Glazyev: the Central Bank drove the Russian economy into a stagflation trap

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

Sergei Glazyev, economist, Academician of the Russian Academy of Sciences, adviser to the President of the Russian Federation in the program "Real Economy" of the "Russian News Service" reveals the essence of his economic program.

We have just agreed that we will briefly go through the news related to the economic situation. Then Sergei Yuryevich will tell in detail about his program, now it is widely discussed that Kudrin will draw up a new economic strategy … First, I look at the dynamics of oil, at exchange rates, and can I breathe out calmly? Meeting in Doha on the 17th, much is expected from it, what is your forecast?

- I think that the meeting will be constructive, have a definite positive result, but we will not speculate with expectations. Oil as a speculative instrument is already a thing of the past. The rise in oil prices is a regularly recurring episode about once every 50 years. This jump in energy prices marks a turning point in the long Kondratyev wave, when the technological order reaches maturity, monopolists get the opportunity to hike prices, because the economy becomes very inert, capital intensive, and any shifts in energy consumption are extremely difficult and require investment. When the technological paradigm that underlies the long wave reaches maturity, a corresponding rigid technological structure is formed, including the energy infrastructure, the monopolists have the opportunity to raise prices, because the economy cannot respond to this by reducing energy consumption due to the rigidity of the technological structure. This has always been the case, it was the mid-70s, when oil prices soared tenfold, the end of the 20s, when coal prices rose many times. This is the turning point from which the Great Depression begins. And depression is associated with the restructuring of the economy,

Why didn't you mention the 2000s?

- And the 2000s by itself.

We have passed this peak and the depression has gone, so it turns out?

- We went through a period of high energy prices, which lasts during the restructuring of the economy. As a new technological order makes its way in the economy, its structural restructuring takes place, and new technologies are always much more energy efficient than the previous technological order. For example, the light sources that we use - LEDs provide tenfold energy savings.

Almost lifelong light bulbs

- Or nano-coatings of metals, which increase wear resistance tenfold, or nanopowders in paints, which make the paintwork resistant.

In the new technological order, the dominant energy carrier, which is changing the structure of energy production before our very eyes, is solar energy. Thanks to nanotechnology, the cost per kilowatt hour of electricity generated by solar power generation has become equal to that of heat.

Why are we making an energy bridge to Crimea, and not installing solar panels there?

- Because we have lagged behind, unfortunately, and the main problem of our economy is a technological lag, which has grown in the last two decades, while other countries are successfully mastering a new technological order, it is growing rapidly at a rate of 35% per year, we are the window of opportunity for the breakthrough was missed.

We are leading to oil

- The period of high oil prices has passed, because a new technological mode is being formed, in which the energy intensity is much lower, the demand for oil will be lower, respectively, there will never be such a need for hydrocarbons, which was 5-10 years ago, there is a structural restructuring of the economy Of the European Union, almost all of its anti-crisis programs were focused on improving energy efficiency. Of course, hydrocarbons will continue to be used as a source of chemical raw materials for industry, but the weight of hydrocarbons in the structure of energy consumption will also fall, it has already fallen and will continue to fall. The very specific need, the energy intensity of the growth of the gross product also drops sharply with the growth of the new technological paradigm. We should not expect an increase in demand for oil, much less a return of oil to the list of speculative instruments. After the price hike, oil pricing was in the hands of financial speculators, oil was used as a tool to extract excess profits from speculation.

We understand that oil will not cost 150, but will it be at least 50?

- This is a question of supply and demand. Commodity prices are governed, according to theory, by marginal production costs in the worst fields, and to the extent that demand is sufficient to attract the worst fields, today these are shale oil, shale gas, they are the most costly, and they will form those trailing costs that will determine the price of oil in the foreseeable future, 15-20 years ahead. This is obviously not 100 or even 80, these are fluctuations around the current level.

40?

- I think that given the instability of modern currencies, one must understand that fluctuations in oil prices can reflect fluctuations in the purchasing power of currencies. But if we take it in comparable prices, then yes.

Around $ 40 for the next 15 years, did I understand correctly?

