Sergey Glazyev. Why the Russian economy is not growing

2024 Author: Seth Attwood | [email protected]. Last modified: 2023-12-16 15:55

The three-year drop in real incomes of the population and the stagnation of the Russian economy have not received a clear explanation from the economic departments. They replace scientific analysis with references to external circumstances and empty phrases like "new reality."

The reality, however, is the continued rapid development of China and India, the rapid growth of a new technological order in the US and the EU against the background of the growing technological lag of the Russian economy.

Idle banking system

The reasons for the stagnation of the Russian economy lie entirely in the sphere of monetary policy. To put it simply, there is almost no lending for investment in the development of production in it. Enterprises finance the overwhelming majority of capital investments from their own funds, and the share of industrial investments in the assets of the banking system is several percent. The transmission mechanism of the banking system, which ensures expanded reproduction of the market economy through the transformation of savings into investments, does not work. This is due to the prohibitively high interest rates for most manufacturing enterprises and the unacceptably high volatility of the ruble exchange rate for investors. Both are within the competence of the Central Bank.

Having raised the refinancing rate in 2014 above the average profitability of almost all industries, the Central Bank transferred the banking system to an idle operating mode. By letting the ruble float freely, he actually passed on the exchange rate formation to speculators, whose manipulations on the foreign exchange market created a giant financial funnel. As a result of these actions, for the third year, there has been a flow of money from the production sphere to the speculative one. At the same time, the Central Bank, instead of creating money for lending to economic activities, withdrew about 8 trillion rubles from the economy, exacerbating the outflow of $ 200 billion of foreign loans and investments.

It is obvious that the development of the economy requires investment. Their growth is provided by bank loans. In successfully developing countries, the growth of production is accompanied by outstripping growth in investments, which are financed by a corresponding increase in bank loans. Thus, a 10-fold increase in GDP in China from 1993 to 2016 was accompanied by an increase in investments by 28 times, money supply and bank loans to the manufacturing sector - by 19 and 15 times, respectively. A unit of GDP growth accounts for almost three units of investment growth and about two units of growth in money supply and volume of credit. This illustrates the operation of the growth mechanism of the Chinese economy: the increase in economic activity, measured by GDP, is provided by the outstripping growth in investment, most of which is financed by expanding the credit of the state banking system.

Degradation amid prosperity

Similar growth mechanisms ensured the recovery of the Japanese and Western European economies after the war, as well as the newly industrialized countries, not to mention the experience of the USSR. All examples of successful development of national economies over the past 100 years are characterized by the growth of their monetization with moderate inflation. This pattern confirms the importance of a bank loan as a financial instrument for advancing the growth of a modern economy. Its widespread use became possible thanks to the use of fiat money * created by the state through targeted emission of money, aimed at financing the budget deficit and funding state banks and development institutions.

The stagnation of the Russian economy is accompanied by a reduction in its lending and money supply. This means that bank loans are not used by the government to ensure economic growth. By refusing to issue targeted money, the state does not use its banking system to finance investments. The non-state banking system, in the absence of a state mechanism for refinancing investment activity, also fails to cope with this task. Therefore, the Russian economy cannot enter the expanded reproduction mode, it is technologically degrading. This entails a fall in its competitiveness, which has to be paid for by periodic devaluation of the ruble and chronically high inflation.

The Central Bank's policy is based on an outdated concept of the nature of modern money, which does not take into account its fiat nature and related functions. The consequence of this is the systematic dysfunction of the Russian monetary system. It does not ensure the normal reproduction of the economy, but serves the unequal foreign economic exchange and export of capital, does not allow investment and innovation activity to rise.

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In general, as the monetization of the economy grows, the inflationary background decreases, which is determined by the efficiency of the financial system. It is necessary to understand that for each state of the economy there is its own optimal level of monetization, deviations from which both upward and downward in the amount of money entail an increase in inflation. Monetization of the Russian economy due to restrictive monetary policy is significantly below the optimal level. Therefore, contrary to the expectations of the monetary authorities, inflation decreases with an increase in the money supply and increases with a decrease. The latter is explained by an increase in costs, a decrease in production and supply of goods due to a decrease in lending to working capital and investments, which entails a drop in the purchasing power of the available money supply.

