Will the central Bank of Russia be able to bring inflation under control?
mike27 September, 2008, 19:07
My understanding of central banks in many countries is that the more independent of the government they are in managing the money supply, the more stable the country is.
In practice, this means that the government cannot tell the bank how much or how little money to create at any time.
Such a bank is expected to follow policies which disagree with the government frequently. For example, a government may want to create a boom before an election so that voters have jobs and credit the current administration. The current administration then is more likely to be re-elected.
But, if the CB thinks that inflation is a possible result, the bank may decide to reduce the money supply, drive up interest rates and create unemployment at precisely the time the administration wants a rising economy.
In this example the bank has reduced prevented inflation and probably has cost the government its re-election bid. But, by preventing inflation the bank has helped the entire country.
It appears from a distance that the Russian CB coordinates its monetary policy goals with the government. If that is true, then my conclusion is that the CB is not independent and that its monetary policies may support the government's goals at the expense of the economy.
I agree that coordinating monetary policy between the CB and the government is hard to do.
Having said that, what would be my recommendation?
Forgive the elemental introduction to begin. As you know, the CBR is the sole issuer of currency. That means that on its balance sheet, currency in circulation shows as a liability against offsetting assets of precious metals and various monetary assets [2 Funds placed with non-residents and securities of foreign issuers ].
So when the CBR BUYS let us say some securities of foreign issuers from a Russian citizen, then the liability, currency in circulation, is increased and the asset account, securities of foreign issuers, is also increased. This results in an increase in the money supply in Russia.
The new money is placed in the bank account of the person who sold the asset to the CBR and then that bank has additional cash to lend out. Liquidity is increased.
Now, if the CBR buys a foreign security from a foreign bank in another country, then there is no effect on Russia's money supply. So, the currency increasing aspects of CBR purchases of assets happen when the asset is purchased from a Russian entity.
The cash it uses is new money that did not exist before the purchase - which is OK since the CBR is the sole issuer of currency.
What happens when the CBR SELLS an asses to a Russian entity? Exactly the reverse, the net effect of which is that the money in circulation is decreased and Russian liquidity is decreased. CBR assets are reduced by the sale of the security and CBR liabilities are reduced by taking the cash into the bank.
In effect the CBR stands outside the domestic money supply and increases or decreases that supply at will.
My prior example was about a bank monetary policy that disagreed with the government's policy. But, what if they agree?
Under the current system as I understand it, the CBR has to appear before the Duma and request a change in monetary policy.
Given the volatility of financial markets, this is completely non productive. The CBR needs the ability to react quickly to changing circumstances.
I propose a CBR Open Market Committee with the discretion to buy or sell a list of approved assets on the Russian domestic only open market at its sole discretion without requiring a government approval. Such a committee would try to balance the goals of controlling inflation and ensuring full employment.
Such a committee will require a guideline only set of circumstances under which it will buy or sell assets and can ignore the guidelines at will. The committee also will require detailed sets of economic statistics from all the major population centers including but not limited to job creation, unemployment, bank reserves, bad loan ratios, etc. etc.
Members of the committee would be chosen from CBR executives and others as nominated by the government with a confirmation required from the Duma. It is certainly possible that one member of the committee is a government representative.
The chairman of the committee is designated under the same process.
This type process would accomplish a few things:
** make monetary policy more responsive to circumstances
** improve domestic liquidity and economic stability
** keep foreign currency reserves available for foreign currency requirements like supporting the exchange rate
** permit liquidity changes without loans, freeing bank reserves for lending for productive enterprises.
In conclusion, the above is an approach that may have some merit.
Mike McKeever, Founder
McKeever Institute of Economic Policy Analysis [MIEPA]
www.mkeever.com
The central bank of Russia at least has the saving grace of having a halfway competent administration -
In America things are much worse
- It looks like Bush will get to blow a TRILLION dollars in 2 weeks, the house Republicans put up a good fight , but with a REPUBLICAN as the biggest govt spender in history, that kinda goes against all that party is supposed to stand for. If it works he may be redeemed but if it fails, hes flushed a trillion dollars .
Sadly, the Treasury secretary is a former CEO of Goldman Sachs who personally LOST 200 Million dollars on Goldman Sachs stock!!!, and they are giving this moron another 700 billion.
Sadly the treasury secretary is STUPIDER than financial adviser Dr Zauis (A brilliant Orangutan Scholar). His invaluable advice of dumping stocks bonds and Mortgage securities, and investing in Bananas on the commodities market was a LOT smarter as Lehman Brothers stock is now worthless,
Mortgage backed securities are worth pennies to the dollar, and Bananas are bringing RECORD HIGH PRICES.
