Russia’s Macro Picture

by Serban V.C. Enache

I used data available from the Russian Federation’s official statistics via the tradingeconomics website to figure out the country’s sectoral balances in the past nine years. First, let’s clarify what the three sectors are.

Government sector = [Government net fiscal position]

(G-T) = Government spending minus Government taxation

Foreign sector = [Russia’s net exports with inverse sign]

-(X-M) = Exports minus Imports

Domestic private sector = [net position of firms + households]

(I-S) = Investment minus Saving

(I-S)+(G-T)+(X-M)=0

(G-T)= -(I-S) -(X-M)

We can see that the private sector has steadily built equity at a handsome pace. The primary fuel for private sector net savings has been the foreign sector’s back to back high deficits against Russia alongside the Russian Government’s net fiscal deficits. Unfortunately, I don’t have the disaggregated data for the private sector, which would show how those net savings are distributed among financial and non-financial firms and households. If I were in Putin’s shoes, however, I wouldn’t celebrate the Government’s surplus from last year. In fact, I’d strive to put it into deficit again via extra investments in physical and social infrastructure and R&D. I’ll explain why in a bit, but let’s have a look at some of the other indicators…

Private debt is going up, which is unsurprising. Calculated in US dollars, loans to the private sector are at about 445 billion. Unfortunately, we don’t know how many of those loans are for productive purposes [for firms to increase output] and how many are for speculative purposes [designed to inflate asset prices].

Inflation has gone down considerably in recent years. The little bump toward the end of 2018 is nothing to be concerned about. It’s a consequence of labor force participation going up, as we shall see in the next graph.

The labor force participation rate has spiked from below 62 percent to nearly 68 percent. Obviously, there’s still room for employment levels to go up. And the Government should strive to offer jobs for anyone willing and able to work, in order to combat all the socio-economic and psychological ills associated with involuntary unemployment, particularly long-term involuntary unemployment.

Standard economic thinking is to claim that anything below 5 percent unemployment is akin to full employment. Those individuals who happen to be part of that 5 percent unemployed figure don’t count in the eyes of mainstream economists and policy makers. Russian fiscal policy shouldn’t fear unemployment going below the [arbitrary] mainstream threshold.

As we can see from this graph, the economy is still operating with excess idle capacity. That means there’s still room to increase demand in order to employ capacity that is currently unused.

In response to the commercial and financial sanctions imposed by the West, the Russian Central Bank tried to juggle with the key interest rate. Completely unnecessary. This rate represents the cost of liquidity. Banks who are below their reserve minimum have to borrow reserves [numbers in checking accounts at the Central Bank] from banks who have a surplus, or from the Central Bank itself. Personally, I favor permanent zero interest rate policy [ZIRP] and no reserve minimum requirement for banks. Permanent zero interest rate because it minimizes cost pressures on output and investment, thus helping to stabilize prices. And by eliminating Government interest payments to the non-government sector, labor force participation and output are increased. ZIRP indeed hurts savers more than it aids borrowers, so a reduction in fiscal drag would be appropriate to counteract this particular consequence of ZIRP. No reserve minimum requirement because banks do not lend out reserves to their customers when they make loans and they are not constrained by reserves in their ability to issue loans – they are constrained by their capital [the spread between assets and liabilities] and by the actual demand for loans.

Banks use reserves for accounting and settlement purposes, and they use reserves to purchase cash to feed ATMs, in order to satisfy the public’s desire to hold physical liquidity. For a list of asset side regulations for the banking sector, regulations required to combat wealth extraction and systemic risk, see this article.

This graph represents the interbank rate, the price at which banks borrow reserves from each other. The CB rate and the interbank rate are often very similar in terms of figures. Standard practice among most Central Banks across the world is to minimize direct transactions between banks and the Central Bank, that’s why the latter is called ‘lender of last resort’. In truth, however, the interbank market serves absolutely no public purpose and ought to be abolished. Banks in need of reserves should borrow directly from the Central Bank.

Russian Government debt as percentage of GDP is extremely low compared to the norm among most developed countries. Japan, for instance, has a ratio of almost 260 percent and that country’s doing just fine [full employment & no inflation]. Unlike the Euro Zone states, a Government that spends and taxes in its own free floating fiat currency has maximum space to pursue whatever fiscal and monetary policy it desires. With debts denominated in its own currency, the Government can operate with negative financial capital indefinitely without any risk of bankruptcy.

