South Africa’s banking system and why you need to buy Bitcoin

If you’re like most working people, you get a salary in rands every month and you use this to meet you and your family’s needs and some of your wants. You probably feel some financial pain as prices rise but it’s not too bad because...

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If you’re like most working people, you get a salary in rands every month and you use this to meet you and your family’s needs and some of your wants. You probably feel some financial pain as prices rise but it’s not too bad because good companies know that prices will rise and increment their employees salaries to at least match the increases in the basket of goods tracked by government through the Consumer Price Index. This is not perfect, but it does allow you not to get left too far behind.

You might have asked yourself at one point or another, wouldn’t it be great if prices went down instead of up for an extended period of time? Your living standards could rise without any need for a salary increment.

So why doesn’t that ever happen? Why do prices only ever go up?

The answer has to do with basic economics and how money is created. Money is actually a product, like everything else in the market, and because of the law of supply and demand, an increase in the money supply means a decrease in its value, since rands are used to denominate the value of every other product and service.

How do we know if the rand is gaining or losing value?

We can measure it by the rand value of everything else we buy: things becoming more expensive in rand terms does not necessarily mean those products or services have become more valuable, just that the rand has become less valuable. Therefore, inflation is happening because the quantity of rands is increasing over time. The Reserve Bank is responsible for this increase and they also measure how much currency is out there through their M0, M1, M2, and M3 measures; the different designations just denote the different forms money can take (i.e savings, deposits, coins, notes, etc.) and all of these different measures show an increase over time as can be seen here, here, here and here.

No wonder the rand value of things keeps going up, but the rand is not unique in this respect.

The problem is the globally accepted system of central banking, which is the dominant system used in most countries. In the United States, it’s the Federal Reserve, the Bank of England in the United Kingdom, and the Reserve Bank here.

This system became popular because it allowed politicians to get access to money without having to raise taxes. Banks also favour this system because it allows them to make profit by charging interest on money they don’t have. The mechanism of how all this happens is an article on it’s own, so I won’t discuss it here; but essentially central banking is favoured by politicians and bankers because it frees them from the limitations imposed on both groups by the previous system of resource-backed money (whether the resource was gold, silver or some other resource) even though it guarantees unending inflation.

The implications of this for savers is that they get worse off over time if the returns on their savings don’t beat the inflation of what they would use the money for it means workers have to keep fighting for an increment otherwise they become worse-off while working just as hard or even harder in some cases. This is all by design. The value you lose is captured by politicians and bankers due to the fact that they are the ones who get to spend new money first. It’s a win-win for them.

The custodians of this system are bankers, and this group understands the importance of not overdoing it, lest the sheep – sorry – the hardworking citizens, revolt and upset their cozy arrangement. That’s why, for example, South African bankers are committed to an inflation target of 3-6%.

In comes the new Public Protector, Busisiwe Mkhwebane.

She recommended that Parliament abandon constitutional currency protection and thus, that the Reserve Bank abandon inflation targeting. This would upset the balance between bankers and politicians. Both groups are in it for their own short-term gain, but bankers realise the importance of maintaining this system while politicians only care about votes. Zimbabwe upset the balance as well, and this resulted in runaway inflation and rapid destruction of wealth.

I’m no fan of either group, and that’s why I’m glad we live in a world where technology is making it increasingly easier to escape this oppressive system.

We now have secure crypto-currencies, including Bitcoin, allowing ordinary people a means of protecting the value they’ve accrued with governments having little power to do anything about it. It has all the advantages of something like gold with the added benefit that all transactions and ownership are all anonymous and opaque to big brother. Get yourself some Bitcoin now, before it’s too late. Just ask a Zimbabwean.

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  1. Anonymous Coward Reply

    > Zimbabwe upset the balance as well, and this resulted in runaway inflation and rapid destruction of wealth.

    But with bitcoin there is almost no one maintaining the balance. There is no one to stop runaway inflation or deflation.

    1. Rüdiger Thiede Reply

      What controls crypto-currencies is the limited supply. It’s like having a gold-backed currency. Nothing controls the value of gold; its own scarcity controls its value. You can’t fake gold and you can’t fake Bitcoin. Fluctuation in supply might influence the value to a degree (just as with gold), but it is entirely secure from “runaway” inflation or deflation.

