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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Paradox of Thrift Hits Moscow

Thrift, as my grandmother always reminds me, a good thing. If I save money, rather than spending it on electronic gadgets, more wine than I can really afford, and eating in restaurants five days a week, I build a safety cushion for rainy days and emergencies, and, hopefully, get richer, because the money I save pays me interest, or is in the form of investments that promise to pay a return.

Thrift is even good for the economy, because even though Moscow’s restaurateurs don’t benefit quite as much from my patronage, the bank at which I deposit my money will then loan it out to businesses, which can then invest to expand, and people, who are then able to buy things like cars or houses. My money still stimulates the economy, even when saved.

But there is one problem with thrift: the moment when businesses and people are frightened into becoming thrifty suddenly and all at once.

If I stop buying the products I normally buy at the same time others decide to do the same, businesses must make cost reductions to match the revenue shortfall, probably by reducing wages or making staff redundant. This causes more people to be even thriftier, forcing more businesses to cut back.

But worse, the money we save by being thrifty is hoarded by banks instead of invested as usual. Because businesses have been forced to make cutbacks and make people unemployed, and some businesses close all together, the asset side of banks’ balance sheets falls in value, forcing them to hold more of our money to compensate. And besides, plunging creditworthiness provides an additional, powerful incentive for banks to hoard rather than invest.

Businesses and households can no longer get loans to expand or purchase, further stymieing economic growth. Worse, debts cannot be refinanced, meaning available funds are channeled away from the economy to pay off debt, further throttling the economy, deflating prices, and increasing the real burden of debt.

Thrift, usually a positive, becomes destructive; and while thrift would usually improve debt to capital ratios for households and business, its cumulative effect leads to the opposite.

This is the paradox of thrift, and I believe we are firmly in this dangerous territory in Russia now.

Banks have already started hoarding money to bolster shattered balance sheets and in the face of plunging creditworthiness. As early as August last year, Der Speigel wrote:

“Banks are becoming stingier with consumer loans… Olga Vasilevna, a sales clerk in Moscow, says she can’t get a loan to repair her battered 1994 Volkswagen Golf…. No one is prepared to front her the money. “It was a lot easier before,” she says. “The banks aren’t lending money now.”

Entrepreneurs are facing trouble, too, as many banks stop lending to small businesses. Natalia Lobinina, owner of a hair salon in Tver, about 100 miles north of Moscow, recently had to sack half her staff and move into a smaller space when her lease expired… no bank would lend her the $300,000 she needed to buy her own shop.”

Meantime, Igor Udovichenko, the director general of UPSK, told news service Regnum:

“In my knowledge, there is no single bank for today which grants mortgage credits”

And now, it seems the great driver of the Russian economy, consumer spending, is suffering, too.

The Moscow Times is ran an article last week which cataloged a raft of closures in Moscow’s hitherto booming retail sector as consumers cut back.

“Empty shops and signs announcing going-out-of-business sales are littering prestigious downtown shopping districts as price-conscious customers turn their backs on designer labels like Stella McCartney, Alexander McQueen, Kookai, Diesel and Manolo Blahnik.
[…]
TsUM and shopping centers such as Yevropeisky remain full of shoppers because stores are offering huge discounts on clothes, said Anastasia Pyatina, editor of Cosmopolitan Shopping. But she questioned what would happen later in the year. “The question is: Will they have money in April or May? At the end of the year, people still had bonuses and they were afraid to lose their rubles through inflation, so they were spending them,” she said.

Pyatina said she anticipated a series of store closures. “I think it is a trend because obviously luxury clothes stores will face a situation when not everyone who bought before the crisis will continue doing so,” she said. “I know different fashion brands are losing 30, 40, 50 percent of sales. Everyone says the spring will be tough.”

The paradox of thrift is performing its destructive magic in Moscow.

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