January 22, 2015
We have of late received a real-life crash course in basic economics, with the lessons imparted at the highest levels of the global economy. We are all seeing the laws of supply and demand in action, with their manifold implications, and we are learning that it is impossible to circumvent those laws without paying a high price. Wherever we look, the attempts of the state to outsmart markets are showing their limits, and more often than not ending in utter fiasco.
Let us begin with a look at the free-falling oil market. Oil-producing countries would of course like to reverse the current trend. Some would curtail production to push prices up, but the rest have learned from experience that collective restrictions only benefit the countries that do not comply. Like it or not, intergovernmental decisions won't alter the factors underlying the fall in the price of oil. One key element is the global deceleration of economic growth, particularly in China, a large energy consumer. Add to this the entry of fracking into the oil game, notably in the United States - just one factor expanding the global supply of energy.
These joint developments substantially push down the demand for, and consequently the price of, oil - so much so that financial economist Anatole Kaletsky asserts that $50 for a barrel may well become a price ceiling rather than a floor.
The supremacy of market laws is manifest in Russia, too.
Gone are the days when Putin's supporters cheerfully claimed that retaliatory restrictions imposed by Russia against imports of Western agricultural goods would be a godsend for the Russian economy. According to that flawed narrative, the import restrictions would boost local Russian production.
The Kremlin was too quick to dismiss the fact that during the oil-boom years, which greatly benefited Russia, nothing was done in that country to diversify the economy away from its dependence on oil exports. Instead, the oil-induced bonanza served to feed the ruling kleptocracy and promote crony capitalism. Import restrictions in that context did not boost domestic output - rather, they accelerated inflation, further depreciating the ruble. Capital flight turned into a stampede.
To counter the trend, Russian authorities tinkered with monetary policy, selling a good portion of their foreign exchange reserves in order to arrest the fall of the ruble and discourage capital flight. In vain: Reserves fell away at such a pace that last December, the central bank was obliged to hike interest rates by 60 percent overnight - from 10.5 percent to 17 percent. Despite the rate hike, the ruble depreciated by 17.5 percent against the dollar in the first two weeks of 2015.
Russian policymakers have tried other unwise and potentially destabilizing measures, drawing from private pension funds after the state fund went into the red; pushing local banks to lend to non-performing companies at better interest rates than those granted to the government itself; andbailing out banks in distress. Little wonder that the head of Russia's largest state bank, Sberbank, has reportedly voiced concern over the specter of a "massive" banking crisis.
The same inability to bypass market laws is at work in China. There, the problem stemmed from a centralized frenzy to promote investment without due consideration of expected returns. Thus, Chinese economists estimate that "ineffective investment" reached the astronomical figure of $6.8 trillion between 2009 and 2013.
Now it is Switzerland's turn to endure the imperatives of market laws. Since September 2011, the Swiss National Bank had pegged its currency at 1.20 francs per euro. The purpose was to keep Switzerland's currency from appreciating over the euro, thereby keeping the Swiss economy internationally competitive - half of Switzerland's exports go the eurozone.
But with the Swiss economy absorbing an intolerable amount of euros, and with the euro caught in a protracted downward trend, the SNB capitulated, abandoning its currency peg against the euro on Jan. 15 and provoking jitters in international financial markets.
It would certainly be unfair to blame the SNB for the currency peg it oversaw for years. The bank has a difficult mission: to manage a currency that, in addition to being a means of exchange, serves as a safe haven for capital from all over the world. This pushes the franc upward and thus harms the country's competitiveness.
Be that as it may, currency pegs have proved no more effective in halting the appreciation of a currency (in the case of the SNB) than they have in preventing its depreciation (in the case of Russia). Sooner or later, market laws prevail over monetary engineering.
In Sophocles' Antigone, the chorus intones an ode in praise of Eros: "Even the pure immortals cannot escape you." In our more prosaic world, something similar applies to market laws: Not even Switzerland, despite its economic savoir-faire, can escape them.
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