      1. Blake Player Reply

        Depending on how you definite inflation or deflation… Entirely possible and, in fact, probable, that bitcoin loses 80% of it’s value in one trading session. This is not inflation, but has the same effect. There are at the moment, perhaps baring Tether, no stable crypto currencies, and even the rand looks comparatively sturdy next to them. As a transactional medium, not useful yet due do scale and value fluctuations (which are as effective in reducing or increasing the value as inflation and deflation). As a store of value, good if you bought in low enough.

  2. Blake Player Reply

    It’s no great secret that the world over is a flood with cheap central bank money which has caused astronomical inflation. However, this inflation has not appeared in the goods and services which are included in our measures of inflation (typically CPIs). Instead, we see the asset price bubbles. Which are wonderful for market participants, until the music stops and the rate hiking cycle must start again in order to leave bullets in the chamber for the next recession. Or any other shock big enough to cause an unwinding of the confidence in the central banks to keep liquidity as high as it is.
    In this respect, South Africa is actually quite benign. We do not do much central banking and our rand value is unfortunately controlled by the rest of the world as well as our tendancy for politicians to ruin any recovery.
    Crypto currency is not at all a more safe place to put your retirement money, especially if you don’t know what you’re doing. I would advise your readers to be very cautious in how they approach the crypto markets. There is a lot of money to be made, but also a lot to be lost. Never play with more than you can afford to lose. Many have been burned by the climbing into the game too eager and uninformed.

  3. Adrian Partridge Reply

    Okay, but hold on a second right there: what this article does not address is WHAT you can do with Bitcoin. Granted, I am a complete illiterate when it comes to crypto-currency but I don’t see “Bitcoin” along the other payment methods or gateways on Bid or Buy, or any other e-commerce site. My local Spar does not accept Bitcoin either. So what is the value of buying some and how is it used in the real world to, as the article says, “meet you and your family’s needs and some of your wants”. Anyone care to educate me a little?

    1. Mpiyakhe Dhlamini Reply

      You make a good point,as currency bitcoin is mostly useful for ecommerce transactions because of how regulated money is by governments,arising from the need to tax. If you pay with payfast,my fellow contributor Nicholas mentioned the other day that you can use bitcoin,for example. Other than that,I would say the most important things are the anonymity(paper currency has this as well),peer-to-peer(bitcoin allows digital transactions between two parties with no requirement for a central body to certify the transaction,it’s purely a matter of maths) and the ability to use it as a savings instrument(like gold) .Putting all three attributes together it’s easy to see how helpful bitcoin would be in the case of a nation-wide economic collapse such as Zimbabwe,economic transactions would continue as before if enough people have a large enough part of their savings in bitcoin.

      So right now I would say it’s more a savings instrument and a possible emergency currency if the rand goes down the toilet.

  4. Mpiyakhe Dhlamini Reply

    In my opinion,the best thing about bitcoin is guarding against the risk of losing the ability to trade in a hyper-inflationary environment,so far crypto has mostly gained in value relative to the government currencies but there are no guarantees so put enough away to allow you to be able to continue buying and selling within South Africa while you make your escape plans or something.I would advise against speculating.

    1. Blake Player Reply

      I’m not sure how long you’ve been involved in the crypto asset space, I’ve only been trading in this stuff since February 2016 – so I’m a bit of a newbie. But what I can tell you is that in even that short space of time I’ve seen so many people lose huge amounts of money as a direct result of climbing into this space on buy recommendations from not so clued up advisors. I’m not saying that you aren’t clued up, but your article doesn’t make any mention of the very real and imminent risks relating to bitcoin and crypto currency at the moment. Namely a potential chain split before the end of the year, massive possible ICO dump etc. I could elaborate on these, but I’m sure you aware of them. I would just encourage you to make mention of the significant speculative nature of the entire market. It’s not at all a fully functional technology yet and almost all of the value that is in that $100bn market cap is speculative. It is a massive bubble and some people make a lot of money in bubbles. But it’s not those people who sit with the hot potato at the end of a bull run having bought in on poor advice and lack of due diligence.

      1. Mpiyakhe Dhlamini Reply

        I agree with you,I know how the tech side works because that’s where my interest lies. I haven’t recommended that anyone invest in crypto in the hope of higher returns but I am arguing the point that it would be useful if we get to a hyperinflationary environment,you’re essentially talking about something I haven’t expressed an opinion on,something which I think would be a bad idea anyway. Everyone should weigh the risk of hyperinflation versus the risk of a popping bubble,both are real and both need to be accounted for.

  5. Glenn Reply

    Just want to pay my respect to a brother who has rejected the folly of socialism. Keep up the good work.

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