do this. So we’re in the philosophical realm here and many would say, well, that’s kind of a pipedream because human nature is what it is you need these state institutions and so on, and we can get into the weeds of that but, really, if we had to bring it back into a slightly more practical reality, what we can at least say is that if we have to have states, which have the potential to wield immense power, and we saw that in the twentieth century, we need to clip their wings as much as possible, we need to put them in a little box and really protect ourselves from the worst ravages of what states can do. States were responsible for hundreds of millions of debts last century, by far the most dangerous force on the planet. Again, in Zimbabwe we can see the deep destruction that the state brought to bear on that country and we’re seeing a similar process unfolding in South Africa, major capital consumption, the destruction of our water and sanitation system, the absolute wreckage of our electricity grid and our electricity system, perhaps not the grid so much as the generation of the energy. This is all being perpetrated by a central state with sometimes good intentions, I am not necessarily saying that these people come out and wake up in the morning and decide to be evil, but through their dirigisme, through their desire for power, their desire to centralise, which comes from a kind of arrogance that they know best, they are creating chaos. So, ironically, the anarchist position tries to reduce chaos, the statist position if it goes too far can enhance chaos. The Soviet Union was a chaotic place. Zimbabwe became a chaotic place and South Africa is coming to that point of potential great chaos. There is chaos already in society and we could tip over.
CIARAN RYAN: Just highlight some of the areas where you think are the big issues in South Africa? If I was to list two or three of them, you mentioned the electricity grid, we’re not seeing investment in this country, nobody is going to build a factory in this country if they do not have security of power supply. That’s the one thing that’s driving away investment but you also have a government that is quite racist in its approach, it really has driven a lot of the young white people away because they felt unwelcome in this country, I don’t know if you would agree with that but I think a lot of the black middleclass are also going away. So although we kind of inherited this apartheid system here, which was based on race, it has been continued by this new government because everybody in this country is classified, you are either white, coloured, Asian, whatever you are and you get certain privileges based on that colour. That seems to be another issue there and we’ve read a number of stories where the skills emigration has just been accelerating in the last few years. Some people in this country are not welcome.
RUSSELL LAMBERTI: Yes, I think that I would immediately identify three debilitating barriers to investment and growth and dynamism. The complete mismanagement of the energy and the water systems I think are very significant. Energy manifests most acutely, and obviously when the lights go out and the factories can’t run the machines that’s critical but the water situation we mustn’t underestimate. Cape Town got pretty close to running out of water and that would have been an utter calamity. I think the entire economy would have crashed if that had happened because you would have had to have had hundreds of thousands of people vacating the city of Cape Town, it would have just been immense. This is how close we are running these major water and energy systems to the brink of collapse.
CIARAN RYAN: The Koeberg Nuclear Power Station in Cape Town can desalinate water for the entire city I am told.
RUSSELL LAMBERTI: There are solutions, and this is the curious thing about economics is that you can be on the brink of collapse and make the right policy choice and restore the whole thing back to good health in fairly short order. We still have that out but we’re not taking it. So the energy and water systems would be the one thing, the other thing would be BEE.
BEE – ‘Saddled corporate SA with immense inefficient burdens’
CIARAN RYAN: Black economic empowerment.
RUSSELL LAMBERTI: This is always a thorny one to try and tackle because it’s been very cleverly done, it’s called black economic empowerment and so the idea is that if you are against it you must somehow be against black people or black empowerment or any of these things. But what this has really done is saddled corporate SA with immense inefficient burdens of regulatory compliance, expensive equity transactions and the goalposts keep moving, so that’s an uncertainty dynamic as well. If we just had the BEE codes of 2004 when they first came in and they were frozen at that, we would now be 15 years into a lot of certainty about what that is. But these goalposts have shifted continuously, they’ve just shifted recently again, and we’ve got these regulations jumping the fence now and being included into competition law now as well. So the Competition Commission is going to be able to make decisions around BEE as well, so that’s the second thing. Then the land question and the property rights question I think is another absolute barrier to investment. Again, it’s been positioned politically that if you are against it, you must somehow be against land justice, you must somehow be against good land reform process. But, again, we have had this uncertainty thrust upon us, where the most radical version of it is essentially that land will start being expropriated without compensation. Hello, that’s called stealing, taking someone’s land and not compensating them. By the way, expropriation with compensation is also stealing. It’s less offensive stealing, I grant you, but it’s stealing because the fact that you had to expropriate it from me means that I didn’t want to voluntarily sell that land that I owned. So the money that I am getting for it is better than nothing but I actually value the land more, so you are actually diminishing my value because that’s why I didn’t want to sell it. So those are three critical areas and we can talk about how to get those areas right but as long as those things are in place right now and getting worse, the energy grid, the water system getting worse, BEE ratcheting up, regulations becoming more onerous, more uncertain and the land expropriation debate, at the very least, just up in the air and uncertain. There is no way some German firm comes and commits big green fields capital to South Africa under these conditions, under a zero percent GDP growth economy. No chance. So the ball is in the ANC’s court and they are floundering at this point
CIARAN RYAN: I think one of the things that really has become a…I don’t really know if the land issue is going to be taken up with any kind of energy or aggression like it was six or nine months before the election that we’ve just had.
