By Sergei Shelin
October 28, 2009
Translated from the Russian by The Other Russia
If you believe the government statistics, then we have had no inflation since August. It ended. Just as it piled up from January through July, it has stopped in the past few months. Even our enemies at The Wall Street Journal admit it: “Recession quells inflation.”
And that’s not all. Prices won’t rise any further as well. At least, that is, through the end of December. This prediction came out easily from the words of Prime Minister Putin at the Russian-Finnish Forestry Summit: “You know that we are striving for a reduction in inflation… This year already it will be, perhaps, a bit more than 8 percent…”
Judging by the fact that we already have “a bit more than eight,” nothing will increase through to the end of 2009. Thus was resolved by the Prime Minister.
A good six months without inflation – that’ll be a historical record for post-Soviet capitalism.
Or to be more accurate, it won’t be; or, perhaps it will. That’s because in reality, the growth of prices has no intention of stopping. It’s also because this “inflation” that the authorities talk about liquidating is not representative of the entire price growth in our economy. It represents but one part: the growth of consumer prices. To be precisely exact, it’s not even that, but just the growth (or lack of growth) of prices of a carefully selected sample of consumer goods. Part of a part.
Calculated in this way, it’s true that the index of consumer prices (CPI) didn’t rise in August, September, or the first three weeks of October. But, like you’ll surely guess, much depends on the technicalities of choosing the sample, and the finesse that goes into the calculations. For example, the so-called core inflation in this same consumer market (but with a slightly different sample) not only didn’t stop, but even grew: having reached its minimum in the summer (with a 0.3% monthly increase in June and July), it then rose again (to a 0.5% monthly increase in August and September).
The “zero growth” CPI is itself the sum of a seasonal recession in food prices and the continuing growth of everything else. In the first three weeks of October, for example, the country was rescued from the general growth of consumer prices by four single vegetables: potatoes (which fell in value by 6%), onions (by 7%), carrots (by 8%) and white cabbage especially, which fell by almost 10% in just three weeks.
Meanwhile, non-food goods rose in price like nothing had hit them (in August by 0.6% and in September by 0.7%; figures for October have yet to be calculated).
But consumer prices, I remind you, only make up a part of all prices. All the remaining prices are growing, and seem to know absolutely no shame. Indeed, they have no public accountability. The index of wholesale manufacturing prices, for example, rose 1.4% in August and 1.7% in September.
In an honest assessment, inflation has in no way stopped. By most measures it is many, even dozens of times higher than in wealthy countries, where the recession has indeed “quelled inflation” and prices have virtually halted.
Here they are rising for sure, although not so rapidly as last year. But that’s understandable. A recession in production as big as ours ought to have induced a powerful wave of deflation. In certain sectors it did, but on the whole, as we see, it has not. You could call it an economic miracle, albeit a special one. And if our domestic inflation, shaky thought it was, withstood the terrible recession of last fall and winter of this year, then why on earth would it stop now, when the worst of it, as they say, is already behind us?
In order to appreciate its full potential for growth, let’s compare our pre-crisis CPI (13.3% in 2008) with the CPI of both wealthy countries, and poorer countries whose economies are stronger than ours. In 2008, the consumer price index in the European Union grew by 3.5%; in the US – by 3.8%; in Brazil – by 5.7%; in China – by 5.9%; in India – by 8.3%. Now the recession in all of these countries is smaller than ours; in some cases their economies have begun to rebound.
In twenty years of high inflation, an entire scientific discipline has formed that wittily demonstrates the benefits of money pumping and the accompanying rise in prices, which our national economy supposedly could not function without.
By this logic, a common man, unhappy with inflated taxes, ones that in reality are worse than any others, just doesn’t understand that this is his advantage. That’s because a stop in price growth, allegedly, is comparable to an absolute halt of the Russian economy. Most amusing is that anti-inflation experiments, conducted from time to time by Russian authorities, have supposedly confirmed these projections, while in actuality they chronologically correspond with successive economic recessions.
Therefore, we have emerged in the current crisis as a world champion of price growth among larger economies. But here, in this difficult hour, it did nothing to help us see straight.
We shall therefore recall the story of our national war with inflation. What went wrong?
We shall remain silent on the first half of the nineties out of tact. After that, however, came three interesting incidents.
