“There are no solutions; there are only trade-offs” – Thomas Sowell
South Africa’s policy makers have come to realise that there are no solutions to the Covid-19 pandemic, nor the economic devastation brought on by the aggressive response to lockdown the economy. There are only trade-offs. The lockdown has saved lives, but has destroyed livelihoods. The latter has led to a souring in sentiment about the extension of the lockdown and the gradual opening up of the economy. And while politicians have revelled in their newly found absolute power, they may have traded off their popularity with nonsensical, dictatorial decisions – hence the countrywide move to Lockdown Level 3 from 1 June.
The macroeconomic policy response should be one of co-ordination between monetary and fiscal authorities. In South Africa’s case, this is only partial due to the heightened fiscal risk and potential spillover to the rand and inflation. How the SARB responds to the currency is also a trade-off: a weaker rand provides stimulus to growth via exports but upside risk to inflation. In cutting rates aggressively, the SARB MPC has had to trade off the benefit to savers against the relief for borrowers.
Investors face trade-offs on a daily basis: a certain return has opportunity cost and reinvestment risk; volatile sectors have wide-ranging potential outcomes; historical correlations may not always hold; and assumptions may be wrong. While cash is king, money market rates at sub-5% will force investors to trade off a certain return against taking on more risk.
As we enter Level 3, we are trading off an increased risk of infection against more personal freedom. Let’s use that freedom wisely.
- Level 2 B-BBEE contributor
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