- We have approximately reached the level of equilibrium in oil prices for the period of stable growth of the new technological order for the next 15-20 years.

Good long-term forecast. The next topic - the head of the Ministry of Economic Development and Trade spoke today at a forum in Finland, talked with businessmen there, and he gave a new definition of the state of the Russian economy: “it has frozen and is waiting for the start, this is an unstable balance,” said Alesey Ulyukaev. Do you understand him?

- This is a rhetorical statement. If the economy is frozen, it means the end, it cannot freeze. If human life freezes, it means that for a given person it will freeze forever. The equilibrium in the economy is never stable, and in the modern economy there is no equilibrium at all. This is all a play on words, and what she means by herself, I don't know, it's a poetic image.

He is optimistic, he believes that the Russian economy will return to growth in the second half of 2016. In the current year, the dynamics of GDP, according to him, will be about zero. But we heard Nabiullina, who predicted a drop in GDP at the end of 2016 the other day. We have seen the IMF forecast, which is also quite pessimistic. What will actually happen?

- I think Aleksey Valentinovich thinks like a romantic poet.

Have you read his poems?

- Of course, we have been friends for a long time.

Like?

- Differently. It seems to me that it deserves more attention than the quotes you are citing.

Do you think he is more successful than a poet?

- I cannot give any assessments due to our relations and my official position.

But you like poetry

- In general, I like poetry, in contrast to economic policy. As for the Central Bank, these people know what they are doing: they have become realists, they admit that their policies are leading to the deepening of the economic crisis, this is already gratifying. Three years ago I told them that their policy of so-called inflation targeting would lead to a combination of a decline in production and high inflation, that is, to stagflation, they did not pay attention to it. Now they admit that their policies lead to a drop in production, this is good, they are learning slowly. But at the same time, they have not yet read modern works in the field of macroeconomics, which prove that in conditions of falling production there can be no low inflation, because inflation is the purchasing power of money, and if production decreases, the purchasing power of money automatically falls. They still have to learn a little more in order to understand that their policy of squeezing the money supply, increasing the cost of credit leads not only to a drop in production, but also to the persistence of high inflation. The stagflation trap, into which the Central Bank drove us, will further hold our economy, prevent it from growing. Within the framework of this monetary policy, there is no room for growth in production, investment, innovation.

“Sergey Yuryevich, thank you for your position. I am against the political and economic course, against Kudrin, Ulyukaev, Siluanov. Move into the political opposition, move away from the enemies of Russia, act on your own,”the listener Igor writes

Alexei Kudrin will work on the Council for Economic Policy. This council is going to define a new economic strategy for the country. Have you been invited to this expert group?

- I don’t understand at all what this is about. The policy that is being pursued in the country today is a continuation of Kudrin's policy. All the main decisions that dragged us into this stagflationary trap, the transition to inflation targeting, which means the free floating of the ruble exchange rate, the use of the interest rate as the main regulatory mechanism and the abandonment of currency control - these are all fundamental decisions that were made even under Alexei. Leonidovich. It is certainly not necessary to expect any changes from him.

Today Dmitry Peskov was asked about Kudrin. There was news that he was returning because he was not returning, then he said that only to the expert group. Today Peskov was asked directly, he said that he was treated well, consulted and considered Kudrin one of the most successful members of the Cabinet of Ministers and one of the best finance ministers in the world

- Of course, he is very successful, he runs the Moscow Exchange, which has become a center for generating profits.

Is he in charge now?

- Now, as the head of the supervisory board. This is a huge success for him, because the Moscow Exchange is the main generator of profit, which is obtained from manipulating the ruble exchange rate. And if our real production has fallen, investments, foreign trade turnover are falling, then the turnover on the stock exchange has grown 5 times and reached 100 trillion rubles per quarter. Today, all free money from the real sector flows into currency speculation, where huge super profits are achieved due to the manipulation of the exchange rate. We can be glad for the currency speculators who, according to experts, have received up to $ 50 billion due to the fluctuation of the ruble exchange rate over the past 2.5 years due to the depreciation of our ruble income.