The Russian Central Bank can boast about foreign currency reserves of around half a trillion US dollars in value. Yet, not all of that half a trillion represents foreign fiat. Russia’s gold stocks have hit a 5-year high, accounting for about 19% of its foreign reserves. At the same time, its share of US dollars was cut from 43.7 percent to around 20 percent. Remember that US dollar reserves sit on the Federal Reserve’s ledger, and Euro reserves sit on the ECB’s ledger. If Washington and the EU decide to freeze these accounts, Russia can’t use the funds. Any and all sovereign nations should pursue alternative payment systems to the established hegemonic order [like currency swaps with partner states].

Conclusion

Russia’s macros look very promising. Whenever I watch Putin’s Q&A interviews on national affairs, however, a bunch of stupid proposals ensue about some tax cuts here, some more subsidies there – all of which contribute to bureaucratic overhead and the proceeds end up captured by landlords and money lenders. If Russia would drop its regressive tax code and switch to a [Georgist] quasi-Single Tax system [100 percent land-value tax + pigovian tax], the real economy would experience the highest rate of development on earth, even under sanctions.

Apples of Discord, RT Documentary

Russia’s 2014 embargo on European food imports cut European farmers out of their second biggest export market. At first, they hoped the measure, taken in response to Western financial sanctions following Crimea’s adherence to Russia, would be temporary. Five years down the road, the consequences for farmers throughout Europe are dreadful. RTD travels around the continent to meet Spanish, Italian, French, Polish, German and Dutch farmers and Farmers’ Union Reps. They explain how the embargo dramatically hit their turnover and bargaining power. They worry about whether they still have a future in agriculture and question the European Union’s response to the crisis.

This particular situation is the best argument, I think, for bringing back the tradition of buffer stock policies. This prudent custom had been scrapped in favor of neoliberal market reforms; but we all know that foreign interests don’t necessarily coincide with the national interest. The role of a buffer stock policy is to ensure an acceptable base level price for both consumers and producers, irrespective of the business cycle. During times of exceptional harvests, when supply exceeds demand and prices favor consumers to the detriment of producers, the Government steps in with a bid to purchase this excess. It’s not mandatory for them to sell the unsold produce they have left, so the Government’s action in this sense cannot be labeled as coercive. The opposite occurs during periods of poor harvests. The Government steps in to sell from its stockpiles to cover the gap in supply and, in so doing, normalize prices. It’s not a silver bullet policy by any stretch of the imagination, but it’s better to have a safety net for consumers and producers.

Another good policy for agriculture, set in a fully phased in Land-Value Tax [LVT] system [also known as the single tax system], land taken out of production for soil or water regeneration purposes would no longer be considered productive land and would be exempt from the LVT, thus helping disadvantaged farmers and protecting nature at the same time. Under the present system, however, it’s the norm for farmers to put all their available land under cultivation just to pay the bills. For more info on the subject of agriculture under the LVT system, see this short video.

Prudence should come before ideology; and make no mistake, many of these trans-national accords are based on ideology. The EU political class must come to grips with the fact that European geopolitics cannot ignore the fate of neighbouring countries, unlike the US geopolitical mentality, based on the island nation context. And making bad decisions on Washington’s behalf hurts not only Russia, but the EU states as well.

Russo-Turkish Relations

Moving Away From US Hegemony

by Serban V.C. Enache

Yesterday, the heads of state of Russia and Turkey held a joint press conference, which is available here. One of their common points was to get bilateral trade working with just the ruble and the lira. Every sovereign nation ought to conduct trade in her own currency and that of her trade partner, and not conduct trade in a 3rd party currency [like the US dollar or the euro]. The issuer of the 3rd party currency receives an unearned increase in his currency’s value. When the international situation deters [like today, due to the USA’s war mongering], national currency swaps between partner countries is better than relying on a foreign currency with which to do settlement payments – especially if the reserve currency in question belongs to a belligerent actor, who – as we have seen in the case of Venezuela – has the power of freezing those accounts.

Both Russia and Turkey are advancing well in their bilateral trade and tourism, some of the most important deals are the TurkStream gas project, Rusatom aiding Turkey with her nuclear power plants, and the S-400 sealed deal.

Vladimir Putin, asked about the trade situation with Turkey being in Russia’s favor, said that a neutral trade balance is what he wishes. You’ll never hear such a statement from a German head of state or Eurocrat Neoliberal. You will never hear the EU or the Eurozone’s top brass criticize the huge and sustained German financial surpluses against the Periphery countries. They will insist for member state governments to have balanced fiscal statements, but never balanced current accounts. Putin emphasized that the main factor of attractiveness of Russian gas exports is reliability of delivery.

