Publication in Russian on the Zen blog
https://dzen.ru/a/Zw0MHvZXkkC7Zz8Z

Russia has released its 2025 budget proposal, if you want a few laughs or a few tears.

In this post, I detail Russia’s unorthodox approach to monetary policy, a strategy that runs counter to conventional economic theory. While most countries are wary of either high interest rates or increasing the money supply, Russia is doing both at the same time. Conventional wisdom says that these moves should devalue the ruble. But the ruble’s fall is more closely tied to oil prices than a full-blown collapse.

But this balancing act raises critical questions: How long can this strategy last? At what point will a fragile system give way to hyperinflation? After all, hyperinflation is not just about numbers: it is about expectations, about people losing faith in their currency. Once that faith is shattered, the fall can be swift and catastrophic, often driven by geopolitical turbulence. It's like trying to pick a mushroom you've found in the woods - you might get some interesting effects at first, but the unexpected results are usually not very pleasant.

In this article, I explore how Russia's experiments with the money supply could lead to unintended consequences. The risks, like those of wild mushrooms, are huge and unpredictable, with dangerous consequences often looming on the horizon. Is Russia navigating the complexities of monetary policy, or is it blindly exploring uncharted waters? Let's take a closer look at how this experiment could turn into the financial equivalent of a mushroom adventure.

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Let's talk about the ruble. But first, I'll tell you about my hobby. When I'm in the wilderness, far beyond the Internet, I often like to experiment, I like to pick mushrooms that I've never seen before, very colorful mushrooms. I hunt for mushrooms and I like such experiments. Do you want to bite off a piece of the mushroom that I find? I like to experiment with mushrooms, I like bright and unusual mushrooms, I don't know what will come of it, but I think that this is what the Russian Central Bank does with monetary aggregates and interest rates in Russia, they are just having fun. Nicolaus Copernicus, a scientist and the father of the quantitative theory of money, clearly formulated the goals and ideas of the theoretical basis of money. In Russia, there is an increase in monetary aggregates M1, M2, M3 in geometric progression. In fact, it is difficult to say what is happening, since you cannot rely on the official data that comes from Moscow, but you can look at the actual data, which you can rely on. You can draw conclusions from the fact that prices are rising and at the same time interest rates are rising to 19-20%, which has never happened before. If any of you join me on a mushroom hunt, I will gladly offer you a bite of the beautiful mushroom I find, but I cannot understand and I do not see the point of what is happening in Russia. Russia is investing in unproductive capital goods, the monetary base is expanding, interest rates are rising, sanctions are eroding the comparative advantage of any kind of free trade, and yet the Russian market is still relatively stable. The exchange rate has fallen by 6-10% in the last month, and as soon as the price falls below 1 cent, it is a cause for concern. As for a stronger correlation, it is related to the regression data of oil prices. BRENT crude has gone from 80 to 70, and that's because of weaker demand in Asia, China and other countries that are going through some troubles with OPEC countries in terms of determining stocks and prices, but it's still not clear how the Russian crisis has lasted so long. In normal economic conditions, you have the equation of monetary theory, which is related to the quantity of money. The quantity theory of money is an equation related to the supply of money under constant demand, or normal demand, or even under abnormal hyperinflation. But there is another component related to the strength of any currency, and that is confidence in that currency. The stock market tends to reduce confidence in the Russian currency, so the ruble is constantly losing confidence, it has not collapsed yet, but it is constantly falling. Also very indicative of what will happen in November is the results of the US elections. I advise you to watch this event and what follows. A very famous professor of economics, a university professor, a great expert on monetary policy, explained to me that there is a difference between inflation, high inflation and hyperinflation, and the root cause of inflation and high inflation is monetary. In the conceptual framework of either the natural rate of interest or the quantity theory of money, hyperinflation is nothing more than a loss of confidence in the currency, when people lose confidence in the money. The currency and the expectation are built into the monetary equation. And when that happens, the currency takes on a life of its own in terms of its trajectory, and that's what's happening right now and what's going to happen in the future with the Russian ruble. We just think that the ruble is still operating within the framework of traditional economic monetary theory, but it's going beyond that and into the realm of expectation-based hyperinflation, which is rooted in a loss of confidence in the currency, and I can pretty much assure you that the ruble is going to collapse. In the meantime, there are definitely oddities in Russia that are like when the house is on fire, and it's still on fire. But if someone in Russia is currently full of entrepreneurial ideas that they want to implement in Russia, then you can just take any recycled paper and eco-ink, soy ink, draw Russian ruble charts and then make paper tissue boxes or any paper products out of them, people like to have eco-approved paper products in their toilet room, recyclable and all this can be used for their own purposes, to forget about Russian entrepreneurship in Russia today. As for me, next time I plan to go not for mushrooms and I will try to do without experiments, I want to walk along the lakes and hunt for fish. And I also plan to pay in Russia with Z, but definitely not rubles. Joke. Remember, mushroom pickers are divided into two types: knowledgeable and dead. Do not experiment and do not play Russian roulette with mushrooms the same way the Central Bank of Russia is experimenting with monetary policy. You don't have to eat mushrooms to learn and understand something important. The damage is irreversible.