You say that oil has already reached the level that it should correspond to for the next 15-20 years. Does this mean that the ruble will also be stable?

- No, for the ruble to be stable, the Central Bank needs to return to the stock exchange, remember its constitutional obligation to ensure the stability of the national currency.

Currency corridor

- Why? The currency corridor is just one of the instruments; there may be a temporary fixation of the rate. Last time we spoke in detail on this topic, we have no reason to have such fluctuations in the exchange rate, it can be stable, our foreign exchange reserves are twice as large as the monetary base in rubles, we have a positive trade balance, our ruble is undervalued three times in relation to purchasing power parity. Currency speculation is the main factor in the ruble's instability. And fluctuations in oil prices explain no more than 10% of fluctuations in the ruble exchange rate, everything else is speculative games, moreover, purposeful ones, played by those who are able to manipulate the exchange rate, and they can do this only thanks to the passive policy of the Central Bank. They are confident that the Central Bank will not play against them, for stability, so they rock the course. We have probably broken all world records for currency fluctuations.

I wanted to answer the listener's remark. I am not going to go into any political position, this is exactly what those who form macroeconomic policy today expect from me. I get in the way exactly where I am and where I work. The intellectual position is much more important than the political one: one can give a damn about political opponents, especially those in opposition, and forget what our monetary authorities constantly demonstrate, they are deaf to criticism, they are only afraid of the president. The goals that our president set in 2012 in terms of economic growth were a decree in May 2012 on a long-term socio-economic policy, where the goals were announced: increasing labor productivity, increasing the rate of accumulation, creating 20 million new high-tech jobs. These goals are real, we can achieve them. I see my task in helping the president to realize the goals that have been set. There is no reason to reconsider these goals. We can develop today at a rate of 8% per year, and I see my mission in proving and explaining: with a reasonable macroeconomic policy, our economy will not be in a stagflationary trap, it will not fall, we will not wonder what the price of the ruble will be. and when we start economic growth, in a year or five, it can begin in six months with a reasonable economic policy.

You say that you will not join the opposition, and you were not invited to the ruling party? Now active primaries are underway, elections are just around the corner

- According to my job description, I have no right to participate, I feel quite comfortable in the role of an adviser and I believe that my main mission is to help the head of state with scientifically based recommendations.

We started with Kudrin's economic strategy, and you already have a program of action. We announced that we will talk in detail

- This is not only my program, it has been repeatedly discussed at the scientific council at the Academy of Sciences, with the business community, it is a consensus program under which the scientific substantiation of our many years of work in the field of the theory of economic growth and the international experience that we have adopted. The program is based on the use of economic laws. Our finance minister likes to say that no one has canceled economic laws. I would add that it would be good to know them. It would be nice if the people who make decisions knew the economic laws by which the world develops, and not those that they read somewhere in the macroeconomics textbooks for the first year.

The main economic law of our time is the key role of scientific and technological progress in ensuring economic growth. Every person who uses gadgets, the Internet, driving a car, flying an airplane knows about this, he sees how his life is changing with scientific and technological progress. It would be good for macroeconomists to know that 90% of the growth in the gross product in developed countries is achieved due to scientific and technological progress, the introduction of new technologies. This is the first thing our monetary authorities do not know about and do not want to know. In their virtual world, there is no scientific and technological progress. A whole series of recommendations for economic policy follows from this basic pattern: it should focus on stimulating innovative activity, the authorities seem to understand this, we have been talking about transferring to an innovative path of development for many years.

Skolkovo, Rusnano immediately come to mind

- But just as the share of innovation-active enterprises was 14 percent in our economy, so it remains. In the world, this share is more than 75-80%, all enterprises are engaged in innovations. The main prize that firms receive in the competition today is super profit due to technological superiority, the so-called intellectual rent.

Why do we understand, but we cannot?

