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Journal number 2 ∘ Malkhaz Chikobava
Does inflation targeting provide price stabilization?

Inflation targeting means that the central bank subordinates its policy to a single goal - to reduce inflation rates. The latter, judging by the numerous explanations of the National Bank of Georgia, is understood as the consumer price index (CPI). Thus, announcing the transition to the inflation targeting policy, the National Bank of Georgia has in mind that the monetary policy is subject to the achievement of the CPI target indicators.

In order to control inflation in an open economy and its over-dependence on imports, it is first necessary to control the Lari exchange rate. But the monetary authorities, on the contrary, refused such control, as from many other instruments for regulating the currency and financial market, including the most effective ones, connected with the use of currency restrictions. At the same time, for any experienced speculator, it is obvious that with a single interest rate in the conditions of free movement of money in the capital account, the national currency Lari rate cannot be kept unless you are the issuer of the world reserve currency.

From this it follows that with such self-restraints on the use of the tools of regulating the monetary and financial market, generally accepted in world practice, there is no need to talk about managing them. His condition will be entirely determined by the moods of the players and the plans of speculators, and not by the intentions of the monetary authorities consciously allowing chaos. Therefore, in the future, the word “targeting” as a definition of the Bank of Russia policy will be quoted, because in reality the monetary authorities do not understand the system of measures to achieve the target inflation rate, but merely reducing the monetary policy tools to the key interest rate where commercial banks are provided with short-term loans to support liquidity. The question arises: why, in the presence of a large number of money management tools, limit yourself to one?

Consider the logic of the monetary authorities, who have chosen the inflation targeting policy. If the refusal of control over the cross-border movement of money in the capital account is postulated, then in the conditions of free market pricing, the monetary authorities have, along with control over the ruble exchange rate, monetary policy tools: discount rate and other conditions for providing liquidity, standards of compulsory reserves, capital adequacy, the formation of reserves for loans and securities, as well as the ability to manage the volume of operations in the open market from bonds and currency interventions, which together form the monetary base. In the scientific literature, it is considered a proven trilemma that, in the absence of a gold standard, it is not possible at the same time to have an open capital market, maintain a fixed exchange rate of the national currency and pursue an autonomous monetary policy. Apparently, based on this logic, the monetary authorities choose an autonomous monetary policy, preferring to manipulate the interest rate and sacrificing exchange rate management.

This trilemma was formulated by M. Obstfeld and co-authors based on an empirical study of the monetary policy of national banks in the period between the First and Second World Wars (Obstfeld et al., 2004). However, much has changed since then. A global financial market emerged with a world reserve currency (dollar) emitted by the US Federal Reserve System (FRS) mainly under the obligations of the American government.

In contrast to the interwar period, an increasing inflation due to an unsecured issue of world reserve currencies is characteristic of the modern capital market. From this it follows that countries that have an open financial market are inevitably exposed to the pressure of the limitless and increasing emission of these currencies in the form of powerful speculative capital flows. This means the emergence in the world financial market of a network monopoly of mega speculators connected with issuers of world currencies, which has enormous opportunities to manipulate them, including establishing control over national segments of the world financial system that are open to free movement of capital. Unlike the global commodity market, subject to competition laws and regulated by WTO rules, the global financial market is not seriously regulated, and IMF rules protect such deregulation in the interests of financial speculators (investment super banks) using unlimited credit from central banks issuing global reserve currencies.

It follows from the above that if the national central bank does not have the ability to issue a world reserve currency and keeps a cross-border capital flow account open, then it cannot control either the exchange rate of the national currency or interest rates in the market. Owning access to the issue of world reserve currencies, financial institutions can at any time conduct a speculative attack on an unprotected national financial market, dropping the exchange rate, or provide borrowers from this country with any amount of credit at a reasonable interest rate. In relation to Georgia, they demonstrated this many times.

Thus, in order to manage the state of the national monetary system, it is necessary to control the cross-border movement of money in capital transactions. Otherwise, the macroeconomic situation, and the development of the domestic economy itself, are subject to manipulation from abroad. At the same time, the management of the monetary and financial market in the sense of a decrease in entropy (randomness of changes) turns out to be impossible. Self-government from control over the required number of parameters for the functioning of the monetary and financial market makes it dependent on an unlimited number of management entities, including foreign mega-speculators.

It follows from the above that the politically so-called “targeting” of inflation means the transfer of control over the state of the national monetary and financial system to external forces (primarily the US Fed, as well as the Bank of England, the ECB and the Bank of Japan), and economically it is done in the interests of financial speculators. If the state loses control over the rate of its currency, then it transfers the ability to manipulate currency speculators with it. If the Central Bank also credits them and, in practice, gives them a currency exchange management, speculators have the opportunity to accelerate the rising and falling ruble exchange rates of any amplitude, and a resonance effect in the form of “currency swings” occurs. Monetary market enters a state of turbulence, there is a disorganization of all foreign economic activity and the breakdown of reproduction of enterprises dependent on it. This is exactly what happened in the economy as a result of the transition to the policy of “targeting” inflation.

In a play called “inflation targeting,” the National Bank of Georgia pretends that it struggles with inflation with all its might. And under the guise of this struggle compresses the money supply, which is the "oxygen" of the economy.

In recent years, the level of monetization of the Georgian economy (the ratio of money supply, measured using the M2 indicator, to GDP) was around 40%. For comparison: in the USA it is approximately equal to 90%, in Great Britain and Canada - 140%. But in China - around 200%, in Japan - 250%. And something in these countries no hyperinflation or even simple (unambiguous) inflation is often observed, and in some places even deflation takes place.

According to our opinion, the central bank is the main culprit for inflation in Georgia.

Firstly, money in the economy becomes prohibitively expensive. In the structure of production costs of many companies that have hooked on the needle of usurious loans, the main component is not the cost of wages or raw materials, but the cost of servicing loans. The interest expenses of enterprises feed the growth of costs and prices (wholesale and retail) on goods and services.

Secondly, the most effective way to combat inflation is to increase the mass of commodities. This is an axiom that was key in old economics textbooks. After all, inflation is a violation of the proportion between the commodity and money supply. The central bank could quickly end inflation, if it were engaged in lending its own economy and thus would contribute to an increase in the supply of goods and services. If he issued loans at the same interest that he receives from placing currency on deposits of foreign banks or from buying treasury securities of other countries.

Thirdly, the National Bank of Georgia refused to maintain the ruble exchange rate, which makes imported goods more and more expensive. Despite numerous calls for import substitution, a significant part of consumer goods and services is of import origin. This is a very important factor fueling inflation processes in Georgia.

Fourth, the Georgian economy is drained of the banking system. The National Bank of Georgia, as a financial megaregulator, is called upon to provide supervision over banks, but it cannot be called satisfactory. Financial organizations are keen on withdrawing money outside the country, and the development of the real economy is not interesting to them, because it is unprofitable. The National Bank of Georgia, as a financial mega-regulator, which has the right of legislative initiatives, could raise the question of imposing bans or restrictions on the withdrawal of capital from the country (banks today are doing this both for themselves and for their clients - both individuals and corporate clients). But the Central Bank does not only raise the question of the need to introduce control in the field of cross-border capital movements, but, on the contrary, from time to time utters oaths of loyalty to the Washington Consensus, which just requires complete freedom of capital movements.

So, if we want to put an end to inflation, then we need to understand that the national bank of Georgia itself is provoking inflation by pursuing a inflation targeting policy.