Saturday, December 20, 2014

Cory Hoffman — The Collapse of the Russian Ruble Does Not Undermine the Central Premise of Modern Chartalism (MMT)

The collapse of the demand for the Ruble in the face of falling oil prices concretely confirms the central premise of modern monetary theory; that the real constraint on a state’s ability to move real resources are its productive capacity and its ability to put its resources into motion. 
That is to say that the basic equation is that, in both the short run and “the long run”, public expenditure is constrained by the real resources and real productive capacity of a given macroeconomy.…
Overlapping Consensus
The Collapse of the Russian Ruble Does Not Undermine the Central Premise of Modern Chartalism (MMT)
Cory Hoffman


peterc said...

Nice. Strong postscript as well underscores the point:

"P.S.: Note that even in Russia, the crashing Ruble stabilized as the taxing power still maintains notional demand for the Ruble even when the Emperor has no clothes.

Meanwhile, Reuters reports that the country’s major exporters swept in and purchased rubles today 'in preparation for monthly tax payments due this week.'

Tell me again how the Russian situation undermines the major premises of MMT?"

Matt Franko said...

And watch how the high rates turn it around domestically for them thru the interest income channel.... the high rates are fiscally supportive. .. rsp

Tom Hickey said...

Supportive fiscally, but not so much for private credit, on which investment depends, unless government steps in with lending — which Russia may do based on signals already given.

Brian Romanchuk said...

The issue in Russia appears to be private debt denominated in foreign currencies. The demand for foreign currency to meet those payments crushed the external value of the ruble.

This is also what sank Iceland; the banks blew up, but the government was OK (although there was the issue of deposit guarantees).

It is politically difficult to throw a good portion of your corporate sector into bankruptcy. You have to hope that they remain hedged. Emerging market borrowers seem to have a bias towards foreign currency borrowing. I have no isea whether this is due to intransigence amongst developed country lenders, or incomptetence amongst borrowers.

Jose Guilherme said...

In the case of companies that sell heavily abroad it may make sense to incur in foreign borrowing, however.

Such companies would be hedged and able to withstand any collapse of the domestic currency.

Tom Hickey said...

Russia has enough foreign reserves to met its BOP and private external debt issues for some time, and it continually earns more through its energy sales. So Russia can finesse this for the immediate future. The problem is foreign direct investment and continued financing from the West, which is shut off.

Russia will have to seek investment and financing elsewhere, which pretty much means China. China, especially, realizes that if Russia falls to the West, then NATO will be on its western border. So the question is how the East and South will react to this. Initially it is looking to be going in Russia's favor with Turkey, China, and India supportive in defiance of US pressure.

This is already altering the geopolitical and geostrategic outlook. It's beginning to look like it may be the West that gets isolated.

Since Western leaders like David Cameron are publicly bragging about economic and financial warfare against Russia to change its policies as a sovereign nation, there is little doubt that Russian companies can invoke force majeure to legally avoid its Western debt if they choose to go to court over a sanctions-imposed shortage of USD. So far they apparently do not need to do so.

From what I can see, the US is playing a long term strategy in that Russia is estimated to be able to last about two years unless oil goes a lot lower.

The US seem to be banking on a color revolution led by the fifth column in Russia allied with the oligarchs in order to oust Putin and institute a compliant neoliberal regime that will be open to Western economic and financial control in order to enrich themselves. They aren't asking what the reaction of the vast majority of the Russian people would be to that though. In addition this is taking place on the chess board of the Great Game and there's a whole lot of balls in the air, with a lot of competing interests and huge uncertainty.

Matt Franko said...

Jose it sounds like Brazil is about to get "interesting" now also...