Sergei Glazyev: The policy of the Central Bank leads to a collapse of the economy
In the studio of the TV channel Tsargrad - Doctor of Economics, Academician of the Russian Academy of Sciences and Advisor to the President of Russia Sergey Glazyev. In an interview with the deputy editor-in-chief of the TV channel Yury Pronko, he answered the main questions concerning the functioning of the financial and economic system of Russia.
Yuri Pronko: At the International Economic Forum held in Astana, President of the Republic of Kazakhstan Nursultan Nazarbayev drew attention to the need for the development of cryptocurrency. Can you express your comment, your opinion?
Sergei Glazyev: The President of Kazakhstan said the following: “It is advisable to consider the possibility of introducing a global settlement cryptocurrency.” That is, the word “world” is very important here. Because there are cryptocurrencies in general now, but these are some private tools that are in demand. Cryptocurrency is an electronic tool protected by special encryption methods. And the specificity of cryptocurrency is that each next cryptocurrency is becoming more and more expensive. Therefore, the flip side of the emission of these today's cryptocurrencies is the increase in electricity consumption for their production.
The cryptocurrency is interesting to me because each cryptomoney has a unique number, it cannot be faked. It is in demand precisely because it is highly liquid, tied to the owner, in the sense that it cannot be stolen, and you can buy and sell it. I do not think that cryptocurrencies can be used as independent substitutes for conventional money, because ordinary money is fiat money that is created under commitments.
Modern economic growth cannot be imagined without fiat money. And cryptocurrencies - they are more like gold. Their prey is worth the money. Therefore, to create a loan out of nothing with cryptocurrency will not work. As a result, the advantage of the modern state, which has the right, relying on its monopoly on the issue of money, to create a loan simply from this monopoly, is lost. Within reasonable limits, of course. Because if fiat money is not issued in a targeted manner, then most likely it will lead to inflation. As we had at one time, when we issued two trillion rubles to rescue banks during the crisis, and the banks collapsed and brought down the foreign exchange market. They began to buy currency instead of investing money in the development of production. Therefore, the secret of effective use of monetary monopoly is associated with the targeted use of money. Cryptocurrency - it is good because you can trace its intended use, as if all the money labeled. Here our opponents say that it is impossible to issue money, since everything is stolen, but here all the money is labeled.
Accordingly, the question arises, can we apply this property of cryptocurrency to ordinary money? I think we can, and the information workers know how to do this. If we issue money, for example, to finance investments for small and medium-sized businesses or for infrastructure development, we can mark them so that they no longer fall into the foreign exchange market, the computer will discard them. They can not be used for speculation. At some point, this money will turn into a salary. And then there will be, therefore, a mechanism for conversion from protected money to ordinary money. But in all other functions they are the same. Then the state can dramatically increase the efficiency of using fiat money that is issued for lending investments.
As for the world currency, this is the favorite topic of the forum in Astana. Ten years ago, Nazarbayev for the first time brought together experts from different countries and, in addition to the on-duty theme of Eurasian integration, suggested thinking about reforming the global financial architecture. A competition of projects was announced, in which experts from different countries offered their approaches to reforming the global financial system. This topic arose almost simultaneously with the global financial crisis, and the essence of Nazarbayev’s reasoning was that the world monetary system was unfair.
First, the dollar issue is in favor of the US budget. We are financing, in fact, US military spending. Secondly, it generates a nonequivalence of international economic exchange. And thirdly, modern reserve currencies are, in fact, private currencies that belong to individual states, and in America they even belong to the private Federal Reserve System, that is, no one is responsible for their purchasing power.
These currencies can devalue at any time, they can simply impose a financial embargo, as they have already done against Russia. Or what they did with Iran when they disconnected from the settlement system. All that was in dollars and euros was frozen. And it happened more than once. The global monetary system serves the interests of the American financial oligarchy. And it is no secret to anyone that the global financial crisis, along with objective reasons related to structural changes in the economy, also had its monetarist component - pyramid schemes that were built on the basis of the issue of the dollar under the financial pyramid of US treasury bills.
Yu.P .: Do you think that the cryptocurrency can act as an alternative to this?
SG: That's about crypto, I would not hurry. But I am sure that the world will eventually move to the contractual currency ...
Yu.P .: That is, to give up the current reserve currencies?
SG: Refuses to use currencies that are not guaranteed by international law. Here is an example of an international currency that is issued on the basis of an international agreement, is the euro. This example would be nice to expand further. Today we are talking about Eurasian integration. Among our areas of work is the creation of a single financial market, but there is no task to move to a supranational currency. It was discussed, but we saw how difficult it is to work with the euro - first the Greek crisis, then the Spanish, Portuguese.
The fact is that the creation of a single currency implies a unified policy of public debt. And then Russia will not be able alone, say, to issue state obligations, because it will be necessary to negotiate with everyone. And in Europe they did not think about it. They introduced a single currency, and a single debt policy was not fixed. With the exception of some general recommendations, like the budget deficit is no more than 3 percent. But the point is that Greece, for example, has issued more government debt bonds than it could afford. The central bank bought them, printed the euro under this case. Now they do not know how to reduce balance here. You can, of course, zero and forgive everything, but for some reason while they do not go for it.
