Tomasz Prusek: What do you do with hot money?

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Both the banks and the government have a lot to do in this regard, because they can pay more for the money they collect from the public, so that safe forms of investment are geared towards ensuring that capital values ​​are protected, and that they do not incur huge real losses. A proven method since the early 1980s and 1990s, when hyperinflation was the legacy of the People’s Republic of Poland: government bonds were responsible for the inflation effect on a monthly basis.

Inflation is causing concern in society because the ubiquitous price rush is felt globally and raises an important question about the responsibility for this condition. No wonder that, like a political “hot potato”, responsibility is shifting to the effects of COVID-19, and this is Russia’s attack on Ukraine. According to the principle “what’s wrong, not us”, we have a growing political denial of the fact that the rulers have been sowing inflation in our country for at least two years due to the government’s economic policy mixed with monetary policy.

On the one hand, we had a fest for social distribution in the previous 2018-2020 election cycle period and fiscal shields against the ice, and on the other hand, we’ve kept interest rates at record lows since 2015, capping their cut. approaching zero in 2020, so that a very cheap loan will help combat the consequences of the epidemic.

Thus, there are many reasons for inflation, and it did not start on February 24, when Russia attacked Ukraine. The rise in commodity and energy prices after World War II Covid is very important, but it is only one part of the inflation puzzle. Nothing will change the fact that in the last month prior to the outbreak of the COVID-19 epidemic in Europe, we already had inflation close to 5%, well above the NBP inflation target of 2.5%. (plus/minus 1 percentage point), and the economic shutdown only temporarily slowed price growth, as did subsequent government anti-inflation shields, which were introduced before Russia’s attack on Ukraine. Thus, social transfers along with keeping interest rates close to zero created a dangerous mixture of early inflation that for a long time destroyed the real value of the savings of those who did not want to risk excessively and preferred to save safely in banks, deposits and treasury bonds, which should protect the value real capital.

Consumer inflation broke to 12.3 percent in April. It is the last wake-up call for Poland to empty its propaganda balloon to fight inflation and to take seriously an effective fight against price hikes. This is a fundamental issue, because controlling inflation at the beginning of the economic transformation of the 1990s, with enormous social sacrifices, is one of the greatest achievements of the Polish transformation. And it cannot be missed, because the alternative is to follow the Turkish route, where we currently have more than 50 percent. economic inflation. As a result, a country that was once portrayed as an example of an economic miracle has been eroded by inflation.

At this point, a diagnosis can be made that one of the most important reasons for rampant inflation in Poland is not only political motives for winning the upcoming elections, pumping private consumption, for example through the 500+ program or additional additional benefits for pensioners. And even the collapse of popular belief in the sense of saving.

Since with near-zero interest rates and high inflation, banks have been seriously considering introducing negative interest rates, i.e. actually paying them extra to store money, it is generally believed that saving – before interest rates increases – is only a contractual tenth of a percentage per year. For many, this point is missed. So some savers decided to withdraw their deposits from the banks and look for other ways to invest the capital that would at least give a chance to protect its value not to mention the real profit.

In this way, real estate prices in Poland rose: in large cities, sometimes half of the transactions were made in cash, which was a signal that it was simply not worth keeping in banks.

But so that not only commercial banks were subject to control, it is worth noting that the government also tried to borrow money from the public at the cheapest possible rate, which can be seen in the interest rate on Treasury bills offered. Therefore, the collapse of faith in the meaning of saving in Poland has many parents and is causing much deeper than the COVID-19 pandemic or the war in Ukraine. The result is a lot of hot inflationary money coming into the marketplace from social transfers, government anti-virus shields, and bank deposits. The main task now must be to find a way to remove this deflationary inflation from the market, to restore the desire to save, both in the short and long term. Otherwise we will be fighting the inflation hydra for years and the danger of stagflation, a combination of high inflation and low economic growth, will cease to be a threat and become a reality that will stifle the economy.

The obvious anti-inflationary activity is the interest rate hike by the Monetary Policy Board. This is what has been happening since October of last year, and it can be said that the delay is better than not, because the long delay in raising the increases was one of the reasons for the erosion of faith in the meaning of rescue among the Poles, as this was reflected. At purely nominal interest rates on deposits. Currently, the key rate has already reached 4.5 percent. Further increases are officially announced. But the mechanism of action of banks is that raising interest rates in the first place leads to an increase in the loan price, and only then brings deposits with better interest.

Hence the recent political voices from the highest level for banks to pay more for deposits and not open much of the scissors between the rate of getting money to lend and the price of credit on offer. It’s just that politics can only translate to state-controlled banks, and even here no one in their right mind expects that they will suddenly start paying the same amount as inflation. Reducing the gap between deposit rates and inflation will be a long-term process, and unfortunately savers must be prepared for more real losses (taking into account inflation), although they should decrease over time.

Deposits established in March gave an average of 1.5 per cent. It is so small that it increases bank deposits by 2-3 points. A percentage will not quickly lead to a psychological breakthrough for savers, that it is worth allocating capital for investments and not for current consumption, because inflation expectations are too high and there is a common belief – reminiscent of the times of the Polish People’s Republic – that it is better to spend today, because tomorrow will be more expensive. This approach is understandable because inflation has gotten out of control and hot money has spread in the market. Therefore, since it is difficult for banks, despite political appeals, to expect to quickly withdraw hot money from the market at their own expense, we can only rely on … the government. Yes, yes, this is no joke, as the government has a lot more to do than you think. But let’s start with what he won’t do: It’s hard to expect him to stop the money for social transfers, because we have parliamentary elections in 2023. Hence, reassuring statements that the 500+ program is not in danger, and pensioners can safely wait for more fringe benefits. . So, if in the course of the upcoming elections it is political suicide to stop the social distribution, let’s add for both the government and the opposition, what else can they do?

It is possible to restore confidence in the sense of safe saving, which does not lead to a real loss due to inflation, in a long process, but it can also be done practically from month to month. And there is no need to invent gunpowder, because such solutions were already tested at the turn of the 80s and 90s, when hyperinflation spread in Poland and prices rose by an average of 70-80%. monthly.

Of course, we do not currently have hyperinflation, but we do have unacceptable inflation in a country that aspires to develop. During the fall of the People’s Republic of Poland, the method of removing inflation money from the market was government bonds, the main feature of which was the linkage of interest rates to monthly inflation. This made them so attractive that there were cases of faking them (because they exist physically). It was enough to change the date stamp of the bank to increase the value of this bond several times, because every month means a higher profit.

The offer of the Ministry of Finance currently includes four-year non-material bonds at a variable interest rate depending on the level of inflation, but their construction does not provide immediate protection against price hikes, but deferred insurance, because their interest is in the first. The annual reset period is specified in the letter of issue by the Minister of Finance (May series equals 3.30%), and consists of the second to fourth annual interest period only of 12-month plus-inflation margin according to the Central Statistics. office. headquarters. center. Thus, the introduction of bonds that take into account monthly inflation, not just annual inflation, can effectively eliminate monetary inflation. Only this would be an expensive method for the government, despite its attractiveness to savers.

Tomasz Prosek
economic journalist
President of the Friendly Country Foundation

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