I must confess – the term used by me in the title of the article is not mine. It is young economist Vasily Koltashov who invented it. But we work together at the same Institute and have similar ideas.
Anyway, let’s turn to the essence of this phenomenon. It is quite simple – during the economic crisis all states try to protect their domestic markets. But they are not bold enough to impose administrative measures for this, and a sharp rise of import tariffs is against the WTO rules. Moreover, the liberal ideology blames such actions. The only simple decision is to devalue national currency.
Many governments resort to this measure simultaneously and even try to outdo each other. It’s like a race. At first, the dollar had been devaluated, then the rouble was and so on. The expected results are the more expensive imports and cheaper exports. The production of imported goods is expected be substituted by by domestic production of the same brands and it should cause industrial growth. This happened after default in Russia in autumn of 1998. But this will not happen now.
It’s because of two reasons. First of all, there were a lot of idle industrial capacities in Russia by the end of 1990s. You could invest some money, reconfigure machinery, gather the scattered workers and a plant would restart production. Sometimes it took just few weeks to do it. Now the situation is not the same. The capacities are exhausted.
Second, the world economy, though unstable, was growing in 1990s. There were idle capitals. The risk for investments in Russia was minimal. But we have the global crisis today, and the risks are much higher.
Consequently, the devaluation of the rouble does not boost the economic growth and can’t do it. The negative effects are minimal too. The ‘soft’ devaluation of Russia’s currency was not accompanied by the rise in prices. It is also due to the economic crisis. The rise of the dollar makes traders raise prices. But the salaries do not grow and the purchasing power falls. The importers sometimes even have to reduce prices at their own expense to sell their goods. The logical result of this is possible shortage of some goods. The companies stop importing and domestic production can not compensate this.
The deficit of goods is considered to be a feature of command economy. It is true, but market sometimes produces the situations of crucial deficit as well. The numerous examples of famine (not just shortage of goods!) are the obvious proof for this fact. During a crisis the market separates customer and manufacturer, instead of connecting them.
As the devaluation of currency can’t cause the positive results, we should prepare for the new wave of it, but the uncontrolled one.
However, the prospects of the dollar are also not very bright. For the U.S.A., the devaluation of the dollar is the way to be released from the burden of financial obligations. Moreover, the anti-crisis measures planned by the U.S. Administration presuppose huge spending. Where can they raise money? U.S. can either print it and cause new inflation boom, or borrow it at the stock market, as Russia’s government did in winter and spring of 1998. Here we see a ‘classical’ pyramid scheme, and it will collapse sooner or later. Some talk about the threat of the U.S.A.’s default that would be similar to Russian and Argentine ones.
Anyway, the world financial markets will not be loyal to the dollar, preferring the more reliable euro. But the European Central Bank will have to devalue the euro in turn, or the European goods will become too expensive for consumers.
It is easy to notice, that the Russian citizens will be losing at every stage of this devaluation race. When the value of the dollar was falling, the Russians tried to keep their savings in roubles. But soon the rouble was devaluated too. Keeping their savings in dollars, Russians will lose again when the U.S.A. decides to devalue the dollar again. The euro will be the last to fall, but our citizens will have very little savings if any by that time.
The conclusion is simple – do not trust money. There is also a saying "don’t look for happiness in money". And there is no sense in waiting for soon relief of the crisis. Barack Obama promised to Americans that things would get worse before getting better. I can promise to Russians – for them the things will get the worst before getting just bad.
Eurasian Home, 29 January 2009
Boris Kagarlitsky, a fellow of the Transnational Institute, is a Director of the Institute of Globalization and Social Movements, Moscow. His latest book is Empire of the Periphery: Russia and the World System (2008)