The blog provides a left-wing non-partisan perspective on socio-economic issues in Russia and throughout the world. The focus is on qualitative development of national economic systems and ensuring flexibility in economic policies to meet the challenges of the 21st century. Email: leftistobserver@gmail.com

WORKING FOR THE FACE VALUE


We should remember that there is more than one economic model at work in the world. What works for the developed world may be quite detrimental for emerging economies which live in a different reality. These are several interesting points that set them apart from the developed world:
  1. Their currencies are not accepted as widely as the US dollar. Their ability to “print” their way out of the crisis is very limited as opposed to the US, whose dollar accepted globally as an international reserve currency. Since their currencies are accepted domestically and at best regionally, any massive printing of money leads to inflation as money gets stuck within the domestic or regional economy. Here in Russia, prices have already soared quite significantly while the international community has been talking about inflationary pressure in China. Similar trends are possible in other developing countries.

  2. They are accumulators rather than originators of the excessive artificial financial assets produced by the developed world. China is the largest holder of the American national debt, Brazil and Russia are also amount the top 10 US creditors. So in fact all the excessive artificial liquidity that you are referring to gets accumulated here in the developing part of the world. The US ability to print more money for another stimulus package can be easily undermined if these countries become unwilling to recognize US money as a valid international legal tender (I do not think it will happen any time soon for obvious reasons, but the possibility is there). If alternative currencies are somehow identified, the dollar will be the first currency to be scrapped. China and Russia have emphasized their desire to do just that many times, but they are silent about it now since both of them are major US creditors. The immediate collapse of the dollar is not in their interests, they need time before they can get rid of the dollar in the reserves quietly without causing an uproar thus losing the value of their current US holdings.

  3. Boosting the US national debt is quite easy simply because that debt is in the very currency the US can “print”. The US borrows money at an interest in dollars and pays back in newly “printed” dollars. If the US was to lend Russia two hundred million Russian roubles, it would first be required to buy them from Russia. Then as time goes by, Russia can simply print more roubles to pay the debt and start the borrowing process all over again. Doesn’t sound pretty, does it? This is what has been boosting the US demand for several decades. On the contrary, developing countries must be very careful as they borrow foreign money since paying back their debts will require an actual expenditure of resources rather than a couple of running printing presses.

  4. It seems to me that the reason for current deflationary trends in the developed world is in the fact that developed countries are the main consumers in the global economy. The US alone accounted for approx. 40% of the global consumption (these data fluctuate from economist to economist). If developed world consumers are unwilling or incapable to continue spending, the prices end up going down to encourage consumption because they are the ultimate consumers in the world economy. If they cannot consume the mass of products and services offered to them, nobody else in this world can. Thus, the developing world, where global manufacturing has been accumulated for the last couple of decades, is depended on external demand. Their own people are incapable for various reasons to consume what their own industries are producing. This is true for China. A similar thing is happening in Russia, which specializes in oil and gas mainly. The Russian economy is unable to consume all the domestically produced oil and gas.
And so on, and so forth. This is not a comprehensive list. The drawback of recent approaches to the global crisis lies in the fact that it is viewed from the financial stand point only. Various financial measures currently considered can work as long as other countries are willing for various reasons to provide an outlet for the excessive liquidity and artificial financial assets produced by the developed world (the US in particular). To the US, it costs approx. 6-7 cents to print any dollar bill, while the rest of the world ends up working hard for the face value of it. This is a very inconvenient truth for the developed world and the leaders of the emerging economies who actually assisted in the construction of the global economic/financial system by providing cheap resources and labor. That is why this ugly reality ends up being hidden behind a wall of economic propaganda.

Boris L. Anisimov

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