The first great battle with inflation took place in 1997-98. The M2 money supply was being more and more strictly held back from growth. At the end of ‘97 it stopped increasing altogether, and then until August ‘98 even shrunk. Inflation on an annualized basis began to number in the single digits for the first time in post-Soviet years.
But then came the default, generating what later became were clear were the erroneous hopes of the authorities to save the overvalued ruble and excessive fiscal spending both at the same time. The time then came to save the economy at any cost. The inflation at that point was immeasurable. The money supply, as well as the prices, rose rapidly.
The next round of anti-inflation battles occurred several years later, when the dust had settled and the economy was operating normally. In 2002, the money supply grew altogether 32.4% (the minimum growth during all those rich years). Inflation quickly dropped, but the rate of GDP growth fell by two percent. Although the rebound continued and nothing terrible transpired, the slowdown was unbearable for the top authorities. For that reason they gave the economy a fundamental zap the next year in 2003, and greatly built up the money supply. The rate of GDP growth immediately went back to normal, and inflation cased to decline.
But hope did not perish. The next couple of years saw fiscal policy zigzag about – here tightening, there loosening up.
The consumer price index was again measured in the single digits in 2006. Diminish it another two or three times and it might have fit the European standard. But then and there came the time to radically abandon all financial sanity. The nationalized economy demanded new magnitudes of stimulation, and the ambitious authorities demanded new, unprecedented rates of growth.
In 2006, M2 growth was as much as 48.8%, and in 2007 remained at the same level – 47.5%. Consumer prices began to pick up speed – not immediately, but all the more certainly.
Anti-inflation policy was then sacrificed a third time, and in essence for the same reasons as before – poorly chosen developmental indicators, megalomaniacal dreams, and, just like always, the aspirations of the elite to realize their vested interests.
And now our present crisis. What is happening to the monetary supply? At the beginning of October 2009 it was 5% lower than one year prior. As this money maintains the economy – which has shrunk in size by 10-11% this same year – the inflation has remained perceptible. Large new expenditures planned for the near future, however, will drive it up even further.
Additionally, there is something else that is more important than any formal plans – the fact that decision-making logic has remained just as it was before.
All the mechanisms to support the inflation that rose in the nineties before being almost completely eradicated are in the same working condition as they were before.
It is a power that looks strong but is inherently weak, capitulating to the financial extortion of coalitions of lobbyists and acquiring masses of their costly undertakings.
Here we see the perpetual inability to solve the problem of such gigantic petrodollar revenues. On its own, the existence of such massive profits might not drive up domestic inflation. However, this would only be under two conditions: if the country received no income from exports (precisely the Chinese approach; unacceptable here since it provides too great a temptation to grab and split up all the free money) or when the national currency is aggressively consolidated (also an unacceptable choice, as our monopolized economy would then lose its last shreds of competitive advantage).
Therefore, in the years before the crisis, our authorities would coil away every few months from anti-inflation policy (when they allowed the ruble to grow) towards a policy of inflation (when, as a result of the war on ruble growth, they printed fiat money and used it to buy up petrodollars). The crisis itself interrupted both their mental and financial agony; but now, with the new jump in oil prices, it’s amusing to see how they spin right back around.
Now to the most, perhaps, secretive mechanism of inflation: our unique banking system. To be more exact – the lack of one. Our banks are massive points of currency exchange and (or) distributors of government money. Therefore, just as there never was, there is practically no normal credit lending, where money is lent at a reasonable rate of interest; but they do this so that the money is spent rationally.
This banking defect is no accident and is constantly supported from above, attaching irresistible power to lobbyists’ demands to organize widespread distributions of government money – which the lobbyists themselves can’t get through any normal channels. On one hand, such thoughtless infusions of cash are a reliable motor for inflation. On the other hand, without them, and without normal banks, the economy caves in, as if confirming the theory of the seamlessness between low inflation and economic downturn. Not for everyone, to be sure; just for our country and its current methods of economic organization.
Indeed, all of the aforementioned mechanisms have successfully survived the first year of the crisis. Everything in the old system is ready for action, and has even in part already gone back to work.
Mechanisms of inflation are as firmly fixed in the system as mechanisms of corruption.
So from that we have our forecast. A departure from high inflation will occur sometime, of course, but certainly no sooner than a departure from the system.