The rand at R100 to the USD

Take a look at the graph below and decide whether the ZAR is a safe bet.

The graph maps the purchasing power of the rand since 1911 – 114 years ago. This is what inflation has done to the ZAR.

The Codera graph shown above suggests an average annual inflation rate of around 5-6% since 1911, though South Africa’s history—pockmarked with the post-WWII booms, apartheid-era sanctions, and post-1994 volatility—has seen inflation swing wildly, going as high as 15-20% in the 1980s.

What this graph shows is the declining purchasing power of the rand. In other words, what cost R1 in 1911 now costs R370. That shows the destructive force of inflation, a force more powerful than nuclear bombs. Inflation is a stealth tax because prices creep up at barely perceptible increments so we tend not to notice them.

Many people assume inflation comes about because companies increase prices. That is incorrect. Inflation comes about because governments and banks increase money supply. The rising prices you see in the supermarket are a consequence of increased money supply. To the extent that governments cannot fund their budgets through taxes, they have to borrow. They do this by issuing debt which adds to money supply. SA’s debt is now about 75% of GDP, and interest on this debt swallows nearly 20c in every rand you pay in taxes.

When planning your personal finances, it’s important to step back and look at the long view. Take another look at the graph above and ask yourself whether the next 10 or 20 years will be any different. Then decide how to protect yourself against this scourge of inflation (bitcoin anyone?).

Note that purchasing power is not a measure of currency depreciation, though there is a correlation.

"Depreciation" typically refers to a currency’s value falling against others. In 1961, South Africa moved from the pound to the rand. At that time, R1 was worth $1.40.

This peg held steady in 1961 because South Africa maintained a fixed exchange rate regime tied to the pound sterling, and the rand didn’t float independently until much later. The ZAR began to diverge after 1971 when Bretton Woods started unravelling. Bretton Woods was the post-World War II agreement where the USD was pegged to gold, and other currencies were pegged to the USD. The dollar went off the gold peg in 1971 and we entered the era of free-floating currencies.

Don’t assume the future will be any different to the past. Inflation will continue to eat into your savings and wealth, and your first objective should be to protect yourself against this.

Holding US dollar backed stablecoins like Tether offers some protection against ZAR weakness (and declining purchasing power). Bitcoin even moreso.

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