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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

MORE DOES NOT MEAN BETTER: IT ALL DEPENDS ON THE PROPORTIONS Money deficit cannot be solved by printing money

13 November, 2012 - 00:00

As the crisis develops, it becomes more and more obvious, that the anti-crisis measures announced a few weeks ago will solve neither the economy’s long term nor even top priority tasks.

The quickly changing situation has left far behind the assumptions that were used to develop the program. Today we have a different economy and a different country. Of course, commissions for import contracts control may be able to support the national currency for a while, though it has been losing weight very quickly. Introduction of price controls could fill the shop shelves with socially acceptable price tags within a month. But their main consequences will be black market and corruption; the authorities understand this quite well. How will events develop? What should state officials do, what can they do and what can they not? Let us start from the fact that the main instruments and main methods of future economic policy are still an enigma. This is probably because the depth of the crisis has still not been determined. However, the authorities will have to announce in the immediate future what credit and fiscal policy Ukraine will carry out.

Financial crises in Asia and Russia are likely to keep the investors from investing in unstable economies for a long time. This means at least for a year Ukraine will be cut off from funds to finance its old debts. Apparently, the government predicts the same time period for the currency deficit and plans to begin state bonds payoff after 1999. This way the situation with domestic bonds is clear, unless unruly bondholders start to protest. The situation is more complicated with those who have got used to receiving budget support.

The point is that the closure of the state debt market makes it almost impossible to finance all budget expenditures at the same volume (consider that the president promised to index against the dollar the current salaries and social payments). From now on the only resource of budget income – people’s and legal entities’ taxes – only partially consists of money. The rest is mutual write-offs, barter, bills of exchange. I think that even inflation will not save the situation by bringing the inflation income to the budget. Moreover, distrust in the national currency may reduce fiscal tax collecting, because enterprises will try to conserve their resources. Such considerations lead to one unpleasant conclusion – very soon Ukraine will start thinking about the money-printing press.

Declarations that there is not enough money in circulation have been very popular with both manufacturers and politicians. Now after the hryvnia has fallen and hryvnia wages devalued 30%, they will become even louder. Only 18% of the GDP is covered by hryvnia resources, another 25% by dollars (also money but not available to all). Over 40% of accounts are done in natural form, another 15% are covered by bills of exchange and mutual write-offs. How can we increase the monetary mass, so that everybody has enough?

The easiest answer is on the surface – to increase the hryvnia emission. Numerous domestic economists suggest this solution. Ukrainian monetarists from the National Bank, however, are against it. The latter have fewer supporters in Ukraine than abroad, however. Despite the fact that the official economic course is called “monetarism.” This means their spiritual and financial support come from out there. Ognjan Hieschow, a leading expert of the German Federal Institute for Eastern Problems, states, “You cannot solve the problem of money deficit by simple launching of the money printing press or fiscal injections into various sectors of the economy. This is too easy to be true. It just will not work.” He says that when industry is in stagnation, when there is distrust to the national currency, considerable increase of the monetary mass will lead only to an increase in the mass of the high quality paper used for printing it.

A milder variation of increasing the money mass is to print only enough money to pay off debts. In some cases such a tactic is acceptable. Margo Turning, economist at Washington’s American Council for Capital Formation says, “This depends on the inflation level. If it is high – 20%-30% a year or more, printing will do people no good. There will be little to buy with this additional money. With such inflation it is essential to increase output and not the monetary mass.” It is understandable, that Western economists, who are used to the norms and rules of the market economy, can give only recommendations, which have been time-tested in their countries. It is no exaggeration to say that no government has yet managed to solve the problems Ukraine and Russia are facing.

How much money should the economy have? World-renowned monetarist Milton Freedman advises, “As much as necessary.” But how much does Ukraine need? The point is that there are cases in economic history when products substituted money. Ukrainian grain and sugar, along with Russian gas and oil are doing this quite well at this (barter accounts for 40% of operations). This means the question should be put differently. How do we increase the hryvnia share in accounts, reducing the shares of mutual write-offs, bills of exchange, dollars, and barter? If there only will be questions about the hryvnia amount and there will not be any questions about increasing the hryvnia accounts share, the launching of the money printing machine will turn out noting but another high-quality paper issue.

We all know the exchange rate of the hryvnia to the dollar. But it also converts to barter, bills of exchange, and mutual write-offs at the same rate. Note that the entrepreneur will tell you for sure for how many “live hryvnias” he will sell his gas for. The hryvnia ratio to barter is two live hryvnias to five barter ones. Energy bills of exchange cost just as much in their heyday. We would not give details on why barter is so popular, describe the schemes of tax evasion, and ways of fighting double bookkeeping. But it is clear that the reason for this lies not only in money being expensive and in deficit.

The unlimited demand for live money by state budget coffers determine the high cost of hryvnias. Actually the government money demand is for 100% of the GDP component covered by monetary resources. Only one-fifth of the money needed is now in circulation. The real competitive hryvnia price should be defined on the open credit market. On the one hand the government pretending to serve the people’s interests dictates interest rates incompatible with industrial profits, on the other, it discredits all other loan-takers, allowing them to avoid repayment legally.

In a word, the system that has taken shape, which cannot be called either fiscal nor productive, dictates its own proportions and rates correlation. If Ukrainian authorities understand and correct these mistakes, then they will satisfy the money hunger. If they fail, the printing press will be turned on, and we will face another inflationary spiral.

 

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