- We'll come back to this. Someone has to finance innovations, these are expenses. In a market economy, they are financed by credit. The main issue is the price and availability of the loan. Schumpeter, who is considered the classic of the theory of innovation, said a hundred years ago that bank interest is a tax on innovation. In the Middle Ages, there were usurers: they gave money, you could take it at 50-100%, there was no innovation. The economy was cyclical, there were almost no innovations. The main engine of the modern economy is scientific and technological progress, its main link is innovation. To innovate, you need loans. The first thing that needs to be done is to create affordable long-term cheap credit to ensure innovative activity, this is the meaning of monetary policy. Unfortunately, monetarists don't get it. Milton Friedman, whom they pray for, has no credit at all. They understand modern money as coins, while modern money is not backed by anything other than obligations, money is printed against obligations. Credit for innovators is the emission of money against the innovator's obligation to produce new products. And new products mean increased production and lower costs, higher efficiency, which means lower inflation. Scientific and technological progress is the main factor in the growth and reduction of inflation at the same time.

“How can you take Ulyukaev seriously? He never guessed, let him write poetry better,”- the listener also likes poetry. "Sergei Yuryevich, please, hold a seminar for the financial authorities."

- We hold a seminar on Tuesdays at the university every week. You can conduct it live.

"Why do they say that in your program you propose to turn on the printing press, and is this so?"

- This is not the most important thing in the program, money is a tool, and not the goal itself, as monetarists believe. Monetarists see the meaning of economics in money, and by money they mean gold as a commodity. Modern money is not only a commodity, and the meaning of the economy is not to have more gold coins, but to have more products, the economy is more efficient, the quality of life has grown, our opportunities have grown. The first basic pattern that our monetary authorities do not know is elementary, everyone feels it on their own skin: the main factor of economic growth is scientific and technological progress, the main element of scientific and technological progress is innovation, the main means of financing innovation is credit. The interest rate is a tax on innovation: the lower it is, the higher the innovative activity, the more opportunities for economic growth, and credit should be available.

The second pattern is that scientific and technological progress is the self-realization of the human personality, this is the disclosure of intellectual creativity, this is knowledge. Stimulating education, increasing knowledge, creating new knowledge is a necessary condition for a successful economic policy. Already 50 years ago, since the 60s of the last century, if we analyze the sources of economic growth, as they traditionally say, capital and labor, then the reproduction of human capital began to occupy a greater place than the reproduction of equipment by a machine, that is, investment in human capital in advanced countries have exceeded investment in machinery and equipment for 50 years. Investments in human capital are education, science, culture and healthcare. If we want to develop successfully, we must not allow a reduction in costs in these areas. The current economic policy is directly at variance with the laws of development of the modern economy. Unfortunately, we are reducing spending on science, in terms of gross product they have dropped almost fivefold compared to the Soviet period, in absolute terms - by an order of magnitude. We are the only country in the world where there is a reduction in the number of scientists and engineers, this is a regression. The conclusions from this second pattern are that if we want to develop successfully, we cannot reduce; on the contrary, we need to increase spending on scientific and technological progress, on science, on experimental design, on education, on health care. Even if we take the average world level, including Africa, today we are below the world average in terms of the share of spending on all these goals in proportion to GDP, and we are about two times lagging behind the advanced countries.

You mention Mr. Kudrin from time to time. When Primakov performed an economic miracle, relying on a scientific understanding of the laws of modern economic development, we developed a development budget and legally determined that additional budget revenues, including variables that come from high energy prices, which we were going to make through export duties, should go to the development budget, and the development budget is spent on stimulating innovative activity. The transformation of the development budget into a stabilization fund is associated with Mr. Kudrin.

Money box

- We did not use the super-profits from oil and gas exports to the development budget, as required by a scientific understanding of the laws of modern economic growth and as laid down in Primakov's program.