Raise the price of money by reducing

The Central Bank's policy of “targeting inflation” is based on a primitive idea of money as a commodity, the price of which is determined by the balance of supply and demand. Guided by this logic, the Central Bank is trying to reduce inflation and increase the price (purchasing power) of money by reducing their supply. This automatically entails a contraction of the loan, a drop in investment and innovation activity. As a result, the technical level and competitiveness of the national economy is decreasing, which entails currency devaluation and a new wave of inflation. We are going through this vicious circle of monetary policy for the fourth time (!) With consistent primitivization and a growing technological lag in the economy.

The monetary authorities do not understand that modern money is created for debt obligations in order to finance the expanded reproduction of the economy. The main goal of monetary policy in all successfully developing countries is to create conditions for maximizing investment and innovation activity. With low savings and incomes of the population, an undeveloped financial market, the emission is used for targeted financing of investments. This policy has been successfully applied since the second half of the 19th century: by Hamilton in the USA, Witte in Russia, the State Bank in the USSR, post-war Japan and Western Europe, modern China, India, and the countries of Indochina. All countries that have performed economic miracles have used large-scale emission of money to lend to investment.

Currently, in order to overcome the structural crisis and revive the economy, the US FRS and the European Central Bank are using wide money emission, which since the start of the global financial crisis in 2008 have increased the monetary base by 4, 6 and 1.5 times, respectively. The main channel for this increase in the amount of money is financing the state budget deficit in order to ensure the necessary expenditures for R&D, infrastructure modernization, and stimulating investment in the development of a new technological order. China, India, as well as the countries of Indochina issue money for investment plans of economic agents in accordance with centrally established priorities.

The targeted emission of money for lending investments in these countries does not lead to inflation, since its result is an increase in production efficiency and an increase in the volume of output of goods. This reduces costs, increases the supply of goods and increases the purchasing power of money. As volumes grow and production efficiency increases, incomes and savings of the population and private business increase. And this is already a source of private investment financing, and the value of money emission is decreasing. But as soon as private investment activity falls, the state compensates for it by increasing public investment, including through emission financing of the budget deficit and development institutions. This is what we see today in the policy of quantitative easing in the US, EU and Japan and in the growth of government investment in China and India.

A fundamental refusal to use the method of financing investment expenditures by means of targeted emission of money, generally accepted in the practice of the leading countries of the world, dooms the Russian economy to a low level of accumulation. It remains twice as low as in 1990 and one and a half times below the level required for even simple reproduction. Tying the issue of money to the growth of foreign exchange reserves subordinates the development of the economy to the needs of the external market, which results in its specialization in raw materials and chronic underfunding of internally oriented industries. Solvent enterprises compensate for the lack of domestic credit with foreign loans, which results in unequal foreign economic exchange, offshorization of the economy, and its vulnerability to sanctions. Another consequence of the lack of domestic credit is the transfer of control over Russian industry to external creditors: more than half of industrial enterprises are controlled by non-residents.

The only factor limiting the emission of fiat money is the threat of inflation. Neutralizing this threat requires linking cash flows in the production sector and the transmission mechanism of the banking system. Otherwise, the emission of money can create a breeding ground for the formation of financial bubbles and currency speculation, fraught with economic destabilization. Exactly the same consequences were caused by the emission of money in order to rescue the banking system in 2008 and 2012. Then the banks used the loans received from the Central Bank to build up foreign currency assets, instead of lending to the production sector.

Three phases of money issue

The emission of modern money is a systematized cyclical process consisting of three main phases: the injection of money supply into the market, its absorption and sterilization. Absorption involves tying the emission of money for productive purposes. This can be done by directing it towards financing the budget deficit, as in modern Western countries, at refinancing state banks and development institutions, as in the countries of Southeast Asia, as well as at refinancing private obligations to increase investment and production, as was done in the post-war period. period. The sterilization of surplus money is carried out by the issuers of world currencies through their export and managed financial crisis with the transfer of the cost of capital depreciation to the host countries. So, in order to dump debt obligations and fix share premiums, the US Federal Reserve and the ECB periodically sterilize significant amounts of money in the international stock market by “inflating” and collapsing financial bubbles. Thus, the market is freed from the excess volume of dollars and euros, from which share premium has already been withdrawn. Sterilization provides their issuers with the opportunity to continuously receive super profits at the expense of their host countries both during the growth of the world economy and during crises organized by them. As a result of the latter, there is a shortage of money and capital, which entails a collapse in asset prices, which the issuers of world money are buying for next to nothing, both at home and abroad.