The situation in Syria was raised as well, including the Kurdish question. As the situation stands, the best option – which preserves human life and avoids further conflict – for the Kurds is to accept Syrian unity and relinquish any territorial claims. If we’re to invoke things like patriotism and nationalism, these ideals are incompatible with strife and death. No true patriot or nationalist can accept the blood of civilians, his own or that of the enemy, and pretend he or she is on the side of justice. The only way for sustainable peace, order, and development is through the implementation and observance of Westphalian principles: forgiving and forgetting past transgressions in perpetuity. The realist and moral position for the Kurdish region is to remain part of Syria, with full equality under the law.

The Kemalists are a concern, however, since their aim is to have stronger relations with NATO and get full EU membership. Erdogan saw how Washington treats its allies when they become independent, they tried a coup against him. Washington maintained radio silence during the coup operation, and only came out in public to condemn the coup attempt after it had failed. If you want further proof, Erdogan demanded Gulen from the Americans, so he could be tried in Turkey for his involvement in the coup. Gulen is NOT an American citizen, yet the Americans declined. It’s very clear that Washington tried to oust Erdogan, and Erdogan, since then, has taken measures to diversify geopolitical and economic relations. Erdogan should aim to strike a balance between the laic and religious sections of the population within Turkey, otherwise he risks a civil war of his own. I wrote about Turkey’s financial plight in August last year, and so far, despite the underwhelming results for Erdogan’s party [the AKP] at the recent local elections, he is pursuing a truly sovereign foreign policy and I give credit where credit is due. Turkey is no longer in the Yankee deck.

The only chance for peace in that part of the world is for Eurasia to rise, not just as an ideal, but as a Westphalian reality [a sisterhood of sovereign nation states]. I call it Southwest Asia, not the Middle East, because the latter, since the Sykes-Picot treaty of 1916, has been used as a British imperial term to describe a hot, resource dense, looting ground, and recurrent geopolitical hand grenade in Great Power conflicts [divide & rule].

The Cure For Hyperinflation: Weimar and Venezuela

by Serban V.C. Enache

We frequently hear people bemoan the dreaded phenomenon of hyperinflation. We often hear only one explanation for it – the government printed money like crazy. We rarely hear the reasons behind the overuse of the currency press, which are: loss of output capacity [human and material] as a result of natural disasters or loss of a war, unfair war reparations, political instability, brazen corruption, the end of a fixed exchange rate with a strong currency. In this article I’ll focus on the cure for the phenomenon of hyperinflation – and this cure won’t entail brutal fiscal austerity that halts inflation by condemning much land and capital [buildings and machinery] to idleness and a great many souls to involuntary unemployment, poverty, and sickness.

The Weimar Republic. Background.

After WW1, life in Germany became hell. The political and economic burdens the creditors of the Versailles Treaty [Woodrow Wilson especially] imposed on the Germans created the conditions for the hyperinflation which soon followed. These impositions were highly unjust and impossible to meet. Meanwhile, the Ruhr Valley, Germany’s industrial heartland was occupied by the Allies. Workers responded to the occupation by organizing strikes. Crashing economic activity led to falling tax revenues and higher welfare payments. The Government, deprived of gold reserves and output capacity, had no choice but to print money to cover its costs plus the war reparations. Hyperinflation ensued. Farmers and manufacturers more and more refused to sell their output for the increasingly devalued Papiermark. This is the context of the phenomenon. Those interested in the facts will verify them, those interested solely in confirming their preconceived notions will dismiss them.

The Plan To Fix The Problem

Finance Minister Hans Luther, working together with Hjalmar Schacht [later head of the Central Bank], using Karl Helfferich’s idea of a currency backed by real goods, formulated a scheme to contain the rampant inflation of the Papiermark. In 1923, Berlin, the Rentenbank was created. The institution provided credit to agriculture, industry, and commerce.

The term “Rentenbank” stems from “annuity bonds”, fixed-income securities [bearer bonds] issued by the first pension banks during the 19th century. Since the Middle Ages the peasants were forced to provide easements to their landlords – various hand services and the like. In the early 19th century, though, agrarian reforms started in Prussia and other German states aimed to disband these obligations. The effort initially failed owing to a lack of a proper credit system.

To accelerate the agrarian reforms, pension banks were established as state-owned mortgage banks. They gave state-guaranteed, freely tradable and fixed-rate bonds (annuities) as money compensation for the expired privilege of the landlords. On the other hand, the peasants paid fixed income to the pension funds over a long period of time, from which the banks were able to service the principal and interest on the bonds. These reforms and the liberation of the peasants gained traction and agricultural productivity rose dramatically.