We have an interesting experience in the introduction of contractual currency, which is formed on the basis of an international treaty. And, it seems to me, the most important thing is that the issue of world currency should be controlled by the states that use it. There are two such calculated currencies. The first is the IMF SDR, which is a unit of account. And the second was the ECU, which was part of a European currency snake. Such a tool to us today would be very helpful. Our heads of state have put a certain reasonable limit on integration, we are creating a common market for goods, services, capital, common standards, a single financial market, but at the same time we are not creating a single financial system. We, in general, expected that the ruble, as the currency in which the vast majority of transactions in mutual trade, with the exception of energy, go, will become the reserve currency of the Eurasian Economic Union. Moreover, Russia accounts for more than 80 percent of the economic potential of the Eurasian Union, which means that our financial system is somewhere 85-90 percent of the entire financial system of the Eurasian Union. Therefore, in a natural way, the ruble itself became a reserve currency. Belarus at that time had already included it in the basket of reserve currencies.
Yu.P .: Yes, but last week it became known about the statement of the President of Belarus and the National Bank of this republic that they are refusing the ruble.
S.G .: It’s not that they refuse, it is the market that refuses the ruble in conditions of very high volatility. You can not even claim to the regional reserve currency, if the rate jumps like horrible, and no one can predict it.
Yu.P .: According to the forecast of some high-ranking officials from the financial and economic bloc of the government and the Central Bank of Russia, by the end of the year the ruble may fall by at least 20 percent. So maybe this is the answer to the question why the leadership of the neighboring republic, with which we form the Union State, decided to abandon the Russian ruble as a reserve currency of the Republic of Belarus?
S.G .: If the ruble exchange rate is an indefinite thing and is governed not by the state, but by speculators. At the same time, even our energy sources, with which we could support ruble trade, are traded mainly in dollars, including within the Eurasian Union. As a result, the ruble loses its appeal.
It is not accidentally written in the Law on the Central Bank that the main function of the Central Bank is the stability of the national currency. When the Central Bank declined responsibility for the stability of the ruble, it is, from my point of view, not only a violation of the Law on the Central Bank, but also a very dangerous action in its consequences. Even if we assume that the Central Bank correctly conducts inflation targeting, which, from their point of view, will automatically ensure further stability and economic growth. This is only a small part of what is needed for stable growth. Low inflation is good, but it alone does not generate investment. In the arguments of our leaders of the economic bloc of the government is full of internal contradictions.
To begin with, there can be no low inflation with a galloping rate. It is excluded. If the rate falls, inflation grows. Especially in an open economy, which depends on imports. According to statistics, more than half of consumer goods of large cities is formed by imports. Therefore, the fall of the course we all felt on ourselves. The 60 percent inflation jump, which occurred in 2014-2015, was caused by a depreciation. It was the fall factor that played a major role in breaking up the inflationary wave, with which the Central Bank began to struggle by reducing money, squeezing demand and eliminating investment in the development of the economy. And now the same thing can happen.
Because when the ruble exchange rate falls, import prices rise, and when the rate, on the contrary, increases, prices do not fall. Economists call this the ratchet effect. Because the trading system responds as it benefits. If the course falls, it means that import prices are rising. And when the course is growing, it is not a fact that they will lower prices. This will happen only if demand begins to curl. This, in fact, was the main factor in the current price reduction. With such a policy, when the ruble rate is determined by speculators, the investor cannot invest in the manufacturing sector, since he does not know what the rate will be in six months or a year. With a jumping course, there can be no investment by definition.
Therefore, when the Central Bank abandoned the free swimming course, and speculators picked it up, we had a giant funnel, which pushes money from the real sector into a speculative one. Moreover, exports and imports fell, investments fell, a financial embargo was imposed against us. It means that there are less objective factors influencing the course. The demand for foreign currency decreased, and the supply decreased, which meant investment decreased. And the volume of transactions in the foreign exchange market has grown fivefold in three years. How does that come about? Objectively, the need for currency speculation is decreasing, and their volume is growing. This takes place only in one case, when speculative operations that are not connected with trade in goods and with some real investments dominate the market. This is a purely speculative investment, the meaning of which is the game of oscillations.
The main players there are large American hedge funds, comparable in power to the entire Russian banking system combined. The central bank artificially creates an eldorado for international speculators, who take money in the United States at two percent per annum and bring it to Russia, freely passing with this speculative capital. Not to build factories or mills, but to invest in our securities, including government securities, and continue to have a difference. We have a yield of 10 percent securities, the price of a western loan there is 2-3 percent. 7 percent is taken not from the air, but at the expense of us, due to the destabilization of our economy, due to the fact that money flows away from the investment sphere and is transferred to large speculative players who sway the market and manipulate it. First, in 2014, they brought it down. Now, it means that they charge it up. Speculative capital comes regardless of the sanctions. Because Americans are not fools, they imposed sanctions only on medium and long-term money. And if you take money for a month or two weeks, then please take as much as you want. And the speculator no longer needs it, he plays short positions.
