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Senior scientist with a background in Chemistry and Physics.
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  • How To Arrest The Depreciation Of The Ruble

    A discussion of the Ruble depreciation invariable leads to premature conclusions such as pointing to the current economic sanctions or the price of oil.

    However as usual, the cause is as a simple as: supply and demand. When many people want to sell the Ruble but not many want to buy, its exchange rate depreciates until a new equilibrium is found.

    The solution to arrest the depreciation of the Ruble (or any other currency for that matter) therefore is to tackle supply and demand. Usually, demand is hard to influence as you cannot simply force people to buy or sell a currency, unless you put a gun against their heads.

    Let's therefore focus on the supply side of the equation.

    Perhaps a brief history lesson is in order. Here is a snippet from Germany's Hyperinflation regarding the Reichsmark:

    "...it was a privately owned and privately controlled central bank, which made loans to private speculators, to enable them to put up the necessary margin to speculate against the nation's currency. Such speculation helped create a one-way street, down, for the German mark. Soon a continuous panic set in, and not just speculators, but everyone else had to do what they could to get out of their marks, further fueling the disaster."

    Just like the old Reichsmarks, Rubles come into existence in two ways: either by form of discounting of treasury bills and bonds (aka "the printing press") or the extension of credit.

    And just like in the case of the Reichsmark, the solution would be to restrict these two forms of money supply:

    "From April 7, 1924 the Reichsbank refused to issue new credits for two months. "The Reichsbank plumped for the stability of the mark," wrote Schacht. The speculators had to turn their foreign holdings over to pay their debts, as their trading positions against the Rentenmark lost money. In this way the Reichsbank increased its foreign exchange reserves from 600 million marks worth, at beginning of April 1924, to more than double that by August 7, 1924."

    Thus:

    1. Restrict credit only to those of the productive sector of the economy.
    2. Credit for speculation and investments such as margin be cancelled immediately and all loans be called in within 3 days.
    3. Revaluation of the entire Ruble money supply to be covered whole or in part by the total stock of central bank holdings such as US T-bills and gold.

    * For more information on the Weimar Hyperinflation, I suggest reading "The Economics of Inflation" by Costantino Bresciani-Turroni.

    Tags: RSX, Forex
    Dec 21 12:01 AM | Link | Comment!
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