“It was called the airbag, safe haven

- These are words. The understanding of modern economics as a household is common to all monetarists. They have not finished their studies, do not know what scientific and technological progress is and do not understand that the main means of fighting inflation, the main way of stabilization is to stimulate innovation: the higher your technical level, the lower inflation, the higher the efficiency and the lower the production costs … And attempts to replace scientific and technological progress with the accumulation of US Treasury bonds is stupidity from the point of view of the theory of economic growth. Our program provides for the restoration of the development budget, a manifold increase in allocations to stimulate innovation, the transfer of our country to the level of advanced expenditures on education and science, this means an increase in these expenditures by half, and the mobilization of all possible additional sources of budget revenues for these purposes. First of all, it is natural rent, which today is largely evaporating, although part of our program is being implemented, export duties were introduced, then canceled, then restored again. Due to taxes on the extraction of minerals, we return some of the natural resource rent to the budget, although this tax is not optimal.

The third pattern is uneven economic growth. Even students are taught about cycles in economics. They are different, it is important for us to understand Kondratyev's long waves, these are long cycles in the development of the economy.

Is Kondratyev an economist?

- This is our Russian economist, who discovered the phenomenon of long waves with an oscillation period of about 50 years back in the 1920s and 1930s. Today we can talk about understanding the regularity of the change of these long waves, based on the change in technological structures. This unevenness is manifested in the fact that when the technological paradigm, and its life cycle is about 70 years, enters the growth phase, a long wave of economic growth arises, the economy goes into stable growth for 25-30 years. Then this technological paradigm reaches a phase of maturity, energy prices rise, and the economy falls into a state of depression. In the course of this depression, the preconditions for a new technological order are formed, the economy is being restructured on a new technological basis, then again rapid economic growth for 25-30 years. The alternation of periods of steady growth and long depressions is the law of a modern market economy.

Has the depression already begun?

- It is now ending. It began with a jump in energy prices, this is about 8 years ago, the financial crisis broke out in 2008. The financial crisis is a turning point. First, energy prices rise, then capital begins to leave production that has become unprofitable, it concentrates in the financial sector, an era of financial turbulence and financial pyramids emerges. As these financial pyramids self-destruct and the capital left after the depreciation makes its way to new technologies, the production of a new technological order, an upward phase of a long wave begins. The alternation of 20-year recovery periods and 10-15-year depressions must be taken into account in economic policy. For countries lagging behind, the period of depression, the change of long waves is a chance for an economic miracle. If at this time to formulate priorities correctly, to invest in a new technological order, then a lagging country can break through to the advanced ones before others, embarking on a new long wave of growth. We could do this if we began to expand production of the new technological order in a timely manner.

I understand correctly that you are proposing to take money from the stabilization fund, airbags and put them into the development budget?

- It should have been done earlier.

It's already late?

- The situation is not the same, but better late than never.

"Why turn on the printing press?" the listener asks

- In the program of economic growth, we proceed from an understanding of the nature of modern money, which is issued against obligations. The everyday consciousness and the idea of monetarists reduce money to coins, modern money is fiat money, it is created against debts to secure the dollar, euro, yuan and all other currencies that appear on the world market today, there is neither gold nor any real assets, there is obligations. The dollar is printed against the debts of the US government, and 90% of it is secured by the obligations of the US government, treasury bonds. The euro is printed against the obligations of European countries, against their debts, the yen - against the obligations of Japanese state institutions, the yuan - against plans to expand production, against the obligations of enterprises. The economic miracle of post-war Europe was financed not so much by the Marshall plan as by the emission of money against the obligations of enterprises. Central banks issued loans to commercial companies secured by bills of exchange, manufacturing enterprises, which thus received an unlimited source of credit and could expand production. Money is a tool, and you need to know how to use it. There are laws of monetary circulation, about which our monetary authorities are also not very well informed. Recently, scientific evidence has been obtained that for each state of the economy at the current time there is a certain optimal level of monetization. If there is less money than this optimal level, inflation rises in the same way as when there is more money. Money, like blood in the body, should be as much as is needed for the reproduction of the body, since the economy is a living system, money plays the role of a connecting link between production resources. Many economists guessed this even 50 years ago. Keynes said that if you have spare production capacity, you need to increase the amount of money to tie it up in production. And if everything is busy in your economy, then you cannot print money, because there will be inflation. We need optimal monetary policy and restrictions. If we want money to work for growth, and not for capital flight, it is necessary to control their intended use, movement, to prevent their flow to the foreign exchange and financial market. Various methods are good for this, not only administrative regulation, but also Tobin's tax on currency speculation. This is a very positive measure. The monetary policy issues of our program are secondary issues that refer to money as an instrument of economic growth.

