Goodbye, dollar

Expressing your thoughts about how prices will change, what will happen to exchange rates and where to invest your savings is a thankless task. In response to requests from friends for advice on how to manage this or that amount of idle money, one has to spend a long time listing the available financial instruments with all their risks and opportunities. And in response to the direct question of whether to buy dollars (euro, Gazprom shares, fund shares) or put money on a ruble deposit in a bank (which one, by the way?), and not at all, except as a joke (I would know, I became a millionaire long ago), not you will answer. Nevertheless, I will risk, with all the reservations appropriate to the occasion, to speculate on what the American currency may expect next year in the Russian expanses. Moreover, several reasons appeared for this at once.

The first, on a purely Russian scale, is that the president has begun to worry about inflation. Moreover, she worries him so much that all the beginning of the week he only talked about her. Apparently, someone hinted to Vladimir Vladimirovich that the attraction of unheard-of generosity called “Budget 2006” may not make the proper impression either on the near-political “beau monde”, cheerfully sawing up its lion’s share, or on state employees, picking up what is left of the political beau monde. Money will depreciate, and all the good initiatives of the authorities will go to waste.

So the president started talking about how inflation is “beginning to eat up our incomes.” Moreover, on Monday, at the weekly “planning meeting” that the president holds with the government, Vladimir Putin demanded the development of a set of measures capable of keeping inflation in check. And not only next year, but also in the future. By the end of the presidency of the second “popularly elected” annual inflation should not exceed 3-4%. The ministers promised Putin to complete the task. And Deputy Prime Minister Alexander Zhukov promised, and Finance Minister Alexei Kudrin, and Economics Minister German Gref too.

The fight against inflation is becoming a national task, comparable in importance to doubling GDP. But if the ministers-economists stubbornly refused to double GDP, at least within the appointed time (and stubbornly insisted that this was unrealistic), then inflation must be overcome. The task, no matter how you look at it, is noble. However, the sharp increase in government spending planned for next year makes this task almost impossible. In any case, with the monetary policy that the Ministry of Finance and the Central Bank adhere to today. This means that monetary policy will become stricter—fewer rubles will come into circulation. The main source of ruble emissions today is the Central Bank’s purchase of dollars from exporters.

By concentrating on fighting inflation, the Central Bank will be forced to buy less, which will automatically create a shortage of rubles. The dollar will start to fall. (Naturally, all this is true provided that oil prices do not drop significantly. If they do, the conversation will be different.)

This is not a very good time for the dollar in the world. After almost two decades of uninterrupted leadership of the Federal Reserve System, “Mr. Dollar” Alan Greenspan resigns in early 2006. He will be replaced by Ben Bernanke, who assures that there will be no fundamental changes in US monetary policy. There may not be any drastic changes, but Bernanke is not Greenspan. If previously one word from Greenspan was enough to “support” the dollar, then the future head of the Fed will have to gain authority for many years to come. Moreover, the views of Greenspan and Bernanke do not coincide on everything. Most analysts are inclined to believe that the new Fed chairman will not fight inflation so uncompromisingly, which clearly does not speak in favor of the dollar. So, good bye, dollar?