G'day Penners, Frank writes some compelling stuff about Russia that remind me of an interesting idea I picked up somewhere over the weekend (at which time my post got lost somewhere in cyberspace). In short, the idea is to project Rusia's crisis on to the world economy as a whole. Frank wrote: >Odd as it may seem, the genesis of Russia's problems is to be >found, not in profligate monetary policy, but rather in overly draconian >monetarism. The relation of money supply (M2) to GDP in Russia has been >the >lowest in the world. In October of 1995 it was 8.5% of GDP and in >October >1996 it was some 10-12% of GDP. (Finanscvoye Izvestiya No 102, Oct. 31, >1996 p. 4.) versus some 50% or higher in the West. It is money >shortages >rather than efforts to evade the fisc that are the reason why >better than >50% of all transactions in Russia are conducted via barter. Firms don't >pay >taxes because they pay and get paid in kind and simply don't have the >cash. >To liken Russia's current financial problems to those of Asia and >South America is to err. For the past seven years Russia has been living >off the large capital stock inherited from the Soviet era. In all sectors, >>human included, depreciation has outstripped investment. Production, >employment and consumption have failed by enormous proportions; hunger, >>homelessness disease and despair are widespread. >Russia's problems are rooted in under-production, under-investment >and under-consumption. The progressively tighter money and fiscal of the >past few years, policies have been continually aggravating the situation. >Could the US have cured its depression of '29 via tight money (interest >rates running 50% or better) and ever more tightly balanced budgets? Russia >has long needed a Roosevelt type new deal to get factories and workers back >to work, and it needs U.S. World War II type budget deficits to wage an all >out war against the human misery which now pervades that nation. >The frightening prospect, however, is that to it will be some time >before this reversal of policies can have an effect on living >conditions. In the meantime the doomsday clock clicks louder and faster. Picture the scene: It's 1989 and a couple of billion commies are gulped up by capitalism. 'Bewdy,' thinks capitalism, 'billions of consumers. Here's my chance to grow.' But no! Poor capitalism does not have billions of monied new consumers, ready and willing to taste of erstwhile forbidden fruit. It has billions of money-poor, labour-rich producers on its hands. The last decade is actually summed up as a sudden and whopping lump of excess capacity. And capitalism's response to excess capacity is traditionally to destroy capital to the point where supply is back in kilter with effective demand. This is where you find out which capitals are weakest. They go first. The erstwhile commie bloc doesn't go first, 'coz it can ride on inherited stock for a while (as above). Asia goes first (structural debt-to-equity problems?) instead. Currencies plummet, and the contemporarily strongest economies reap a whirlwind of benefits. 'Commodities', capital equipmet and consumer goods are cheap. Costs of production go down and effective demand climbs. Stock markets soar, fuelled by fleeing money. But the initial global problem was one of excess capacity! And, even though erstwhile and current commies are now beginning to wear the full extent of this crisis, the strong economies are loathe to make available cheap money to kick-start effective demand. This is because to drop interest rates (an option not available to Japan anyway) is to risk inflation and destabilised currencies of their own. So the money upon which world-system-resuscitating demand would require exists, but is locked up. Excess capacity is met with enforced under-consumption! Greenspan may be a case in point. He's been trying to regulate Wall Street's climb by hinting at hikes for years - whilst never actually raising the rates. Now he's hinting at dropping rates. But if he were a horse, you wouldn't back him actually to do that, would you? Not on form. And I doubt Clinton would enjoy climbing inflation and falling greenbacks just now. If he's not stuffed already, he will be if Americans suddenly get a whiff of the foul odour seeping from the south and the west. So Wall St rockets precisely 'coz it shouldn't! And what about Moody's downgrading Latin American credit status, eh? Credit becomes dearer still! Real 'I'm alright, Jack' political economy! And, or so it seems to me, just the sort of monetary denial, and from just the sort of people, who brought us 1930 (and, arguably, 1939). Does this make sense? Cheers, Rob.