By itself, the reduction in inflation achieved by the Central Bank by squeezing money supply and reducing final demand cannot ensure investment growth. After all, the latter need to be financed. Businesses are working to the limit of their financial capabilities. Household savings are more than half covered by consumer and mortgage debt and are heavily dollarized. Foreign investments in world currencies are blocked by sanctions. Only investments from the PRC remain, which require government support.

Thus, it is impossible to do without targeted credit issue of investment growth necessary for expanded reproduction of the economy, at least up to the level of 27% of GDP established by the presidential decree. Without this, it is impossible to achieve economic growth, the possible rate of which, based on objective resource constraints, could be up to 8% of GDP growth per year. To do this, it is necessary to increase investments by 20% per year at the expense of a corresponding increase in bank loans. Not by reducing the consumption of the population, but by funding development institutions and banks under special investment contracts through special refinancing instruments.

Accounting and control of intended use

To avoid an increase in inflation, it is necessary to control the intended use of the money issued for lending investments. They should invest in expanding the production capacity of competitive goods based on advanced technologies. As a result, an increase in the monetization of the economy will be accompanied by an increase in its efficiency, which will ensure a consistently low inflationary background. In Russia, it is relatively high due to underdeveloped competition, corruption of regulators, technological backwardness and low efficiency, which generates cost inflation and devaluation of the ruble. The key reason for the constant decline in the purchasing power of the ruble is the monetary policy being pursued: high interest rates (the price of money) are compensated by producers by an increase in the cost of manufactured goods, as a result of which their supply either decreases or prices for consumers rise. The total damage from the Central Bank's policy is estimated at 15 trillion rubles. underproduced goods and 10 trillion rubles of unmade investments compared to the trend that developed before 2013.

In the context of structural imbalances characteristic of the Russian economy, a selective credit and investment policy is required, differentiated by industry and development direction in accordance with the objectively established differences in their profitability. The existing practice of concessional lending to the agro-industrial complex and small business confirms the effectiveness of selective concessional lending for investment projects. It should be scaled to the entire economy, which requires centralization of the credit and investment process in relation to strategic and indicative plans for modernization and production growth. These plans must be confirmed by special investment contracts concluded between enterprises, investors and authorized government bodies, under which state development institutions and banks could issue long-term loans. Strict control must be exercised over the targeted use of funds using the technology already working when placing a defense order.

Taking into account the large scale of work on the formation and implementation of strategic and indicative plans, in which state banks, development institutions, corporations should participate, as well as the wide involvement of private business, the creation of a special anti-crisis management system is required. It should solve the problems of developing strategic and indicative plans for accelerated economic growth in the context of industries, territories, economic entities and sources of funding. And also to ensure the execution of these plans in the form of special investment contracts, the allocation of the required amount of credit resources. Their delivery through a network of authorized banks to end borrowers at rates from 1 to 5%, depending on the profitability and riskiness of the relevant industry.

Without bringing monetary policy in line with modern economic development requirements and world experience, the current victory over inflation will turn out to be Pyrrhic. The growing technological backwardness of the economy will inevitably cause a further decline in its competitiveness, which will entail another ruble devaluation and a new inflationary wave. If the raw material specialization of the Russian economy is preserved, it can also be caused by currency speculators, using the floating exchange rate as an accelerator of any external shocks.

Only an outstripping growth in investment due to targeted credit issuance can put the Russian economy on a trajectory of sustainable rapid growth. And without it, macroeconomic stability is impossible.

* Fiat (from Lat. Fiat - "decree", "indication", "so be it") money, credit money - money, the nominal value of which is established and guaranteed by the state, regardless of the cost of the material from which the money is made.

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According to vulgar monetarists, there is a directly proportional relationship between the amount of money and inflation. In fact, according to statistics, the opposite is observed in 160 countries of the world: the more monetization of the economy, the lower inflation. This is due to the action of a positive feedback: the emission of money for lending investments - an increase in volumes and a decrease in production costs - an increase in the competitiveness of the national economy - stabilization of the exchange rate and sustainable economic growth. All successfully developing countries use this mechanism, while the Russian state refuses it, which results in chronic stagflation.