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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

Viktor Lysytsky: “Central State Banks Look at Money Like Highway Patrolmen Do at Cars”

13 November, 2012 - 00:00

The book recently published by NBU Governor Viktor Yushchenko and his top adviser Viktor Lysytsky, Money: Demand, and Supply Development in Ukraine, has provoked various reactions, with the National Bank coming under critical fire from Viktor Naidionov and Andriy Smenkovsky for an excessively tight monetary policy that led to the deep industrial decline. The Day interviewed Viktor Lysytsky, the book's co-author, who says: “this book is about our common bitter experience” and adds:

V.L.: Unfortunately, I am again forced to turn Prof. Naidionov’s attention to the fundamentals, the basics of economic theory. All our classics used to say that money is the result of production: the money mass in circulation increases as production volume grows and vice verse: the money supply reduces as production falls. Imagine that someone is manufacturing some kind of product. At some point he decides to accumulate 10% to buy a new TV-set and spend the other 90% on current consumption. This 10% that he decided to invest was accumulated in the form of money, etc.

What really happened in Ukraine? No one can deny that the production volume has been cut more than in half in seven years of independence. Whether we calculate in constant prices or production volume, the decline is obvious: metal, coal, electricity, footwear, television sets... Naturally, if there is less production, there should be less money in circulation, because there is a smaller volume of the products to be divided into two parts, those for sale and those for accumulation in monetary form. What are the reasons for this development of events? Much has been said about this, but I am absolutely certain, that the main reason lies in the speedy self-dissolution of the Soviet Union. Was there any other way? I don’t know. What if it does not work in either history or economics.

What should have the NBU done under these conditions? First it should have reduced money supply, but it increased it. NBU was unofficially controlled by Parliament then and the first decisions on monetary emission were adopted in May 1992. These decisions caused much indignation in the Russian Central Bank, because the ruble is its national currency. It started regulating monetary relations so as to fill Ukraine with empty money, and inflation began to accelerate in Ukraine.

Now I want to go back to a very different question. The money in bank system deposits and in people’s pockets in 1991 was worth less than its nominal value. When they say there was too much money then and not enough money now, this is utter nonsense. In terms of purchasing power there was very little money then. And the product deficit, which emptied the shop shelves in 1991-1992 is adequate proof of this. Moreover, if we had managed to somehow cut off this monetary overhang, we would not have had such rapid inflation and disorientation of economic agents, which took place under conditions of soaring prices.

The next stage is 1993. The idea of protecting the domestic producer was on everyone’s lips. It was a hard time, because those on top, had no idea of what was happening. We cannot judge them harshly – independence came, and there was no elite ready to govern the state. This, however, does not mean the monetary theory was false. It says that you cannot increase money offer when the production declines. Cannot, but the increase continued. Only after 1996 did the money supply increase slow significantly. I do not think that all those who demanded such an absurd monetary policy, pursued negative goals. There were some, but most honestly believed that economic revival was just around the corner. However, the enterprises did not start back to work. Because instead of asking for money, they should start by determining who is going to buy what from you.

The Day: According to NBU, the level of monetarization in the economy is 18%. Our opponents state, that now, after a few years of low inflation, enterprises will have different reaction to an increase in the availability of money. Can you comment on that? When will money availability be able to reach 60% and 90% of GDP?

V.L.: The answer to how much money should be in the economy actually depends on a number of other questions. Everybody knows that besides hryvnias there are also dollars in circulation. And how many dollars are there in Ukraine? For the legal economy the sum is clear, but no one knows how many dollars shuttle traders have brought in.

Even if these dollars come out of the shadows, this would not mean an increase in the economy’s monetarization level. 18% level means that our overall economic agent finds it necessary to accumulate 18% of GDP in the form of money. I am sure that the monetarization level is defined by the people’s living standards. In short, you don’t save money if you’re hungry. Monetarization level is the GDP component, which our citizens have decided to accumulate in the form of money, because it is easier for them to work that way. Thus, our National Bank — just like other central banks — looks at money the way highway patrolmen do at cars. They do not regulate the number of cars; they regulate the traffic.

In fact, we should approach both barter and debts from this position. If an enterprise produces products, ships them to the customer who doesn’t pay for them, and this has been lasting for seven years, sooner or later the enterprise will have to reduce the product’s price. All market traders do that. The official system prevents us from doing this legally. All his shows that our economy has few market economy elements. To get rid of nonpayments, debts, and barter we need free price formation, and the sale of old debts at any price. We have to choose whether to live with this dangerous blood clot or revive the normal turnover of money and products by getting rid of it.

The Day: The decision on the voluntary-compulsory exchange of domestic bonds means the government is finding it too difficult to fulfill its financial obligation. What consequences could this have for the banking system?

V.L.: I can add nothing to what the NBU head has said many times. The liquidity of the banks, which agreed with the government suggestion, will be supported by the NBU. There is also a question of people’s savings. This is a very complex problem and it has not been solved in a positive way. The individual bank deposits are protected by the concept of the monetary policy being carried out. In addition, the dynamics of some deposit indexes raises hopes. It turns out our people rarely panic. For instance, from the early August hryvnia deposits began to decline slightly, while hard currency deposits grew. But this is not the main thing. The emission of cash put in circulation by banking system in August was negative. In other words banks took in Hr 214 million more than they issued. According to the latest data on the banking system, I can say that bank liquidity will not be damaged and the slight fall in deposits cannot be considered a serious threat. I think we will see a whole different, more profitable situation within ten days.

 

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