"Does your program provide for a business loan in the amount of 2% per annum?"

- Yes, our program provides for the remonetization of the economy. Today it is far from the optimal level in our country, therefore, the attempts of the Central Bank to reduce inflation by further compressing the money supply are doomed to failure. When the economy deviates from the optimal level of monetization towards demonetization, inflation rises in the same way as when the amount of money exceeds the optimal one. Therefore, we propose targeted credit emission based on the example of post-war Europe or modern China using the instruments of the American and Japanese central banks, which creates money against the obligations of the state and business to ensure economic growth. The state and business agree on the growth and modernization of production, business undertakes obligations to implement investment projects, and the state provides them with a long-term cheap loan of 2% per annum - this is what is needed to stimulate the restructuring of the economy and growth in a situation of extremely low profitability of our economy. Our country has an average profitability of 1%, so 2% is a problem for many enterprises.

"What is the likelihood that the government will accept your program as a guide to action?"

- The problem of implementing the program rests on economic interests.

How do you yourself assess the probability?

- And who is hindering, why is it not being implemented? Any economic policy is the sum of interests. The current policy is beneficial to currency speculators, large banks, which endlessly draw money and use preferential refinancing or borrow money abroad. It is also beneficial to the state banking system, because it has unlimited access to credit. Bankers benefit from high interest rates.

And officials, in part, it turns out

- 70% of our banking system is the state, which means officials. They like to be the masters of life, they have tremendous influence, they are easily amenable to manual control, this creates the illusion of controllability, but in fact the economy is increasingly plunging into chaos. We have to admit that our influence, the influence of the business community, scientific and engineering communities is still not enough to change the economic policy.

- We start voting: if you made a decision, would you support Sergei Glazyev's program or are you against, do you like a different approach, for example, Kudrin's program?

Let's connect the listeners. Hello

Listener: Hello, Vadim, Moscow region. Russia 247 billion, France 1.8 trillion, Brazil 1.5 trillion. Why do we have such poor budgets?

- Because a significant part of the income base leaves from taxation. Our taxation is based on labor, this is the worst tax system you can think of. All basic taxes, VAT, income tax, social tax are taxes on labor, on newly created value. These are taxes that kill innovation. At that time, the advanced countries were trying to shift the burden of taxation to consumer spending, to the income of the rich, to rent payments. We would have a unique opportunity to drastically reduce taxes on labor, to abandon VAT, this is also part of our program. We propose to remove all taxes on scientific and technological progress, on innovation, investment. In advanced countries, this is not only not taxed, but subsidized, and shifting the burden of taxes to natural resource rent. The Lord provided us with gigantic natural resources, partly we managed to do this at the expense of export duties, but now we need to introduce an additional tax on additional income of subsoil users and collect natural rent instead of the tax on the extraction of minerals, which is transferred to consumers. Due to this distortion of our tax system, wages are low, low income base, while excess profits from natural resources flow to offshores and dissolve abroad. We receive less light taxes and compensate them with taxes on labor.

- The listener writes that this is not a program, but theses from economics textbooks that have nothing to do with real life.

- Good textbooks, then. Usually in textbooks they write something different from what I say. The textbooks just write about monetary theory, the theory of market equilibrium. This means that the listener reads good textbooks, probably under my editorship.

The reality of life is corruption. Does the program take into account what it will face in real life?

- Yes. We propose two measures to combat corruption. The first is to give every citizen the right to demand the resignation of any official who does not fulfill his function, and second, if they extort a bribe from you, then for what you reported for, you are automatically provided with the required service.

The topic of the next program is "Real Economy". I propose to talk about big privatization. Could you express your position on this matter?

- As an announcement: along with the official privatization, there is a creeping nationalization. State banks bankrupt enterprises that are given loans, and these enterprises from private ownership come under the control of state banks, and then they are distributed to someone.