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If 1 ruble is worth $0.011 and the marked ruble is worth less, then theoretically you can exploit this difference in value against the ruble. Let's say you start with 1000 rubles, exchange them at a Russian bank and get $10.75, then go to the black market and exchange your $10.75 to get 2000 rubles (let's say they are valued at 200%). Then you go back to the bank and exchange the 2000 rubles for $21.50, rinse and repeat. As I said, I don't believe in these official exchange figures (ruble/USD) simply because then you can get rich in no time by exploiting the difference between the Russian bank and the black market. Now tell me again to believe in these official figures, it's crazy, like eating mushrooms I know nothing about, a real gamble for my life, isn't it? The ruble is nothing because it is dead!

As for the gold reserves, they are not used in Russia. There is a lot of it in South America, as well as in such "great" "rich" countries as Ghana, Brazil, Uzbekistan, but gold does not create capital goods and a productive population. Is there much gold in Norway, Iceland and Denmark? Hong Kong? Japan? We are talking about free markets, and there is none of that in Russia.

Where is the demand for the ruble? International communities avoid it like the plague. What is the future of this Russian currency? There is no demand, the exchange rate does not correspond to reality, it is used only as an internal voucher. The real rate has nothing to do with the published rate. The economy is about to break the back of the country.

The main test is whether you personally would invest your savings in rubles?

I will try to explain it in a completely amateurish way. The Russian ruble is a commodity. It is a commodity with very limited demand. The demand for it is primarily within Russia itself, and the people who run it dictate in various ways how many rubles can be exchanged for goods. The people who run Russia tell the people of Russia that this currency is worth a lot. Because foreign trade in this currency is now restricted, its value appears higher than it would actually be on the free market. This is facilitated by trade within Russia. Russians expect their goods, rubles, to be worth this much, and they refuse transactions that quote a lower value for the ruble. The value is based on what Russians think it is worth, combined with government edicts on the value. It has more to do with the immediate expectations of Russian citizens that their comfortable and secure way of life, where everyone can get a well-paid, state-subsidized job, will continue for the foreseeable future. Yes, there is a constant danger that the bottom will drop out, but it is like walking on a snowy frozen lake, and the weather is gradually getting warmer. All seems well. You can't see what's under the snow. You might hear a few quiet cracks far away across the lake. The ice feels nice and thick. No big deal. Everything seems fine. Just fine.

In conclusion, the reality of the Russian population is that they don't give a damn about the murderous acts committed in their name. Russia is not one country. It's two countries. The first country consists of Moscow and St. Petersburg. The second country is everything else, called the federation. The budget deficit will only affect those outside of Moscow and St. Petersburg. As for the horrific war, it will only end when it returns to where it began. To Moscow and St. Petersburg.

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Publication in Russian on the Zen blog
https://dzen.ru/a/Zw0MHvZXkkC7Zz8Z