The enduring myth of the collapsing rand

[alfiano]

@kam4031 I've fixed the numbers, and they're much the same between purchasing power and interest rates. You should always be parking your (spare) cash in interest bearing accounts, if not equity investments.

But yes, the depreciation is the default state and will continue to be so, but a depreciation is not always a devaluation. A slight devaluation has occurred, mostly evenly across the past two decades, yes, but as to whether this will continue, that is anyone's guess. We maintain a trade surplus, expectations for our economy are very low & the green transition will increase demand for metals, so I'd personally wager the rand will strengthen in real terms over the next decade.

 

[strongarm5791]

@alfiano The rand keeps devaluing because the government is running a budget deficit. As long as we are spending more than we earn, the rand will keep devaluing over time. It is as simple s as that.

 

[alfiano]

@strongarm5791 I think you may be confusing a budget deficit for a trade deficit.

Budget deficit's impact on exchange rates depend on how the debt is financed. The most recent figures I could find (2020) have our government debt at close to 90% rand-denominated. This means the impact of our budget deficit on exchange rates (through the 10% international borrowing) is relatively small.

Anyway, South Africa mostly runs a trade surplus, which should lead to strengthening over time, not weakening.

 

[strongarm5791]

@alfiano No, I definitely mean budget deficit. South Africa is borrowing money so that politicians can “eat”.

The effect may be small, but it is cumulative over time.

Hence the slow but consistent decline of the rand.

You’re over-analysing it.

 

[deus_ex_machina]

@alfiano I believe you are over-theorising it.

You really need to tell me how, in the real world examples of say Zimbabwe and Argentina with currencies going to shit, how they are somehow still doing OK.

 

[deus_ex_machina]

@strongarm5791 Yes, and no Interest Rate parity/Purchase Price Parity blah blah, is going to save you.

 

[strongarm5791]

@deus_ex_machina Exactly.

 

[angelic143]

@alfiano Oh good, I’m glad to see this. A good explanation. I do hope a lot of people read this.

 

[deus_ex_machina]

@angelic143 Argentina has and the printers are back on maximum output, because a weak currency is OK. LMFAO.

 

[alfiano]

@deus_ex_machina Maybe take a minute to consider that you might not understand the information you’ve been presented (you clearly have missed the point), or the historical context of the examples you’re throwing around eg. Argentina?

 

[deus_ex_machina]

@alfiano Sorry, I don't believe you really understand the link between inflation and the depreciating power of a currency or how dangerous it is .

 

[anoncord]

@alfiano I am an honours finance student and this was synthesised better than any lecturer could put it.

Absolutely amazing

 

[resjudicata]

@alfiano It's racism or laziness simply, but mostly ignorance. People want to blame the nearest scapegoat that they can, rather than take radical responsibility for their lives.

In reality, nothing is actually stopping you from making more money and having a better life as result. It will be difficult. But what isn't? I feel for people who don't have food, clean drinking water or housing. But if you're reading this, you're privileged enough and its neither impossible, nor is it against South Africas constitution for you to make more money than the government collects in taxes. No matter who gets elected, it's not gonna effect your day-to-day as much as you putting yourself in a better position.

Loadshedding sucks, but plane tickets to other countries and solar panels have a finite price that you can work towards.

Edit: Down-votes won't change your situation either.

 

[resjudicata]

It's racism or laziness simply, but mostly ignorance. People want to blame the nearest scapegoat that they can, rather than take radical responsibility for their lives.

Truer words have never been spoken

 

[zorges]

@alfiano Intrest and exchange rates are too very different things

 

[prarierose91]

@alfiano This is basically the rule of one price. If a product or service is much cheaper in one country or market, then eventually arbitrage will remove the difference. Please note that this rule will collapse if there is extreme uncertainty, e.g. Zimbabwe, Germany, in the 1920s, Venezuela etc etc.

 

[djj1973]

@alfiano Your post makes it seem like carry trades can’t be profitable- but there are many that are and have been for years.

Over the long term interest rate parity takes precedence according to the Fisher equation.

 

[alfiano]

@djj1973 It is the people taking advantage of these arbitrage opportunities that cause the parity to hold over time.

 

[myjourneyinfaith]

@alfiano I'm counting on a continually weakening but not collapsed Rand since most of my investments are in dollars. So besides the investment return, there will also be a significant currency return when exchanging back to Rands in 10+ years.

 

[alfiano]

@myjourneyinfaith Counting on the rand to weaken is not a reliable strategy. The expected return is zero. It is just as likely to strengthen as it is to weaken in the future, unless you know more than the market. @redpill21 outlines it more clearly in his response to the post.

The dollar is also very strong relative to past two decades, if that unravels you also get a negative return, even if the rand weakens (by less).

Investing offshore of course is sensible (as outlined in the International Diversification video in the post). But relying on currency returns, or expecting them to be significant, is far from it.