In this column we will discuss two matters—one important, one less so. Actually, the less important one is merely a pretext to discuss the important one. That less important matter is the panic over the hryvnia exchange rate, or more precisely, the logical question: is this already hyperinflation or not yet? The author found this question so compelling that for the first time in his life he watched Shuster’s show, where our central banker was busy explaining the official line.
From what I heard, one can conclude that Tymoshenko, with her 311 billion in newly printed money, as usual overdid it. But the National Bank is injecting money into the economy, at minimum, through “rehabilitation” measures for the banking system. What’s more, Hontvareva acknowledged printing 96 billion hryvnias “for Naftogaz.” And although she assured us that this money cannot enter the market, we shouldn’t believe her. Money produced by central banks doesn’t exist in the form of coins, ingots, or even paper cash. The expression “printing money” is merely a metaphor. In reality, paper money in our world constitutes only 8% of the money supply—the rest are simply entries in banking ledgers. Given that banking activity—the maintenance of these very entries—is regulated by laws, decrees, orders, letters, notes, and those little yellow sticky notes on the refrigerator, I have little doubt that this money has already found its way into the market. Altogether, it’s a rather impressive sum, sufficient not only to destabilize the exchange rate but to push inflation to the brink of hyperinflation. The question of when inflation becomes hyperinflation—when people begin refusing the inflating currency en masse—cannot be answered precisely. It will happen if the state keeps pumping the economy with worthless money, though other factors play a role too, such as the assorted regulations that accompany this process. Between the volumes and the regulation, we are fully prepared, and the latter is only expected to expand—so we can launch into hyperinflation while official inflation figures still qualify as “acceptable.”
On hyperinflation, I have two pieces of good news. First—hyperinflation means the death of the currency with which it occurred. Second—hyperinflation means the death of the government that triggered it. Everything else the young can learn from their elders, and the elders should dig their kravchuchkas out of storage and oil them.
That was the unimportant matter. Now for the important one.
Let’s recall what the central bank does. It manages the monetary unit. Let’s recall that prices and monetary calculation—the mechanism in which this monetary unit operates—are the foundation of the system that controls the market. The crucial point is that money itself does not exist outside this system; on the contrary, it is part of it, and its “value”—the exchange ratio with other goods—is generated by the same economic regularities.
Fiat currency and the central bank represent precisely an attempt to circumvent these regularities and present the monetary unit as a tool, something neutral with respect to the rest of the economy. The central banker has a special methodology—macroeconomics—which explains when he should enter the game and how he should behave. If someone believes this theory exists independently of the central bank’s activities, he is mistaken. The history of the central bank’s origins is the history of state regulation, and above all, the attempts to reconcile metallic money with fractional reserve banking. Regulation came first; then the theory justifying and serving it appeared. A defining characteristic of macroeconomics is its method—it is essentially physics, or more precisely thermodynamics, transplanted onto social soil. It operates with changes in certain aggregates calculated for arbitrary conditions (for example, for the “economy” within state borders). Moreover, regulation proceeds toward the goal of achieving equilibrium, which is, of course, an absurd and unattainable task. The interested reader who doesn’t wish to wade through thick volumes can consult the introduction in the note “Wrong Method” in this collection. In any case, there is no place in this science for human beings—the only entities who actually operate in the economy.
Highly revealing is the phrase that escaped Hontvareva during Shuster’s show: “the population is very dangerous for the currency system of any country.” Everything you need to know about a monetary system with a central bank is contained in that sentence. It’s fine when a central banker, like Greenspan, spends his workday glancing at fifty charts and then simply goes home with a sense of duty fulfilled. It is bad when he starts acting. Any action by the central bank is an assault on the monetary unit, and thus an assault on the most fundamental economic processes in which it is used. With sufficient skill from the central bank, money transforms from a tool of coordination and management into a tool of disintegration and chaos.
This is precisely what the NBU is doing now. Hontvareva told Shuster that the National Bank intends to “help the market find an equilibrium exchange rate.” This is necessary, she claims, because the trade balance requires it. That is, the reports generated by a fiction—the notion that the state is an entity that buys and sells—require another fiction: the “equilibrium exchange rate,” an average price of one currency in units of another that nobody in the real economy needs. All of this would be merely a game of inflamed fantasy if it didn’t lead to concrete interference in the economy. “If we don’t find an equilibrium exchange rate now, we will have to take additional administrative measures,” Hontvareva warns, and I readily believe her.
Now that we have familiarized ourselves with what the central bank does, let us examine our prospects. Vladimir Vladimirovich Putin will attack us until he dies. This will constantly create “challenges,” the nature of which will be misassessed—owing to the misapplied methodology of the natural sciences applied to social processes—and worst of all, decisions will be made to correct these situations, decisions that will cause enormous damage to the “economy as a whole,” since they will strike at its very foundations. The more troubles befall us, the greater the need for free exchange to proceed unimpeded, and for money to be part of the economic process rather than the fantasies of bank clerks. But the young assistants of the law of gravity and seekers of equilibrium exchange rates will not rest until they have turned every stone in the economy. And the reason is not the personality of the central banker—I have no complaints against Hontvareva; she is doing her job, it’s just that her work causes enormous harm to me and other Ukrainians—the reason is the institution of the central bank itself.
The question of “honest money” is the question of our survival and our post-war recovery. The institution of the central bank directly impedes both. Therefore, the liquidation of the National Bank must become an urgent political task, and the sooner it happens, the fewer the losses and the faster the recovery.
As long as the state and the myth of “national currency” exist, a perfectly acceptable option is a “currency board,” whereby the volume of “national currency” is 100% backed by foreign currency reserves. The beloved fiction of national currency persists, but the mischievous little hands that sprout from “macroeconomic indicators” and their “regulation”—do not. In such a situation, Vladimir Vladimirovich can throw his “challenges” as much as he likes; the money will be sound and the economy’s response will be adequate and healthy. No institution will be multiplying the consequences of “challenges” and creating new problems with its “responses” to them. The world has accumulated considerable experience with such boards, including negative experience—which tells us, in particular, that if you switch to “currency board” mode, the central bank must be destroyed and razed to the ground, otherwise you end up like Argentina. But these are details. What matters is that even within the existing political paradigm, monetary systems exist that allow a country to function without central banks and the colossal damage they inflict while seeking to aid the objective laws of nature.