RUSSELL LAMBERTI: I think the president is trying to downplay it and keep it on the backburner and keep it quiet.
CIARAN RYAN: Kick the can down the road.
RUSSELL LAMBERTI: Kick it down the road but I think the key point is that it’s actually not so much the expropriation of land per se, although if it’s done badly it will be horrendous, it’s the uncertainty of it, it’s the fact that what is the status of property rights in this country, what is the status of land, what is the status of all these things.
CIARAN RYAN: You’ve even had politicians I think from the EFF coming out and saying go and take that house that you want. That could jump the fence to the suburbs, you could have absolute chaos going on if this was allowed to continue.
RUSSELL LAMBERTI: There’s this kind of completely nutty fringe but I think what people underestimate is how much of EFF ideology is held within the ANC. There are some ANC parliamentarians, for example, who are very extreme. This issue isn’t going away, it needs to be firmly dealt with. The executive has got to come out and say, right, this is the plan. Now, if the plan is bad, fine, but then we know the plan is bad and we’ll make decisions accordingly. But the uncertainty leaves us in this purgatory on the property rights question that creates a status and a kind of inaction and, therefore, we are sitting in this zero-growth economy. I think in real terms when you look at the thinning out of our supply chains, when you look at the lack of capital investment, we’re really in a kind of permanent recession at the moment and have been for a number of years now. It’s not necessarily a nosedive but it’s certainly this steady decay and steady decline.
‘You don’t create growth out of consumption’
CIARAN RYAN: We are running out of time, there are one or two questions I do want to get to before we close off. Today, Thursday July 18, the Reserve Bank is going to make a decision whether or not to drop interest rates and that seems to be the consensus view. I believe you have a slightly contrarian view that they should actually raise interest rates and not try to stimulate the economy.
RUSSELL LAMBERTI: Let me firstly give you the very pure Austrian position, which is that no single individual knows the correct rate of interest, which makes it absurd that we have a monetary polit bureau, if you like, that decides on the rate of interest and dictates this rate. Really, it determines too much, the price of the rand and it’s got a monopoly on rand production. In other words, we have a centralised polit bureau making decisions on one half of every transaction because half of every transaction is money, right? So we have this incredibly centralised organisation. The truth is we don’t know exactly where interest rates should be but we do know that interest rates should never be negative, for example, like they are in Europe because if I had to pay you money to lend you money, it’s far more rational just for me to hold onto my money because a negative interest rate is me paying you to lend you money. Then I take on credit risk and all these sorts of things, so why wouldn’t I just hold my R100, as opposed to lend it to you. So we also know, therefore, that negative real interest rates are relatively irrational as well, in the sense that I wouldn’t lend you money if I thought it was going to be eaten by inflation and I couldn’t get an interest rate that could at least compensate me for that inflation rate. So inflation in this country is officially running at about 4.5%, this is controversial but I think inflation is underestimated. There are a few biases in the measurement basket that I think bias the rate lower. So I think we’re probably running an inflation rate of closer to maybe 6%, 6.5%, the repo rate is currently just under 7%. There seems to be no good reason why banks should get a privilege to borrow from the central bank at zero real interest rates and I think, therefore, that we could arguably hike rates to create positive real interest rates and that starts to create a more realistic price for the time value of money. It forces banks to take more prudent lending decisions, it forces banks to give deposits a higher rate of interest and that encourage more savings and we desperately need savings in this economy, we’re a savings-poor country and savings are the only basis for growth. You fund growth out of savings, you don’t create growth out of consumption, consumption is a nice, happy end state of that process but you’ve got to fund it through savings. So at the very least I don’t think the Reserve Bank should be cutting rates. I find it a great pity that they’ve been swept into this Federal Reserve dovish bias, if you like, that now we’ve got to start cutting interest rates.
