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I appreciate Neil's insight into how currency exchanges function. Not so sure about his proposed remedies.
It seems to me that the Russian stagflation is a classic case of Dutch Disease. Increased taxes are not the cure since the Russian economy is not running at full capacity.
Neoclassical theory would hold that the invisible hand of the market will eventually cure the Dutch disease -- the weak ruble will make domestic production more competitive, and imports will fall. The problem with that theory is that ramping up domestic production requires long term investments which are risky given that the currency problem is tied to oil prices that are controlled by the Sauds and to sanctions that are controlled by the US.
It seems to me that either the Russian government needs to nationalize domestic industries that produce basic necessities -- like food and medicine -- or else institute tariffs and commit to keeping the tariffs in place permanently, so that domestic producers will be assured of a stable market for their products.
You're missing the fact that the currency area is shrinking. That's what dollarisation does.
So you have to increase the size of your currency area, and you do that by imposing taxes on the part of the economy that has dropped out of your control and making it difficult for people to transact in anything else.
Then you replace that in the economy by deploying the real resources you've made unemployed doing things to alleviate the shortages.
You make sure that imports are billed in your currency and that your suppliers handle the currency exchange issue via the banking system. And you do that through realising that there is more than one 'rest of world' country out there and they are competing for your business.
Don't assume a constant currency area size. That's just as much a mistake as assuming full employment.
Currencies circulate due to transitive requirement and force of habit. That is the same as the banks lending to each other overnight.
However if there is stress in the system, the transitive stuff evaporates and you have to rely on the primary driver - tax and spend in the case of a currency and the discount window at the lender of last resort in the case of banks.
3 comments:
I appreciate Neil's insight into how currency exchanges function. Not so sure about his proposed remedies.
It seems to me that the Russian stagflation is a classic case of Dutch Disease. Increased taxes are not the cure since the Russian economy is not running at full capacity.
Neoclassical theory would hold that the invisible hand of the market will eventually cure the Dutch disease -- the weak ruble will make domestic production more competitive, and imports will fall. The problem with that theory is that ramping up domestic production requires long term investments which are risky given that the currency problem is tied to oil prices that are controlled by the Sauds and to sanctions that are controlled by the US.
It seems to me that either the Russian government needs to nationalize domestic industries that produce basic necessities -- like food and medicine -- or else institute tariffs and commit to keeping the tariffs in place permanently, so that domestic producers will be assured of a stable market for their products.
Dont forget about all of the additional interest income from the now higher rates....
Dan,
You're missing the fact that the currency area is shrinking. That's what dollarisation does.
So you have to increase the size of your currency area, and you do that by imposing taxes on the part of the economy that has dropped out of your control and making it difficult for people to transact in anything else.
Then you replace that in the economy by deploying the real resources you've made unemployed doing things to alleviate the shortages.
You make sure that imports are billed in your currency and that your suppliers handle the currency exchange issue via the banking system. And you do that through realising that there is more than one 'rest of world' country out there and they are competing for your business.
Don't assume a constant currency area size. That's just as much a mistake as assuming full employment.
Currencies circulate due to transitive requirement and force of habit. That is the same as the banks lending to each other overnight.
However if there is stress in the system, the transitive stuff evaporates and you have to rely on the primary driver - tax and spend in the case of a currency and the discount window at the lender of last resort in the case of banks.
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