Money circulation and economic reforms

    This article is a continuation of my article published on December 11, 2015 on the same resource:
    “Is there enough money in the economy?” Why?"
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    And the immediate impetus for its writing was the reading of an article by Dmitry Tulin, the current first deputy chairman of the Bank of Russia, “ In search of seigniorages, or easy paths to prosperity,” devoted to criticism of Sergei Glazyev’s famous proposals.
    This article was published in November 2014, but I only read it recently.

    Now it is possible to more accurately answer the following questions raised in the discussion of my December article:
    1. Is money and its amount the direct driving force of the economy?

    2. To whom exactly and where exactly is not enough money?

    3. Is it possible to cause economic growth only with soft loans?

    4. Should we focus on the development of the existing ruble-based monetary system as the only legal means of payment, or is it better (and quite sufficient) to allow any foreign currency to be used in settlements within the Russian Federation without restrictions?

    The answer to the first question is simple - no, money alone is not the driving force of the economy.
    I already wrote that money is a lubricant for the economy. And you can’t get far with grease alone.
    And if you add more oil, you won’t go faster either.
    Now I have seen with great interest that D. Tulin also speaks almost exactly the same in one of his interviews (I will refer to him several more times). Here is a quote from his interview (Interfax March 5, 2015):

    For understanding, the economy can be compared to a complex machine, which is controlled by several teams of people. There is a team in the Central Bank, there is a team in the Ministry of Finance, there is a team from line ministries, the government, and the presidential administration. And everyone is trying to make our economy viable and survived, and people live well. At the Central Bank, a team of people is responsible for the supply of oil. If you pour too much - bad, pour a little - even worse. But unlike the car, there are no strict technical instructions . ”

    You probably can’t tell more clearly. Is it possible to add that in the modern economy there are not enough ways to purposefully (and not using the “hand of the market”) redistribution of lubricant (money) from those places where there is now some excess to those places where there is a shortage.

    Consider question number 2: Who exactly and where exactly is not enough money?

    If you take specific people or individual organizations, then of course, specific people and organizations lack money by definition. This is a common place and you can not talk about it.

    Let us now look at this issue from the point of view of the country's banking system. Lack of money, if any, is commonly called a lack of liquidity. Is there a lack of liquidity in the banking system?

    I am inclined to agree with D. Tulin here that there is apparently no shortage of liquidity in the banking system of the Russian Federation (March 2015). He substantiates this with the following:

    We believe that so far there is enough liquidity. Why do we think so? Well, firstly, when we held the last auctions, our offer exceeded demand, and liquidity was not completely selected. This is the first sign that there is no rush demand at the current level of rates.

    The second sign that there is enough liquidity is that the interbank market rate falls within the corridor around the key rate. In December, when we had a super-tight policy, the interbank market rate was almost a week above the upper limit, but then we were not up to the purity of the inflation targeting theory. And now all this has returned to normal, our policy has become moderately tight, and rates have entered the corridor.

    And the third indicator is the collateral utilization ratio. Utilization of market assets at the end of 2014, according to our estimates, reached its peak - 80%, that is, only 20% has not yet been used. Now a survey of banks shows that this figure has dropped to 50%. Our units, which provide loans secured by non-marketable assets, are more conservative. They do not interrogate anyone, but trust only that they themselves "felt". Their numbers are different, but the trend is the same. According to them, the utilization rate of non-market collateral as of January 1, 2015 was 86%, and as of February 25, it was 69.5%. These signs indicate that there is still enough collateral liquidity, but the problem is that lending to the economy does not go very well at these rates
    . ”

    So what's all right with the amount of money?
    No, banks are not the ultimate consumers of money.
    They have enough, but the economy - no. And it is necessary to speak about the economy as a whole.
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    The following signs speak about the shortage (shortage) of money in the economy as a whole (note, I’m talking about the signs, not the evidence, because if it were so easy to provide evidence, this would mean that the task of determining the required amount of money I got my decision, but this is not so. This problem has no simple solution):

    1. Low monetization coefficient in our country (monetization coefficient is the ratio of money supply in the country to GDP). It is now in Russia less than 50%, while not only in developed countries, but even in all other BRICS countries, it is noticeably larger and closer to 100% and even more.

    2. Small and medium-sized businesses now have virtually no access to bank project financing (I write this from my own experience of the last year and, if necessary, I can explain this conclusion separately).

    Let us confine ourselves to these signs.
    The monetization coefficient is also of particular interest because if you look at how exactly the countries in the world group together that are prosperous in the economic sense (where, in particular, low inflation, steady economic growth) and dysfunctional (high inflation, unstable growth or its absence), then how it turns out that monetization is always high in the first group of countries, and always low in the second.
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    So what kind of beast is this - monetization? Is it necessary to urgently, quickly and immediately increase it (as many suggest)?

