Russian Economy Essays - National Accounts, International Finance

Russian Economy The global economy has been brought about through innovation, technology and de-regulation. To the extent the government prints more Rubles than the equivalent of the hard currencies earned on exports, it will lower the real exchange rate value of the Ruble. In effect the government makes itself a forced partner of anyone with Rubles, whenever it prints Rubles for which there was no corresponding production of goods. By laws and policies it transfer this money from the poor to the rich. Printing Rubles is the same thing as collecting a tax. But it is a tax on possession of money not production of money and is therefore parasitical. If a country runs a current account deficit it needs to finance it with a capital account ?surplus? (i.e. inflow). If it has a current account surplus, it must have a corresponding capital account ?deficit? (i.e. outflow). Comparing 1979-81 with 1985-88 West Germany's capital balance moved from an inflow of $8 billion to an outflow of $40 billion. Japan's from an inflow of $5 billion to an outflow of $75 billion, and America's from an outflow of $2 billion to an inflow of $129 billion. But this yardstick is hardly of any use: it is inaccurate and misleading. A balance of payments yardstick for capital flows gives a misleading impression because they show net rather then gross flows of capital. In 1980 total world bank cross border and foreign currency lending was $324 billion. By 1991 it was $7.5 trillion. The combined GDP (Gross Domestic Product) of the 24 industrial countries in 1980 was $7.6 trillion; in 1991 it was $17.1 trillion. 1996 GDP of Russia as half a trillion. So during the past ten years bank lending has risen from 4% of GDP (Gross Domestic Product) of these 24 nations to 44%. From 1970 to 1988 the ownership of American bonds by foreigners increased from 7% to 17% and for Germany from 5% to 34%. Turnover in foreign exchange is now $900 billion each day. There are now 35,000 trans-national companies with 147,000 foreign affiliates. Finance has become totally global. History shows that the countries whose governments do not involve themselves in business and have the fewest regulations about business, get the most investment. Russian budget ?investments? are not investments at all but subsidies. They is no substitute for real capital. Neither are Western government budget allocations investment. Elimination of regulations about business (Freedom) is what develops economies. Currency risk is the greatest deterrent to investment. In an international economic system of global integration, differences between interest rates precisely match the expected changes in the relevant exchange rates. If a one year dollar assets yields 5% and a one year Ruble asset yields 600%, investors must expect the dollar to appreciate 595% against the Ruble over the next 12 months. It is more difficult to steer economies with Monetary policy and fiscal policy when capital flows freely in a global economy. Financial interdependence has neutered government economic policy makers. Monetarists believe that all you have to do to control inflation is control the supply of money. The ?quantity equation? of monetarists says that the supply of money in circulation multiplied by the number of times it turns over in the economy each year must equal the price level, multiplied by the amount of output produced. Under these conditions slowing the growth of money will slow the growth of demand. The events of the 1980's have obliged us to disregard this theory. It has however been accepted that output is driven by supply-side factors and not by demand. For monetarism to succeed it must be possible for the government to control the supply of money and there must be a stable relationship between the amount of money and the amount of demand in the economy. Due to financial innova tion and the expansion of global finance neither of these conditions was met in the big industrial economies in the 1980's. Raising interest rates no longer controls the money supply. Domestic interest rate policy is undermined in a global economy. Higher interest rates increase exchange rates. If governments chose to limit exchange rate fluctuation they cannot increase interest rates. The truth is that there is no longer any