Russia’s Slow Walk to Financial Independence
Russia’s Slow Walk to Financial Independence by Tom Luongo – Gold, Goats and Guns
I’ve been critical of the Bank of Russia’s slow-rolling their interest rate cuts for more than a year now. This ultra-conservative approach has worked to also slow the growth of the domestic Russian credit cycle, keeping borrowing costs well above the demand for Russian debt.
Last Friday the bank lowered its benchmark lending rate 25 basis points to 7.50%.
And in a completely counter-intuitive turn of events, the ruble strengthened as a result.
But what is so noteworthy is how commonplace that reaction from the ruble to a central bank rate cut is.
It tells you just how starved the Russian economy is for its own currency. The ruble is supposed to drop on increased supply, which is what lower rates imply. When, in fact, the opposite occurred. Demand for the ruble rose to because borrowing costs were lower.
This speaks to just how much the Bank of Russia’s policies are holding back what should be a much more robust expansion at this point.
Overly tight interest rates are just as bad as overly accommodative rates. They both bias economic investment along the wrong points in the structure of production, by mis-pricing risk.
Austrian Business Cycle Redux
Usually Austrian Business Cycle Theory is applied to western Central Banking models to criticize Keynesian-style counter-cyclical policy which lowers interest rates in the face of falling aggregate demand.
The problem with this analysis, and Keynesian/Mixed-Monetary Theory economics in general, is simply that there is no such thing as aggregate demand.
Demand for goods and services is unique to the individual markets.
And as such, so is the risk-tolerance of the investors in said markets. So, there really is no one interest rate for an economy. It’s why all central banking schemes will eventually end up in the gutter.
The decisions to expand or contract output in any particular markets is dependent on the cost of capital. And the cost of capital is dependent on the cost of money, i.e. the rate of interest to borrow.