    I think it is necessary to treat it (monetization) as an integral characteristic of the type of body temperature in humans. And low monetization is a sign of some kind of trouble. This is like an increased or excessively low temperature in a patient - symptoms of a disease. And of course it is necessary to treat not a symptom, but the disease itself. Only now, continuing the analogy, if the disease is started, then at the same time as treating the causes of the disease, it may be necessary to bring down the temperature or warm a person, otherwise the patient will not survive to recover.

    It must also be said here that simple linear relationships practically do not work in the economy. For example, the well-known Fisher equation ( MV = PQ), linking the amount of money in circulation with the speed of their circulation, the price of goods and their quantity, is in fact suitable only for elementary education in the basics of economics, but completely unsuitable for practice.

    And the existing dependencies are all multi-parameter and always non-linear.
    So, for example, if we analyze economic statistics for many countries and try to build one-dimensional graphs of the dependence of the inflation rate on the following values: monetization coefficient, refinancing rate, share of government spending in GDP and share of salary in GDP, then all these dependencies have the form of a V-shaped curve with distinct inflation minimums at the following values ​​of the studied parameters:

    - by monetization coefficient - inflation minimum at 100-150%

    - at the refinancing rate - minimum at 2-6 %

    - by the share of government spending in GDP - at least at about 80%

    - by the share of labor costs in GDP - at least at about 70%

    (source: speech by S. S. Sulakshin at the scientific and practical conference “Demonization as a factor of stagnation”).

    Thus, we can assume that the well-being of the economy can be achieved only with approximately the above parameters of the economy.

    Now let's say that we decided to raise the monetization coefficient and stimulate economic growth, not inflation, but not due to direct emission of rubles by the Central Bank, but a sharp decrease in the refinancing rate and an increase in the bank multiplier (which is now around 3 in the Russian Federation).

    Those. we will stimulate the growth in the amount of, conditionally speaking, “credit money” (although I will immediately make a reservation that these “credit money” in circulation are no different from all other money, including directly issued by the Central Bank).

    At the same time, however, the Central Bank will need to significantly soften its standards, in particular the N1 standard (simplified is the ratio of bank capital to the amount of loans issued). Now the standard N1 in each bank should be at least 10%.
    And with a total amount of loans issued of about 55 trillion. rubles and the capital of the entire banking system 8 trillion rubles, the average value of the standard N1 is already close to the limit value.

    Well, or it is necessary to greatly increase the capitalization of the banking system (again to give money from the budget to state banks).

    And of course, it will be necessary for banks and the Central Bank to lower requirements for the quality of loans.

    All this, of course, in the future will reduce both the overall stability of the banking system to the next crisis and reduce competition in it. This is at least.

    However, if the volume of cheap loans can be raised (and the economy needs only cheap loans), then only crumbs will reach the real sector.

    First, as Tulin rightly writes, due to interest-based arbitration, credit money will be redistributed into deposits, of which as a result only money at the previous or slightly lower interest will reach the real sector.

    Secondly, no one has canceled such a phenomenon as a capital outflow and a substantial part of cheap money will simply increase the export of capital abroad.

    Thirdly, we must take into account that it is now more profitable for banks to lend to individuals, rather than enterprises. And such lending will stimulate the growth of imports and, consequently, inflation growth first, and only then, maybe, there will be production growth.

    So, in themselves, preferential, cheap loans (if you make the main bet only on them), alas, is not a panacea either.

    Now let’s take a closer look at what D. Tulin writes in his article published in November 2014 (it’s better to read this article in full):

    1. The current monetary policy of the Bank of Russia is mostly correct, although there were mistakes in it, and a change in the “ financial paradigm, financial and economic model ” as a whole, which actually makes sense to say, “goes beyond the authority and responsibility of the Central Bank . ”

    2. D. Tulin agrees with S. Glazyev that “the relationship between the dynamics of money supply growth and inflation is not strict - the quantitative parameters of this relationship are not the same in different time periods and in different national economies .” Those. in other words, the growth of the money supply does not cause a purely automatic compulsory increase in inflation (although it may sometime cause it).

    3. He criticizes, and in my opinion, reasonably and conclusively, the idea that there is a "seigniorage" arising from the process of any issue of money.

    4. He writes that there is no evidence-based causal relationship between the methods of issuing money by the Central Bank (through the purchase of foreign currency or through refinancing operations on the domestic market) and the growth rate of the economy.

    5. It shows how and why soft (at a low rate) loans from the Central Bank without a radical change in many of the existing financial and economic schemes - will not give the real sector cheap money.

    Here on the last, what can be understood as truly radical reforms in money circulation and the economy as a whole , and we need to dwell in more detail.

    My fourth question (Should I focus on the development of the existing ruble-based monetary system as the only legal means of payment, or is it better (and quite enough) to allow any foreign currency to be used in settlements within the Russian Federation without restrictions?) Was deliberately a little provocative. Because the correct answer, in my opinion, is neither one nor the other.

