first majestic silver

Floating Ruble vs Currency Board

January 15, 2015

When the only tool in your kit is a hammer, every problem looks like a nail. When the only tool in your kit is a currency board, then….

Over the last month or so, I’ve read several pieces calling for Russia to set up a currency board today, just as Keynes did for Russia 100 years ago. I do not agree with that prescription.

The US went to (economic) war with Russia almost a year ago by imposing sanctions ostensibly because of Russia’s military actions in Ukraine. Forgotten is that the US fomented the coup in Ukraine which toppled the previous pro-Russian government.

Just as likely, sanctions were imposed because Russia wanted to get rid of all the US Treasury bonds it had accumulated through trade. Russia knows that the US is a bad credit risk, issuing more debt than it ever can repay while rigging the interest rate it offers to pay, to below the US inflation rate.

When the Dollar started its recent surge against all the world’s other currencies, including the Russian Ruble, Russia initially “defended” the Ruble by using some of its foreign currency reserves. As the country saw that this was a losing proposition, Russia stopped paying out Dollars to keep the Ruble from falling. And fall it has, along with Oil & Gas, Russia’s main exports. (In Ruble terms, oil & gas still cost the same as before.)

At the same time, Russia IS continuing to spend its Dollars (albeit at a slower rate) to buy another world currency – GOLD. Russia is in the camp of China and the other BRICS countries (and others) in that it knows the Dollar soon will be toast. The Dollar is being used less and less for world trade, while the Dollar is being shunned by more and more countries as currency reserves. What appears to be coming during the next few years is a switch back to Gold as the major world reserve currency.

So, let’s look at the currency board idea.

First, it originated with the father of modern currency debauchery, John Maynard Keynes. I would reject the idea on that basis alone, but there are other reasons as well.

The currency board proposal calls for using the currency of the country which declared war on you (the US against Russia) as your reserves – your guarantee of value for your currency. It calls for using US debt, paying a stupidly low interest rate guaranteed to lose purchasing power, as your standard of value.

The currency board would lock Russia into spending Dollars to keep the Ruble artificially expensive – a process which Russia already has determined is a bad idea.

But, what exchange rate is the “correct” rate between the Dollar and the Ruble? Today’s rate? The too expensive rate from last year? Half of today’s rate? Who decides? Why is one rate better than any other rate? Why should that rate be set in concrete for all time?

Russia is benefiting greatly from the Ruble’s fall last year. Exports are being encouraged, while imports are being discouraged. That means more jobs and a growing Economy for Russia. True, imports are more expensive, but even if the level of imports didn’t fall, the exchange rate difference would account for only a little over a 5% (additional) general price increase for Russia.

For the US, it would be good if Russia implemented a currency board. It would force Russia to get more in line with what our country wants. But, for Russia it’s not a good idea. We Americans are forced to live under the stupid economic policies of our government. Russia has the luxury of going their own economic way, and they would be well advised to do so.

Robert (Bob)  Shapiro is self-taught in Austrian Economics and has consulted briefly for the governments of Mexico, Greece, Portugal and Spain. He has traded Gold & Silver and their stocks since 1970. Bob Shapiro’s blog is http://us-issues.com


In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."
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