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. Last Updated: 07/27/2016

Might Printing Rubles Help Rescue Russia?




Most economists cringe at even the thought of printing new money, theorizing that a wave of new rubles will lead to rapid inflation and greater social unrest.


Tough monetarists instead support the creation of a currency board that would ban the printing of any new money not backed by hard currency reserves.


But as the Russian crisis deepens and the country's leadership remains without a rudder, others argue that the whir of the printing press could be vital for a populace starved for bills.


Done in moderation -- moderation being the pivotal word -- printing rubles could be the only way to restore the frozen system of payments that has left many businesses unable to complete transactions in the wake of the ruble devaluation.


While shuddering at the thought of flinging fresh rubles to moribund industry or printing money to feed the federal budget, some market analysts believe the money supply should be raised to reflect the rise in prices that has occurred since the currency's devaluation.


"Depending on where the ruble settles, we think they'll need to print a little more money to accommodate the higher price level," said Tom Adshead, co-head of research at United Financial Group, an investment house where the theory has found a home.


"What we are seeing now is enterprises having problems doing things they can afford to do because they can't get the cash from the bank," he said.


UFG brings to its defense the venerable Fischer Equation, or MV=PT, which concludes that Money supply multiplied by the constant Velocity of a currency's circulation equals Price levels multiplied by the number of Transactions.


If Velocity is a constant and Prices rise due to a ruble devaluation, then Money supply must rise the same amount to save Transactions from dropping. If transactions fall, as they have in the past several weeks, economic depression sets in.


If the ruble settles at value 20 percent lower than its previous value, prices will rise about 10 to 15 percent, taking into account domestic and imported goods, Adshead said. The money supply -- 370 billion rubles currently are in circulation or held in bank accounts -- should be raised by the same percentage, he said.


If a devaluation causes prices to jump and new money is supplied to meet those new prices, then the new money does not create more inflation, said UFG fixed-income analyst Alexei Zabotkine.


But what some call a sound economic principle, many others call hogwash.


Any new increase in the money supply would cause greater inflation and further debase the ruble, said Al Breach, an economist with the Russian European Center for Economic Policy.


"The only time new money does not cause inflation is when people's demand for rubles increases," said Breach. "Right now, nobody wants rubles."


"It's never a good idea to print money," agreed Peter Eckman, professor of finance at the American Institute of Business and Economics. "What will happen is inflation the same percentage as there was a percentage increase in the money supply. That's a very standard concept in macroeconomics."


That is certainly what happened in the years 1992 through 1994, when the government's new money emissions to finance the state budget set off a spiral of inflation.


Zabotkine maintained a one-time controlled emission of new money would not have that effect, and that there will be new demand for rubles as the exchange rate stabilizes and businesses begin to clamor for domestic legal tender to pay their bills.


To prevent the extra money from being turned into dollars and causing further devaluation and inflation, it is important to make the emissions only after the exchange rate settles, and after Russia's shakiest banks have been shut down, Zabotkine said.