    Let's start from the end - why not allow the circulation of dollars without restrictions. As one of the commentators wrote to me earlier - after all, the dollar in my pocket is already my dollar - where is the loss of sovereignty?

    A lot can be said on the topic of criticism of the free circulation of the dollar. But I will limit myself to only one thing: all who have a little idea of ​​the specifics of cash payments through banks understand that all payments go through correspondent accounts.
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    And correspondent accounts in dollars are ultimately always with US banks. And the USA at any moment can “with a flick of the hand” stop all non-cash transfers of dollars. Well, the value of cash dollars will then become completely unclear what. Yes, of course, they are unlikely to do this in practice. But they can!

    What then can be done quite radical, remaining within the framework of only the ruble as the only legal means of payment.

    1. It is possible and even to some extent necessary to introduce direct state administration (not control as it is now, namely management) in terms of managing the credit policy of banks. The measure is not much market. Although, as claimed, it is quite actively used in some countries (China, Italy).

    2. It is possible (as suggested, in particular, by Mikhail Yuryev) to introduce a complete ban on the possession and any use of foreign currency within the country. Also not a strong market measure.

    3. You can try to cancel the system of partial bank reservation. Introduce the rule of mandatory 100% reservation of term deposits with the Central Bank. In this case, only the state will be the only issuer of money. Banks will not produce credit money. And by the way, a bunch of reasons for banking crises will disappear. However, there will be no need for the Central Bank either. Such proposals are known to be promoted by the Austrian School of Economics. True, these proposals do not provide for the growth of monetization at all.

    In this regard, I want to return again to the proposal, which was described a little earlier in my article “What kind of money does the economy need (new money for settlements ) ”, published on this resource November 30, 2015.

    Its use will make it possible to use non-market measures of direct state administration to a lesser extent (although one cannot do without them).

    The basis of this proposal is primarily the rejection of the assumption (well, or the assertion of someone like that) that the parallel circulation of several domestic currencies (but not foreign of course!) Is bad and uncomfortable.

    In this regard, I propose to recall that even in the history of our country there were at least three periods when several currencies existed in parallel.

    The first period - the middle of the 19th century - simultaneous and prolonged circulation of silver coins and paper bills.

    The second period is the twenties of the 20th century - the NEP - the parallel circulation of the “golden dime” and “ordinary rubles”.
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    The third period is from about the late thirties to the beginning of the sixties of the last century. In the USSR, then there were two different rubles with diverging ranges of circulation: cash ruble and non-cash ruble, and sometimes the number of such different currencies reached 4 - so in the calculations between the CMEA countries another transferable ruble was used, and foreign workers could receive part of the salary in Vneshtorgbank checks (which then could be spent in a special chain of stores Birch upon returning to the USSR).

    In all these cases, the state solved quite successfully, including using several currencies, various socio-economic problems.

    Further, let us recall again about local additional currencies, which precisely during periods of crises and recessions of the economy in many countries very successfully helped solve local economic problems. First of all, they eliminated local failures in the distribution of the money supply, and also made it possible to independently solve local problems without waiting for help from the central authorities of the state.

    And thus, it is quite logical to supplement the list of measures of radical economic reform (and of course there should be several measures, now I consciously speak of only one of the measures) with the condition for allowing the turnover of local local currencies.

    And we will further increase the monetization of the economy not by issuing ordinary rubles (followed by a bunch of problems how to get them to the real sector of the economy), but by issuing a new type of currency. All the same, we are actually in the process of increasing monetization - it’s better to do this through multi-currency systems.

    The new currency (I have conventionally called it - Special Settlements - abbreviated as SSR ) should be intended only for settlements, without the accumulation function.

    It should be demurred and there should be a ban on its use in the foreign exchange and stock markets. In all other calculations, it apparently needs to be allowed to apply.

    This currency should be used by the state (Government) to finance public investment.

    I think the introduction of another currency - only for settlements - will also allow a new approach (which will also need to be done) and in general to the question of the role, place and importance of the foreign exchange and stock markets in the economy.

    The presence of two different currencies (for settlements - a currency with demurrage and a regular currency with a small loan interest for savings and savings and a number of other purposes) will reflect and support the simultaneous existence of two equally necessary, but seemingly opposite, public goals:

    - stimulation of competition (ordinary money with a loan interest) and

    - promotion of cooperation (how and why money with demo loan encourage cooperation is well written by Bernard Lietard (books “The Soul of Money” and “The Future of Money”).

    In conclusion, at one significant point, I would like to supplement D. Tulin's theses. Namely: money (and their amount in the economy) cannot be considered only as a derivative of the existing economic ties and the degree of complexity of the economy. They themselves (more precisely, of course, not they, but the existing monetary system itself) are a serious factor that changes even the very consciousness of people, and not just the economy. Waiting for the economy to evolve and then the issue of increasing the money supply and other issues of the monetary system will be resolved as if by themselves, alas, there is no possibility. I'm afraid we just won’t wait.

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