@alfiano Hi, I disagree with a lot of points in your post. Let's tackle them all piece by piece shall we?
Interest rate parity is an economic theory that suggests that the difference in interest rates between two countries should equal the relative change in their exchange rate. According to interest rate parity, if the interest rates in one country are higher than in another, the currency of the country with higher interest rates should depreciate relative to the currency of the country with lower interest rates.
However, it's important to note that real-world currency movements are influenced by a multitude of factors, including economic indicators, geopolitical events, market speculation, and central bank policies. Interest rate parity is just one of the many factors that can affect exchange rates, and it might not always hold true in the short term due to the complexity of global financial markets.
source:
https://www.academia.edu/download/33565472/IJAIEM-2014-03-05-013.pdf
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=878972
In the example you gave about interest rate parity you didn't take the inflation rate into account. You shouldn't be looking at the rate of return, but the real rate of return after taking inflation into account, so you could've been earning 10% when holding the rand, but it could be possible that high inflation would outstrip that, relative to the inflation rate in the US which could have been higher and would not outstrip the returns achieved when holding the USD in these "risk free investments".
In the example you gave about interest rate parity, you didn't consider the inflation rate. You shouldn't be looking at the rate of return, but the real rate of return after taking inflation into account, so you could've been earning 10% when holding the rand, but it could be possible that high inflation would outstrip that, relative to the inflation rate in the US which could have been higher and would not outstrip the returns achieved when holding the USD in these "risk free investments".
In addition, you should look at things such as the increase in energy prices, prices of goods, rent prices, and so on. The increases in these prices would have been different between the US and South Africa and historically it has been different. Meaning that relative to Americans we would afford fewer goods than the previous years.
Your
Purchasing Power Parity point doesn't warrant that much of a deep dive, you assumed that salaries keep up with local inflation year on year, which is not the case. South African real salaries have actually been declining for 5 years. Again your point in this regard was an oversimplification of what occurs in reality, first, you assumed that wages do not lag behind inflation, then you gave the example of the iPhone, without considering possible changes in tariffs and so on.
Source:
https://www.news24.com/fin24/econom...5-years-trend-set-to-continue-report-20230517
There is your
last point "But this doesn't affect us so much as we only import 6.7% of our imports from the US. So those imports will cost twice as much, but the rest of our imports cost the same"
What do you mean, this "doesn't affect us so much"? We are completely dependent on the import of Petroleum and let me remind you crude oil is denominated in the USD, meaning that depreciation to this extent is very very very bad, I don't need to explain why oil is much more expensive to this extreme extent is bad for the country. Also, although we only have 6.7% of our imports from the US we export to the US at a volume that is much less meaning that we have a balance of payment deficit with them, which is never good.
Also, 6.7% of our
EXPORTS are made to the US 9.6% of our
IMPORTS are from the US as of August 2023. I linked the source below, it seems you read it incorrectly and thus quoted the incorrect percentage.
Source:
https://oec.world/en/profile/country/zaf#:~:text=Imports%20The%20top%20imports%20of,(%245.2B)%2C%20and%20Saudi
https://www.sars.gov.za/customs-and-excise/trade-statistics/