Real Estate Investor Magazine South Africa June 2013 | Page 16

COVER STORY
up by security of any kind, allowing the banks
to charge high interest. This high interest may
not seem so high right now when we have
enjoyed the lowest interest rates in decades for
a prolonged period of time. But many experts
are deeply concerned about the level of debt
defaults that could occur if interest rates begin
to rise, given that half of credit consumers are
already unable to service their debts.

The buck stops where?
Don’t believe for one moment that government
debt is not your problem. Don’t think that
mass debt defaults – that could be triggered
by interest rate increases – will affect only the
financial institutions, without affecting each
one of us. And don’t believe that a 75.8% debtto-income ratio is a concern reserved for the
experts.
As the people of Cyprus recently discovered,
the buck stops with the citizens of the country –
and that is you and I. How exactly does all this
debt become my problem and yours?
Firstly, government debt attracts interest
costs, which is paid with our tax money – money
that could be used to provide roads, health care,
safety and security. A government’s debt-toGDP ratio is used by investors to measure a
country’s ability to make future payments on
its debt, thus affecting the country’s borrowing
costs and government bond yields. The higher
the debt, the higher the interest cost associated
with that debt. In South Africa’s case, the
interest cost of state debt is projected to rise
to almost R100 billion in 2013/2014. Over
the past three years the cost of state debt has

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June 2013 SA Real Estate Investor

risen by an average annual rate of almost 16%,
making it one of the fastest rising expenditure
items in the Budget. If government’s borrowing,
which is clearly on the rise, is left unchecked,
government debt will quickly become a major
hindrance to achieving many vital policy
objectives. In fact, the cost of debt already
exceeds the total budget allocation to our police
services. The buck stops with us – the victims of
a crime rate that is among one of the highest in
the world.
Understand, however, that “government”
is an institution run by a transient group of
people, who have been authorised by a majority
vote among the country’s citizens to manage
the affairs of the country on their behalf, for a
few years. In addition to giving “government”
the power to act on our collective behalf, we
also fund the “government” through taxes
to fulfil its mandate. So when “government”
borrows money, it does so on our behalf, and
the debt will belong to all of us, long after
this “government” has served its term. For
this reason, a government’s total debt is often
expressed as an amount per capita – currently
R29 335 for each South African citizen. The
buck stops with us.
Thirdly, it is the taxes we pay that allow
governments to “borrow” money that does not
exist, but is “created” through the fractional

reserve system. A government’s “promise to
pay” is underpinned by projected tax revenues
that can be collected from future generations
of workers in the country. Based on this, a
government can “promise to pay” vast amounts
of money in the future (when they will no longer
be in power!) and the central banks use this
“promise t ?^x?'H??[\H?[?[?H[?^B??$??[??\?[?\??\?H8?$??X]H?\?[[?[???8?'[?^x?'H?XH[X???X?[??Y\??X?]\?H\¸?'?X]Y8?'H[?^H\???[??[??X??[YK]]\??\?]?H?[YH?HZ?[???[YH???HH[?^B?[?XYH[??\??[][?[?]\??]?H?[??p??[K8?'[??][??'K?[????X\??H??[???[??][??H?X??????]\??[?H???\??[??KH[?H\?H[?[[X][H?\???X?H??HX?[???B???[??x?&\??[?[??X[[??]][??Y?X\??X??Y?][?[[??H??[??x?&\??]^?[????[????H?[?[??X[[??]][???Y?^H??[?[\?[?\?????Y??X??\??[?[???X?X?\?]?[?H\?H??\??Y[?\?B??X\?[???H??[??x?&\??[?????Z[[B??]??]\?\??\??YX??KH8?'??\??Y[?8?'H\?H?[??Y[???\?[?H?[??[??[?[??]][????Z[??H[?H?H??[??K[?Y??H8?'??\??Y[?8?'H?[????Z[?]H?[?????X?]\?H]\???Y\[?X?]?[?H[?H\?B?[[X][H[?\???X?H8?$???Y?H?]?B???[?Y\?N?8?'?Z[[??'K?]\?H\?\???B?[?H??\?\??\?X\???????˜?Z[XY????B??