CIARAN RYAN: What’s that word you used?
RUSSELL LAMBERTI: Dovish, which is the term that we use in central bank parlance for cutting interest rates. You are supposedly hawkish if you’re hiking rates, which is actually a ridiculous terminology because that’s really a war terminology, you’re hawkish if you want to make war against another nation. So supposedly hiking rates is this very aggressive act. But really what you are doing is you are hiking rates to restore sensible time value of money and if you’re cutting real interest rates to below zero or negative real interest rates you’re just subsidising the banks to make bad decisions again. We don’t need that in this country, we need good credit allocation decisions, good savings rates, better savings rates, we actually need higher interest rates across the yield curve. So I hope the Reserve Bank doesn’t cut, I think that will create some vulnerability on the rand, I don’t think it will do anything for the economy whatsoever, it won’t do anything to encourage savings, I don’t think it will do anything to encourage real wealth creation. I know they won’t hike, of course, but there’s a case to be made for hiking interest rates quite steadily over the next few years and restoring the reward for saving money.
When Money Destroys Nations
CIARAN RYAN: We’re going to have to leave it there, but I have one other question for you, what was the name of the book that you wrote?
RUSSELL LAMBERTI: The book that I co-authored with Phil Haslam is called When Money Destroys Nations and it’s a book about Zimbabwe’s hyperinflation and we essentially just chronical what happened in that country from the mid-90’s, through the 2000’s, how that hyperinflation devastated Zimbabwe and how to avoid those mistakes in the future. So I hope some South African policymakers get hold of it.
CIARAN RYAN: Do you remember what the peak inflation rate was in Zimbabwe? Was it 13 million?
RUSSELL LAMBERTI: Gosh, it could be, the numbers are so dizzying and, in fact, when you get to those rates of inflation there’s no real ability to measure it at that point, a million percent is the same as six million percent, it’s ridiculous rates of inflation. I can’t remember all the details, but the final bank note that they ended with was ZIM$100 trillion but, bear in mind, that was after they lopped about eight zeros already off the currency. So what they really got to was ZIM$100 trillion plus about eight zeros, you can work out that number.
CIARAN RYAN: You wonder how a finance minister in a country like that or a Reserve Bank Governor can walk the streets without getting burnt alive.
RUSSELL LAMBERTI: Ja, maybe he’s living in a Swiss chateau or something [laughing].
CIARAN RYAN: Are you reading any good books or are there any books that you’d recommend for people, something that’s really jerked your excitement?
RUSSELL LAMBERTI: Wow, that’s a surprising question because there’s so much that I’ve read recently. A book that I found fascinating and I’m going to reread, it’s a book by Hans-Hermann Hoppe, he’s a German philosopher and economist.
CIARAN RYAN: Didn’t he write the book called Democracy: The God that Failed.
RUSSELL LAMBERTI: Yes and it’s a searing critique of democracy. Now, he wrote a book called A Theory of Socialism and Capitalism, which is deeply illuminating on political economy. It’s very accessible, there might even be a free downloadable PDF version at the Mises Institute www.mises.org but it’s just a very accessible book. I found that to be a very good book. Another fascinating read recently was Douglas Murray’s The Strange Death of Europe: Immigration, Identity, Islam. He gets into what I think is the critical issue of our time, which is the ability for us to now move easily across the world and the mass immigration dynamic that’s going on in Europe. There’s such emotion and tension right now in politics around borders and the positions are becoming quite radical and quite far apart. Some people are for radically open borders or no borders. Others are starting…there’s a sort of neoreactionary movement that says hang on a minute, we think borders are quite a good thing. Europe is at the forefront of this mass immigration from predominantly the Middle East, and so you’ve got this big clash of cultures. How Europe deals with that and how these societies deal with that is complex and fascinating. So I found that book to be tremendously illuminating and even-handed and just well written by Douglas Murray. I would recommend those two books.
CIARAN RYAN: Excellent, Russell, thank you very much for coming in.
RUSSELL LAMBERTI: Thank you so much, Ciaran, I have enjoyed it.