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Alchemy Comes Back Into Fashion

10 November, 00:00
Ukraine becomes more and more convinced that one's own mistakes are the best ones, which one has to periodically repeat in order not to forget them. Only fools learn from other people's mistakes. Not so with us: we will learn from our own. We can go even further and prove that economic laws in Ukraine are different from those in the outside world.

Other characteristics hardly apply to the country, which lived through incredible peacetime inflation. In 1993-1995 prices on consumer goods grew 2,200 times. But as you see, this was not enough. From all corners at all levels we are again hearing louder and louder voices saying that the economy is suffocating from a shortage of money, that the correlation between money and the GDP is not good enough for the economy to develop normally.

As it turns out, everything is quite simple. For complete happiness we only need to print more money. The only thing I do not understand is why we failed to make ourselves happy in this way long ago. It is all so simple: print money, give it to people, and everybody will be just fine. We could not purge ourselves of this way of making people happy since 1993, when as a result of consumer prices increasing over 100 times, real wages and salaries three times over as did the sectors of the economy connected with meeting consumer demand.

At one time alchemists tried to turn all sorts of things into gold. Our homegrown alchemists are also using all sorts of arguments, forgetting only one thing, the main one, the truth of real economic life in Ukraine.

"Rescuing" the economy through a monetary emission will only make it worse. The more money we print, the less we will actually have. Thus in 1993, the actual value of the money in circulation fell five times, while the monetary mass in circulation (the M2 index) rose 19.3 times. And prices rose 102.6 times then (19.3:102.6x100=18.8%). As a result, the amount of money per GDP point does not rise, but on the contrary, it falls. In early 1993, the year of the highest inflation, there were Hr 50 in turnover per each Hr 100 of goods produced, and at year's end the index was Hr 32.50. And this figure continued to drop, because the money printing machines worked just as busily in succeeding years.

The amount of money per
Hr 100 of the GDP (as of January 1
of the corresponding year)
               Such work by the money printing machine helps production about as much as a Band-Aid helps a corpse. It inevitably degrades, and its plunge picks up speed. The inflation caused be a monetary emission will eat up the economy's wealth. Productive capacity falls along with enterprises' turnover funds. In 1993 turnover funds increased 38.4 times (from 6 to 228 trillion karbovanets), and this did absolutely no good, for the enterprises could buy only 37% (6:228x100) of what they could buy at the beginning of the year.

The second factor of manufacturing recession is people's declining incomes. Real wages and salaries feel three times over in 1993. And as people's purchasing power falls, production volume inevitably falls.

The appearance of plans to revive Ukrainian economy magically is the natural result of inaction, such that instead of reforms we have talk about them and instead of combating causes, they try to combat effects.

Certainly, the revival of economic growth requires an increase in effective demand in the economy. But to have more money in it, we do not need to start up the money printing press. This is like fighting a forest fire by starting another fire. Thus only price stability makes it possible for us to talk about securing the actual purchasing power of money.

Inflation and monetary mass
increase dynamics*
 

  *Real money mass is determined by dividing the money mass by the real price index.

Let no one be surprised by 1994, when the real money mass increased with a huge emission. Let us recall conditions back then. The inflation was artificially limited, breaking out in November and December, when prices grew 72.3% and 28.4% respectively. The two months' inflation simply did not have time to consume this money. It did so later, for the economy suffered from price controls and the emission treatment for another few months in 1995. Real and quite significant money mass growth took place only in 1997, the year of the lowest inflation in Ukraine. Prices rose only 10.1% that year.

The further supply of money to the economy can be done through investments. It is investment that revives the economy, creating chains of economic growth. Any revived or newly created production purchases the products of other producers (consequently, they also revive), the budget gets more revenues, which means the workers of entities finances from the budget will also receive them. And this means more goods are sold.

Investment requires two things: financial stability and a conducive investment climate. We have never had the latter. By now we have lost the first as well. Paying attention to the alchemists' advice will make achieving these two conditions even more difficult and painful.

Ukrainian experience shows that it is very easy to lose what we have achieved, and it is very hard to restore them. In three years (1993-1995) the amount of money for Hr 100 of the GDP fell fourfold (from Hr 50.00 to Hr 12.60). We managed to restore it only to the level of Hr 13.50.  The treating the Ukrainian economy by means of an emission might lead to a new steep fall in the real amount of money in the Ukrainian economy.
 

 

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