Thursday, May 26, 2011

Another Lesson on Inflation

Belarus is currently experiencing a very high rate of inflation and this article has some good lessons on what inflation does to a country and how the government acts as a demagogue in such situations.  Here are some key effects of inflation:

1. Rapid move from cash into tangibles and out of cash:
"Belarus consumers are sweeping store shelves bare in a frantic attempt to spend their devalued rubles before prices of imported goods go even further through the roof in the cash-strapped former Soviet state."

2.  Rapid devaluation of currency creates a panic and a desire (but lack of ability) to move to other currencies:
"On Tuesday, Belarus devalued its ruble by 36 percent, fixing it at 4,930 rubles to the US dollar.
But for consumers, buying dollars at the official rate has become a real problem with so few willing to sell any US currency leading to lines at exchange booths.

Five people sat on crates and folding chairs next to one booth in Minsk waiting for dollars -- or any other currency to go on sale."

3.  The government acts as demagogue:

"The president on Wednesday admitted that the ruble's value was plunging but refused to attribute the troubles to his own policies, blaming them instead on rising energy prices set by Russia.

"Perhaps we overdid it with the easing but the main thing is the leap in the price of energy," local news agencies quoted him as saying while on a visit to Kazakhstan."

4.  Bailouts required, and the weakened government loses sovereignty to another nation: 

"Lukashenko has pushed for a bailout loan from Russia, which has for years supported its economy by selling it cheap gas.

But Moscow hiked the price last year, with a senior Russian official noting Tuesday that Belarus "has lived at our expense long enough."

A Russian-led union of ex-Soviet states is now preparing a $3.0 billion loan which calls for Belarus to sell off its main government-owned firms. A final decision is expected on June 4.

Russia is already in a position to take control of the Belarus state gas transport company and has its eyes on other prized industrial assets."

Of course the government won't accept responsibility for the weak currency, instead, they blame someone else for their troubles.  This is precisely what happened in Weimar Germany, and what happens whenever the government is caught devaluing their currency.

The article states clearly what is the cause of the ruble's troubles:  "The economic crisis in Belarus was triggered by a colossal trade deficit and massive state spending that preceded last year's presidential elections which gave a new term to authoritarian ruler Alexander Lukashenko."

Sound familiar?

As Adam Fergusson writes in When Money Dies, the government blamed the Mark's problems on

"an adverse trade balance, the consequent necessity to sell German currency abroad, and its resulting depreciation, followed by the fall in the exchange rate and inevitable rise of home prices, leading to increased costs of materials and labour and so to new rifts in the budget.  Dr Rathenau expressly and publicly denied that the printing press had any role to play in that permanently spiraling sequence of events, and by ascribing the country’s ills primarily to the unfavourable trade balance caused by reparation payments he totally failed to understand the reality that the country was living far beyond its means, printing money to pay for excesses which included over-employment, the inordinate subsidy of industry, the import and manufacture of luxuries for domestic consumption, and a grossly inefficient tax-collection system.”

As Herbert Schlossberg writes, "Inflation is both a cause and effect of moral decline."  The panic buying of tangible assets and out of paper currency creates a spending furor that encourages greed, hoarding, and a sort of savagery.

As Fergusson concludes, "Thus must sound money be the first bastion of a society’s defence."

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