Enter the Rentenmark

Returning to the 1920s, November 1923 to be precise, the Rentenbank issued its own currency, the Rentenmark, which was covered by mortgages on the grounds of holdings. Total amount of mortgages and land imposts was valued at over 3.2 billion gold-marks. The Act creating the Rentenmark ensured twice yearly payments on property, due in April and October. In return for the real estate, Rentenbank issued interest-bearing bonds with a value of over 500 gold marks or a multiple thereof. The exchange rate between the Rentenmark and the Papiermark was set at 1:1 trillion, and with the US Dollar at 4.2:1.

The Rentenmark didn’t have legal tender status, so there was no legal obligation for private agents to accept it as a means of payment, however, all public institutions had to accept it. Even without legal tender status, the citizens embraced it right away. The Rentenmark’s value was relatively stable, while its quantity remained fixed, Shacht insisted on it. On August 30th, 1924, the newly-introduced Reichsmark became legal tender and was given equal value to the Rentenmark. It’s very important to note that this exchange rate was applied to two fiat currencies over which the Government had power of authority. It retained the right to alter the exchange rate if it wanted or needed to. The issued Rentenmark nominal remained in circulation up until 1948.

Tight Money Policy

In charge of the Central Bank, Hjalmar Schacht implemented a tight monetary policy, the institution ceased discounting Papiermark bills and, despite political pressures, he kept the volume of Rentenmarks strictly limited. As for fiscal policy, Finance Minister Hans Luther went on the austerity route, the correct choice given the circumstances. He brought forward due dates for taxes, increased prepayments of assessed taxes, raised the sales tax, and readjusted the fiscal burden between the regional governments [Lands] and the Reich [the Central Government]. Spending-wise, Luther shrank the number of Reich bureaucrats by a quarter over four months, froze bonuses and reduced their wages. These measures accompanying the issuance of the ‘land-backed’ Rentenmark succeeded; hyperinflation was brought to an end immediately. People spoke of the ‘miracle of the pension mark.’

Between 1926 and 1929 inflation hovered below 2 percent. In the early 30s, however, in reply to the Great Depression, the Government of Heinrich Bruning imposed harsh austerity measures needlessly [tightening credit, cutting wages, cutting public assistance, and increasing taxes], which exploded unemployment and poverty levels in the country and, in the process, made the once marginal Nazis incredibly popular with the people. The National Socialists opposed Bruning’s Government from the beginning, unlike the other right wing parties. Bruning and his policies became widely hated.

See the graph below.

The reader will rightly ask, why did fiscal austerity work for Schacht and Luther, but not for Bruning’s Government? Schacht and Luther applied counter-cyclical fiscal and monetary policy, while Bruning applied pro-cyclical policy. Excess demand relative to supply is eliminated via taxation [draining income from the private sector]. But during the Great Depression, there was too little demand relative to what was actually on the shelves. Bruning’s reforms collapsed aggregate demand levels even further.

Thoughts On Venezuela

The geopolitical aspect is very important, for it can greatly amplify minor or general problems very fast [See Turkey], or it can spark them. The State Central Bank’s dollars in non-cash form reside in accounts at the Federal Reserve, which are beyond Maduro’s control. The Government can’t access these funds. Recently, the US and the UK stole Venezuelan oil and bank assets worth about 30 billion dollars. More so, the US has imposed an outright embargo against Venezuela [trade sanctions levied since 2013 got harsher and harsher, depriving the country of hundreds of billions of dollars in economic activity]. Lastly, belligerent statements coming from Europe and Latin America [Brazil and Colombia especially] and Washington threatening with ‘all options on the table,’ which includes assassination, sabotage, coup, and invasion.

Footage from supermarkets in the capital, stores filled with produce, reveal that a shortage of goods isn’t the problem, but high prices. If it’s true that Maduro’s Government kept public spending high without re-adjusting it to falling prices of crude, then his policy is a key contributor to the bolivar’s dramatically reduced purchasing power. Currency pegs and indexation of wages and pensions with anticipated inflation feed the vicious loop. The Venezuelan Government announced that it’s accepting payments in Euros. In my opinion, this is a big mistake, because the ECB can pull the same stunt on Venezuela that the FED pulled. Maduro is much better off negotiating an entry into the Petro-Yuan with Beijing. Why? You can purchase virtually anything from China. China has made numerous investments across the developing world without asking for political concessions in exchange, in stark contrast to the likes of the IMF. Beijing doesn’t seek regime change or privatizations in exchange for its money. It does business with whoever is interested and it offers advantageous rates too. Trade-wise the Chinese are interested in two things: securing raw material imports and securing demand for their factories. It’s a win-win for both sides.

