Russia’s economy has been a sore spot for more than two years now. Since the ruble crisis of late 2014 the role of the Bank of Russia has been to apply IMF-style counter-cyclical tightening to stabilize the situation in the wake of the decision to allow the ruble to float freely on the open market.
That was the right decision then. It was the move the US did not expect President Vladimir Putin to make. It was expected Putin would hold to his natural conservatism and keep the ruble trading in the 30’s versus the US dollar as opposed to risking a collapse in exchange rate in the face of an historic drop in oil prices over the eighteen months between July 2014 and the low made in late January 2016.
Oil dropped from $120+ per barrels to around $28 during that period. And if Putin hadn’t proactively allowed the ruble to fall from RUB32 to a high of RUB85 in early 2016 Russia would have been bankrupted completely.
During that time Bank of Russia President Elvira Nabullina raised the benchmark lending rate to 17.00% and Russia began the slow, painful process of de-dollarizing its economy.
It’s been five years since those dramatic times. But a lot of damage was done, not just to the Russian people and their savings but also to the mindset of those in charge at the Bank of Russia.
Nabullina has always been a controversial figure because she is western trained and because the banking system in Russia is still staffed by those who operate along IMF prescriptions on how to deal with crises.
But those IMF rules are there to protect the IMF making the loans to the troubled nation, not to assist the troubled nation actually recover. To explain this, I have to get a bit technical, so bear with me.
The fundamental problem is a miseducation about what interest rates are, and how they interact with inflation and capital flow. Because of this, the medicine for saving an economy in trouble is, more often than not, worse than the disease itself.
If Argentina’s fourth default in twenty years doesn’t prove that to you, nothing will.
Nabullina still believes that her job is to get inflation down to 4%. Inflation targeting, as central bank policy, is a disease that needs to be placed next to smallpox at the CDC in Atlanta.
It seems I have to write this article once every few months just to remind people what the problem is.
When inflation is above the target an austerity mindset dominates at the central bank who keeps interest rates above the market rate in the vain hope they can wring the last bits of inflation out of the economy, because sufficient confidence hasn’t returned to the banking system after the crisis.
This is Russia’s problem today. Nabullina still believes there’s work to be done before allowing the economy to grow.
When inflation is below the target, like in the ECB and the US, then to the miseducated central banker growth is sluggish and demands stimulus in the form of cheap money to create a virtuous credit cycle. It hasn’t worked and it won’t work.
Because both of these theories about the effects of inflation targeting are dead wrong.
They haven’t worked in the US and Europe because there is no more capacity within their economies to take on more debt to stimulate demand and increase spending. All they are doing is, as described by Mises and others, “pushing on a string” offering money no one wants at interest rates the market cannot sustain.
That cheap money inflates asset prices like stocks and bonds while diverting capital to long time-horizon projects like fracking in Texas, and housing and car loans, but it thieves working capital from the future by mispricing the risk of those projects in the form of the interest rate.
The net effect is enriching the already obscenely rich and powerful, through wealth transfer which feeds leftist and Marxist criticisms of the ‘free market’ while they proclaim the end of capitalism.
But central bank inflation targeting and control is the height of a centrally-planned economy. Control the value and cost of money and you control the means of production. So, capitalism this ain’t folks.
Miseducation on matters economic are commonplace today from the commanding heights to the lowest barrios.
Eventually, you reach the point we’ve arrived at in the west where no amount of forcing the market, through punitive negative rates, can stimulate growth. This is simply arrogant men praying at the altar of math torturing equations which have no resemblance to reality and turning it into policy.
On the other hand, we have Nabullina trained in this world of econometrics and its econo-babble, holding back the Russian economy with interest rates set above the market. She is either overly-cautious, if I’m being generous, or a full on fifth-columnist stifling growth to support Russia’s enemies, if I’m being cynical. …