This Wednesday, Federal Reserve Chair Jerome Powell will address the world to likely announce the raising of interest rates. With the first rate hike in several years and the promise to reduce the balance sheet later this year, the stage for 2022 will be set. Also tomorrow, per CNN:
…Moscow needs to hand over $117 million in interest payments on dollar-denominated government bonds…
Russia owes foreign creditors in US Dollars, yet at the same time:
Half of the country’s foreign reserves — roughly $315 billion — have been frozen by Western sanctions imposed after the invasion of Ukraine…
And so, this game of Geopolitical RISK continues. Seems strange. Imagine owing the bank money, but the bank freezes your account then holds you liable for default. With the interest payment due this week, it doesn’t look good. Managing director of the International Monetary Fund, Kristalina Georgieva, said default is no longer “improbable,” and that:
Russia has the money to service its debt, but cannot access it…
Should this be the case, and Russia can’t access US Dollars, they might pay back in rubles as the Russian Finance Minister claims:
As a result, Moscow will repay creditors from “countries that are unfriendly” in rubles until the sanctions are lifted.
Whether Russia has the rubles in a bank account or they just print them from their central bank to pay creditors, some light can be shed on central banking and these Magical Monetary Theories.
As explained by USA Today, when describing the Fed’s “magic printing machine:”
“The United States can pay any debt it has because we can always print money to do that,” former Federal Reserve chairman Alan Greenspan said on NBC in 2011. “So there is zero probability of default.”
It will be interesting to see if the magic printing machine works the same in Russia. Yet, this also raises a question as old as fiat currency itself: If a debt is repaid, but the currency has been rendered worthless, is it really a debt default?
If the Russian central bank is committed to increasing the supply of rubles to make good on its interest payments, as the USA does, then maybe it won’t technically default on its debt obligations. Of course, there are other factors, such as rating agencies and world currency markets, that will affect the issue.
Assuming rubles are accepted as payment, those nations receiving the rubles would ultimately be forced to engage in trade with Russia, or trade rubles with a nation who does; this is problematic when sanctions have been imposed on the country, making import/export with Russia difficult, or completely impossible.
If there is a default, it would mark the first time Russia defaulted on a foreign debt since the Bolshevik Revolution in 1918!
We’ve seen national debt defaults and currency printed into oblivion throughout history; we’ve also seen how raising rates to fight the effects of money printing is a nonsensical idea. Hopefully one day society can learn from the past, and reality. If not, then in the future, 2022 will be nothing more than an entry of a long list of international and domestic policy (mis)steps, all of which could have been avoided.
Reprinted with permission from Mises.org.