In my opinion, Venezuela will become Syria 2.0, because there’s no sign that Washington is going to accept any other outcome. The satanic crowd around Trump, the Deep State, and their servants in the corporate media are all pushing the same old hypocritical, war-mongering narrative. They spew it as if it’s a new dish too, not the same rotten thing, teeming with slime and worms. And before we blame it all on the Republicans, remember that 85 percent of journalists in the US are registered Democrats. Since this issue is bipartisan, we know it’s outright devilry. Bolton, Pence, Trump, and the rest – they want to cover up their failure to dismember Syria and Iran by picking on Venezuela, a more vulnerable target closer to home.

If I were in Maduro’s shoes, I’d escalate things ahead of my rivals. I would invite in Russian and Chinese troops and war-gear. Washington doesn’t like to cooperate or negotiate with sovereign regimes. For many decades now, the logic has been, you do as we say, otherwise we treat you as a rogue state. Against a rival who doesn’t wish to bargain and who has threatened [euphemistically or not] violence and murder, you’ve no choice but to take all measures required. Maduro has to choose the 2nd most extreme of defence options [2nd only to the preemptive strike, which doesn’t apply here] because in this context, it’s the wisest step.

If mainstream commentators are fine with US gangsterism, with countries purchasing protection from Washington and the Military Industrial Complex, then they should be fine with Venezuela purchasing protection from Russia and China. They can’t oppose it without being hypocrites and without being Monroe Doctrine apologists, defenders of imperialism, oppression, and mass-murder; not that that’s gonna stop them. Let’s not be naive, US hegemony is shaking. The 2nd Cold War is on.

Update on Venezuela: a report by CEPR finds that US sanctions against Venezuela, started by Trump in 2017, are responsible for tens of thousands of deaths.

So What’s The Cure, Dammit?

The recipe for a return to price stability is contingent on the factors which spawned the instability. This list of measures will hopefully cover all eventualities: 1) Counter-cyclical fiscal policy [drain excess money in circulation via taxation, while cutting superfluous spending.] 2) Land-value capture to replace taxation of buildings, labor, sales, and enterprise [taxing natural monopolies, the rent of location; the site-value tax carries negative dead weight – it brings efficiency to the marketplace]. 3) Buffer stock policies [the public authority buys seminal commodities during periods of excess production and sells these commodities domestically during times of dearth]. 4) Allow the national currency to float freely according to demand [drop any fixed exchange rate, whether it’s to gold or foreign currencies, and embrace a sovereign fiat regime]. 5) Negotiate with rival political factions to settle differences and produce a national accord that appeases all sides to a reasonable extent. 6) Ration basic resources to ensure no section of the population starves [hands and minds are precious and must be kept alive and functional to create goods and services for another day; there’s no sense in killing off one section of the population to feed another extra rations]. 7) Bring in a second or third great power in your region, in order to decrease the bargaining power of the established one/s and strengthen your own position in the process. 8) Link up the country’s regions through a comprehensive system of infrastructure, high speed rail especially [the points of resource extraction with the manufacturing centers, the latter with the marketplaces]. 9) Restrict bank lending for speculative purposes [do not permit banks to accept financial assets as collateral for loans, or to mark their assets to market prices.] 10) Discourage private and public agents from borrowing in foreign currency [always ensure loans in domestic currency are cheaper than in foreign currency; never subsidize the latter type of loans]. 11) Employ all available labor to achieve maximum output [Depending on the situation, participation in public works programs would be mandatory or voluntary. In case of emergency, working hours could be increased and holidays decreased.] 12) Don’t lose a war [or better said, don’t lose peace negotiations concerning your fate]. 13) War Bonds [While the role of War Bonds is to allegedly fund a war, in practice what they do is drain liquidity from those who purchase them. They can be denominated in foreign currency, domestic currency, or both. That being said, liquid or illiquid purchasing power is still purchasing power. People can still purchase things on credit, contingent on their own financial situation. War Bonds may have a psychological effect on the populace, reminding households that they must tighten their belts, deferring consumption to the future, so more supplies can be allocated to the troops in the now. The promise is that, after the war is won, bond holders get paid at a profit. 14) Retiring the currency and replacing it with another [Brazil did it several times in the last 77 years; the Government announces taxes and fines payable in a different currency. This method involves burning away people’s cash savings. To escape hyperinflation, Zimbabwe gave several foreign currencies legal tender status.]