Hope there is still time to kill the bailout as so far they give NOTHING to main street, and and 700 billion to a treasury secretary with worse financial sense than an ape.
Latest Banana Prices----
http://www.freshplaza.com/news_detail.asp?id=28852
Giving the 700 billion to Zaius for his Banana fund actually makes more sense as at least with Dr Zaius , we have got a better chance of getting our money back & hes been showing a profit lately, instead of a 200 million dollar loss.
Also worst case scenario, the US gets LOTS of bananas, instead of the worthless paper wall street is trying to foist on the govt.
Inflation is a result of too few goods chasing too much money/and/or too much money chasing too little people.
In my view, RF has both these problems.!
The economy has to learn to be more productive and increase its production/competitiveness in lieu of increases in money supply while the population either has to become more affluent or more savings prone/investment oriented.
CB's role can be limited to -
Tinkering with Interest rates.
Control of money supply.
Exchange rates.
Bank ratios.
and maybe some other tools.
But, IMHO, the main factors for and of inflationary trends or the absence of them is outside the purview or even the control of CB's, Russian ones included.!
So long as Russia's Central Bank is wholly a creature of the Russian Treasury inflation should be very much controllable. During the time that The United States Bank, a division of Treasury, was the true central bank, we were okay so far as monetary policy and management were concerned, although people did (as they always will) go overboard with promisory notes and went bankrupt, the United States Bank operated upon proven and sound banking principles and inflation was not a major factor - - - only when the international banksters, in the form of the so-called 'Federal Reserve' got control of the money supply and kept it in private hands did our national economy go into uncotrollable spasms of one kind or another, ending at last in the death of America. Watch out, Russia, the international banksters hate your guts, and will stop at nothing to bring you down, too.
* Oct 30:Russia's international reserves dropped $31 billion (in a week) the most on record, as the central bank struggled to prop up the rouble and the banking system came under threat from the global financial crisis. About $15 billion of the decline was from currency sales, while another $5 billion may have been in transfers to the state development bank (Nadorshin via Bloomberg)
* Russia's reserves of foreign exchange and gold fell to $484.7 billion in the week ending Oct. 24.Russian reserves have lost 19% since the start of August as the central bank sells currency to limit the rouble's decline and investors pull money out of riskier emerging- market assets.Meanwhile the USD rally has reduced the value of Russia's euro and pound assets which make up 52% of the total stock.
* Russia's two sovereign funds which are managed with Russia's reserves account for almost $190 billion of that total. Russia has been spending some of its reserves to stem outflows and has pledged as much as $90 billion to support Russian banks and corporations and help them finance their external debt
* A Medvedev aide suggested that any amount above $100b was sufficient level of reserves for Russia, indicating that Russia might continue to spend its reserves(Bloomberg)
* Russia has been gradually decreasing the dollar share of its reserves in favor of the Euro and shifting a portion of its reserves from deposits to fixed income, contributing to the reduction of Russia's net position with banks reporting to the Bank of International settlements
* In 2007, the central bank of Russia lowered the US dollar share in first line reserves (ie not the stabilization fund) from 49 % to 47 % and increased a share of euro from 40 % to 42.4 %. the Central Bank also has lowered a share of pounds sterling in first line reserves from 10 % to 9,8 % and the Japanese yen - about 1 % to 0.8 % (via F+F)
* In June 2006: 50% of forex reserves were in dollars, 40% in euros and the remainder in sterling. Previously it was believed that just 25-30 per cent of the reserves were in euros, with virtually all the remainder in dollars (FT)
* Russian reserve and stabilization fund invest in government bonds (including those of government agencies) in a 45% USD 45% EUR 10% GBP allocation. 80% in government bonds 15% in agencies 5% in international institutions
* reserves of foreign currency rose by almost $170 billion in 2007 to reach $384.67 billion. purchases of foreign exchange by the Bank of Russia accounted for $142.3 billion of Russia's reserve growth in 2007 with valuation changes of reserve currencies (euro, pound and yen account for $20 billion
* Russia has reduced its holdings of U.S. Agency debt (mostly short-term) from around $100 billion at the end of 2007 to under $50 billion
* Ignatiev: In order to sterilize excess money supply caused by growth in international reserves, the Central Bank uses a range of instruments; specifically, it attracts deposits from commercial banks and issues its own bonds. The Stabilization Fund’s role in sterilizing excess liquidity was particularly prominent between 2004 and 2005, when the Stabilization Fund resources increase was about 60% of the total increase of Russia's international reserves In 2006, and especially in 2007, international reserves have increasingly boosted by the inflow of private capital
