“Shrinkage” in Russia – Putin is leading the country into an economy of scarcity

WORLD “Shrinkage” in Russia – Putin is leading the country into an economy of scarcity Thomas Mayer - 11 hours ago The constellation of a weak economy with rising inflation known from the 1970s, for which the term “stagflation” was found, was already created during the Corona crisis. Fiscal support for aggregate demand financed by the issuance of new money met with limited supply and pushed consumer prices up. The Ukraine war has once again intensified the “stagflationary” impulse in Europe. In comparison, Russia is likely to experience an even more dramatic development, which could be called "shrinkage lation". In 1973, the Yom Kippur War and the associated oil embargo by Arab countries triggered an explosion in oil prices. The increase in consumer prices led to an increase in wages, which drove prices higher. The price-wage-price spiral over the decade would have been impossible had central banks not allowed a huge expansion of the money supply. Even today we are experiencing an explosion in commodity prices, which is leading to higher consumer prices. Wages are already rising in the USA, and the European standard wages will soon follow. As in the 1970s, monetary policymakers ignore the emergence of a money overhang. Since 2015, the nominal gross domestic product (GDP) in the euro area has risen by 20 percent, while the money supply M3, which the European Central Bank (ECB) used to take into account, has risen by 45 percent. In Russia, too, the economy is awash with money If the difference is not hoarded or real GDP does not grow accordingly, the excess money will keep inflation high for a long time. But in her recent press conference, ECB President Christine Lagarde said nothing about the development of the money supply - and nobody asked for it. In Russia, too, the economy is awash with money. Real GDP has barely grown since 2015, while nominal GDP has increased by 59 percent due to high inflation. Since the money supply has risen by as much as 135 percent, the money overhang is even higher than in the euro area. While the state was quite frugal, growth in claims on other countries and loans to private households in particular drove money creation. Inversely, cash in circulation and investment company bank deposits have increased enormously. As a result of the sanctions, domestic production is now shrinking and many imported goods are no longer offered. A severely reduced supply meets demand inflated by high money holdings. The result is likely to be galloping inflation. Inflation hits the economically weak and undermines trust in government money and ultimately in the state itself. That calls politicians into action. Prices are capped – for energy in our country and for bread in poor countries. This costs the state a lot of money, which the central bank prints because it has no reserves of its own and in order to avoid higher interest rates. The flywheel of inflation keeps turning. If things get really bad – and that could be the case in Russia – the state freezes all prices. Costs for the acquisition of goods are then incurred in the form of waiting times. President Putin dreams of reviving the Soviet empire. From this dream, only the restoration of the Soviet shortage economy is likely to succeed. Thomas Mayer is founding director of the Flossbach von Storch Research Institute.