Fun with your new bank

Why does inflation remain high in Kazakhstan?

In Kazakhstan, the most predictable thing about money is that it’s unpredictable. 

In the past few years, the National Bank of Kazakhstan has hit the brakes on the printing presses, slowing growth in the supply of tenge (see the table).  Normally, this would slow inflation, which is the average rate of increase in prices.  With fewer tenge to chase every kefir bottle, kefir prices should fall.

Year	Growth rate of M2 money
2011	22%
2012	12%
2013	5%
2014	3%
2015*	1.5%

*Based on data for January through May, compared to the same period in 2014

In reality, the rate of inflation has remained stuck between 6% and 8% for several years, despite the slowdown in money (the figure shows annual inflation rates for consumers).  To the National Bank’s credit, inflation has been far less volatile in Kazakhstan than in conflict-ridden Kyrgyzstan and Tajikistan, and it is lower than in Russia, but it still rises far more rapidly than in the United States.  What gives?

Perhaps people pay more attention to the Bank governor’s statements than to patterns in money supply.  Kairat Kelimbetov, who came to power in late 2013, has made clear that he intends to maintain inflation between 6% and 8%.  So, people may base their decisions on that vow rather than on the sharp decline in money growth – a decline that would justify far lower rates of inflation.  Their decisions determine the rate of inflation; if all workers demand a 7% cost-of-living increase, their employers will raise output prices proportionally in order to cover the cost. 

Maybe Kelimbetov has credibility with the public, despite his turnabout in depreciating the tenge by about a fifth in February 2014. Or maybe the public will believe anything.     – Leon Taylor tayloralmaty@gmail.com

Notes

Inflation data are from the World Bank, at the Web site www.worldbank.org . M2 data are from the National Bank of Kazakhstan, at www.nationalbank.kz.  M2 encompasses currency, checkable accounts, and small savings accounts.

Why Stalin rued the ruble

How to asphyxiate a recovering economy

In the true spirit of a dictator, Stalin paid for World War II by printing money.  When peace broke out, 59 billion rubles were circulating, more than enough to pay for what little there was to buy.  Prices rose.

Stalin’s cure for this headache of his was characteristically drastic.  In December 1947, the Politburo voted to replace every 10 old rubles in circulation with one new ruble.  The devaluation-tax rates on bank deposits were more merciful – either a third or a half, with the larger bite on larger accounts – but only deposits below 3,000 rubles were spared.  And the Politburo would cancel ration cards.  These reforms would occur overnight.

Now for Excedrin Headache #2: The devaluation was not the world’s best-kept secret.  The government had been planning it since 1943 and had printed the new rubles throughout 1946, shipping them in guarded railcars to 46,000 “secret” exchange stations, with 170,000 workers,  throughout Russia.  Weeks before the devaluation, savvy bureaucrats exchanged old rubles for durable goods.  Sofa and piano prices soared.

Where’s the blue-light special?

Hundreds of Muscovians – not to mention swarms of shoppers from other oblasts -- lined up in front of department stores hours before they opened.  The shelves emptied and the stores closed.  Frantic Russians turned to groceries for nonperishable foods like smoked sausages, until the government stopped these sales, too.  Nothing was left but perishables, and sometimes not even them.  “Today is the sixth day in a row that my wife stood in line for bread from 2 in the morning to 10,” said one citizen of Belgorod. “But alas, all six days she came home without bread.”

Russians had no better luck with financial bread.  Panicked withdrawals forced savings banks to padlock their doors, since they could not have paid out all the deposits demanded by depositors; some of that money had been lent elsewhere.

Stalin had meant to contain inflation.  And he succeeded, of course.  It’s pretty hard for the price level to rise when the money supply is down 93%.  But the disinflation came at a price.  News of the coming devaluation stoked high prices for durables, endangered banks, and wiped out the paltry savings of poor Russians.  Dear Generalissimo had thought that the devaluation would harm only the rich.  In reality, it bludgeoned everyone but.  The wealthy could protect themselves with durables and dollars.

“…More than 2000 officials, including senior party and law enforcement officials, were prosecuted for violating the currency reform law,” wrote historian Oleg Khlevniuk.  Store directors hoarded durables for resale when the price was right.  “...(But) ‘a significant proportion of senior party and government officials (have) essentially escaped punishment.’” 

A dictator’s reign over an economy is never absolute, since he cannot suppress all information.  A word to the wise in Central Asia.  – Leon Taylor tayloralmaty@gmail.com

Good reading 

Oleg V. Khlevniuk.  Stalin:  The biography of a dictator.  Yale University Press.  2015.  The source of the material used here.

Robert Lucas.  Understanding business cycles.  1976.  How information – or the lack of it – affects a national economy.