Yu.P .: Is it enough for them two weeks?
SG: So what happens as a result. The central bank is trying to keep them in the market due to the high interest rate. This means that we all have money dear. We cannot invest anything in production at this interest rate. If the interest for a loan is twice the rate of profitability, then what company can take this loan? No one takes it. This means that the real sector is giving money back to the Central Bank. Eight trillions have already given over these three years. Remain on their money, which they take from a simple turnover. And given that before the crisis, half of our working capital was formed through loans, then consider that production has shrunk. Production shrinks, which means capital is concentrated on the stock exchange.
The central bank, which constantly says it opposes printing money, starts issuing its own bonds at 8-9 percent per annum and takes money from the speculative market. He will pay these interest at first at the expense of profit, and then it will become unprofitable. That is, the central bank becomes unprofitable. This is generally nonsense for a normal economy. And then he begins to cover the loss issue of money. This printing of money is not for the development of production and the economy, but for providing super-profits for speculators. And when the Minister of Economy says that they have raised the interest rate, and this may cause an outflow of speculative capital. Well, yes, this is how a speculative market behaves, will cause an outflow. But why do we need such capital at all?
Yu.P .: And why was it necessary to create such conditions?
SG: It turns out that all the power of our state financial system works on the income of international, mostly American speculators. For their sake, the Central Bank holds high interest rates and issues bonds, which are then financed by issuing. And all this will ultimately lead to the very consequences that the Minister casually said.
What are the consequences? It means that in our country in the conditions of an open economy and, once again, the free movement of capital across the border, the Central Bank artificially keeps speculative capital at the expense of a high interest rate. Thus, he kills loans in the manufacturing sector. Investments in the real sector have been falling for the third year in a row. Of course, they are, but not at the expense of banks.
The central bank, I note, not only does not fulfill its main function - stabilization of the exchange rate. He also, in fact, transferred the transmission mechanism, which allows to turn savings into investments, into idle mode, by launching a speculative flywheel there. The share of the banking sector in financing investments is now 2-3 percent. And the share of bank loans in attracting investment financing from enterprises has already been for many years 7-8 percent, and now it has become even less.
The central bank, in fact, stopped the most important thing in the banking system - the transmission mechanism. As a result, banks are idling in terms of economic development. They collect savings, but either give them back to the population through consumer credit and mortgages, or they go to the foreign exchange market, where they receive superprofits along with manipulators, and the borrowers in the real sector become bankrupt. After all, those who make investments, they were counting on funding for years. And it stops, enterprises stop, investments are deadened and depreciate. The degradation of the real sector entails a technological lag and decline in competitiveness, which is an objective factor in the decline in the exchange rate. And so, for the fourth or fifth time, we walk in a circle and step on the same rake. We will stabilize inflation by squeezing money in the real sector, which is degrading and causing a drop in competitiveness. There is pressure on the course. This is how much talk there is now that the course is too high and competitiveness does not match.
Yu.P .: Officials openly say that the fall will be at least 20 percent.
SG: There is pressure from exporters that it is necessary to lower the rate, because we cannot cope, so to speak. Competitiveness is falling, which puts pressure on the depreciation, because paying for the technological lag is the decline in revenues, which is reflected in the fact that imports become more expensive. We have to work more and more in order to get the same volume of goods for import. And you can completely hurt your head if you step on the same rake indefinitely. Now the main threat is that the ruble exchange rate is actually in the hands of speculators who manipulate the market. The central bank holds them, artificially keeping high yields. This is a well-known carry trade - a terrible disease that all countries are trying to avoid ...
Yu.P .: What will this lead to, and what is the staleness of this situation?
SG: Carry trade is that cheap money from abroad comes here and accelerates due to high incomes. This situation can not continue indefinitely. Sooner or later it ends, and foreign speculators begin to leave. And this entails the simultaneous collapse of both the foreign exchange and financial markets. So it was already in 1998 year, when the GKO pyramid collapsed.
Yu.P .: Does this mean that we shake again?
SG: No, I believe that we still have opportunities to prevent such a course of events. To do this, take appropriate measures to limit the movement of speculative capital and to stabilize the course.
Yu.P .: That is, if we do not do this, we still shy away?
S.G .: If we do not do this, then the question of whether we dodge or not will be decided for us in Chicago. It is there that the mirror currency market with the ruble operates. And it is the American financial speculators, since the Central Bank threw the ruble into their management, today formulate a policy on the foreign exchange market. It does not depend on us. When they decide to leave the Russian market, we do not know. And the ministers do not know. And the head of the Central Bank does not know.
Yu.P .: But nevertheless in our hands to change this situation?
SG: In order to change it, it is necessary to introduce control over the cross-border movement of capital and not to allow a sharp outflow of speculative capital. If a speculator is going to withdraw money, then he must declare it in advance in a few months.
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