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23 December, 2011  ▪  Georgiy Tereshchenko

Milking the Cash Cow

Unemployment does not decline as good currency issuance is channeled into bad assets

International financial institutions have recently downgraded projections for the growth of the global economy. The World Bank decreased its earlier expectation by 6 p.p. to 3.2%. However, growth as a term seems misleading here; a slight revival of dynamics after the 2008-2009 nosedive would be a more appropriate description of the trend. Growing social tension is another typical trend, for developed countries first and foremost. And this one has been pointed out by the International Labor Organization, among others.

Economic trends in Ukraine on the whole, and the labour market in particular, are largely mirroring global trends. The local economy - especially heavy industry whose enterprises and related entities generate the lion’s share of jobs in Ukraine - rely too heavily on the situation in global markets. Export activities affect hryvnia stability; which in turn affects the inflation rate, real income for households, their purchasing capacity and other aspects key to the labour market.


ILO experts underscore the fact that unemployment hit its historical record in 2010 at 200 million people. However, this number is more of an eye catcher as it shows the trend, rather than the reality because it does not take into account hidden unemployment in post-soviet countries, some African and Latin American specific aspects and other things. Yet, general analytical conclusions are quite accurate: employment rates in virtually all industries and economic sectors are unstable, while the 2011 anti-crisis measures have hardly improved the situation on the labour market or in the social sector. A myth favoured by employers whereby cutting salaries for employees allows them to preserve or create new jobs has been dispelled. In fact, this forces employees to work more, and harder, for the same or less money.  

The criticism of the 2011 anti-crisis measures has come as no surprise. Essentially, they come down to trivial money printing coupled by government pledges to cut inefficient public spending, just like in earlier years. The Ukrainian Week has already written about key reasons for the global recession and two scenarios for further developments – the deflation variant and the money printing one. So far, the former has occasionally shown itself, while the latter deserves a closer look, just like its effect on the labour market, which is crucial: governments try to support output by printing more money to facilitate demand. They rarely succeed though. The US Federal Reserve, for instance, is printing dollars in piles while Americans are actually growing poorer. In 2010 alone, their average income shrank 2.3% year on year.

The Keynesian theory with its many adherents is not working. Increased budget spending, via multiplying sovereign debt among other ways, does not boost the income of the real sector. Money is not making money in the US, EU, Russia, Japan, Ukraine or elsewhere. Now, why is that?   

Serhiy Ehishiants, Senior Economist at the investment firm ‘ITinvest’ accurately describes the background of the recession. In his opinion, increasing public spending generates a short-term economic impulse due to the support of consumption, either directly through public procurements or social programs, or indirectly through lending financial institutions. Meanwhile, money printing provokes price growth for basic goods, including food and fuels. This sort of inflation, which hits consumer expenditures, undermines consumer demand and more importantly decreases corporate income. As a result, companies must raise their wholesale prices and streamline their spending which includes spending on staff. This also kills demand. The trend seems like a vicious circle.  


Both official and expert statistics show further boosting of output, which was earlier fed from lending by way of demand stimulation, is no longer possible.

Stephen Roach, a senior executive with Morgan Stanley in Asia, says the US Department of Commerce has downgraded its assessment of consumer spending growth over the past 14 quarters since the beginning of 2008 by almost twice, to 0.2%, including inflation back in June 2011. This means that the revival of consumption is currently slowest in the US which in turn makes it impossible for the country to exit the crisis quickly. EU states are facing an identical situation while China is not rushing to stimulate domestic demand while waving off pleas to increase payroll spending.

What could this mean for the US and all other more or less developed states provided that they stop printing money? A default, spending cuts, a decrease in money supply, sharp fall of output, failed payments that could ruin trade chains and skyrocketing unemployment. This is the so-called deflation scenario based on Neokon consultancy’s assessments.

What could further money printing mean for the US and all the rest? Postponed deflation in the context of overproduction, continuing trade wars with China, India and Brazil as the devaluation of national currencies through money printing reinforces national producers and weakens importers, and cheaper sovereign debts. Most importantly, though, currency issuance facilitates the unfolding of a global inflation of basic goods, i.e. fuels and food.

Thus, the key priority on the labour market is plain to see: American – Chinese trade wars with the value of currency units as the battlefield will sooner or later result in a situation where people will have to work for a plate of rice (which so far, is only a metaphor).  

A survey conducted by Bloomberg LP in October caught the US Consumer Comfort Index falling to its lowest point since April 2009. 95% of Americans expect an economic downturn – at national, corporate and individual levels. As to the latter, the list of complaints from those polled is painfully familiar: difficulties with mortgage repayments, the slow rise of job numbers, and restricted salaries.


According to GfK Ukraine’s October survey, the consumer confidence index grew by 3.9 p.p. to 78.6 in Ukraine compared to September. Yet, this trend hardly mirrors any positive changes on the domestic market as the factor behind this rise is the purchase of durables. Thus, Ukrainians are still buying imported goods, as in previous years, and supporting manufacturing in other countries. By contrast, the same survey shows that the index of expected economic development in Ukraine has fallen by 0.4 p.p. to 70.3 in the course of the year compared to September. And Ukrainians expect unemployment dynamics to grow 10.3 p.p., pushing the relevant index up to 135.3.

In his article on, Stephen Roach outlines priorities for export-oriented economies: according to him they should, “rely on internal demand.”  This is a great piece of advice for Ukraine. Its chances of maintaining the current level of output and employment in 2012-2013 seem few, unless Ukrainian steelworks and chemical plants refocus on the needs of the domestic market, the infrastructure develops, the cooperation of various industries is revived and the NBU conducts an appropriate and transparent monetary policy. The labour market of 2008-2009 might look like a piece of cake when compared to the upcoming year of peak repayments of sovereign debt, both national and corporate.

Conversations with numerous investment analysts leave a firm impression that some Ukrainian oligarchs feel prepared for the global recession. One of the options they are considering is to switch to exporting iron ore to China which they hope will allow them to trudge through hard times. This approach partially responds to current challenges but does not look good as a national strategy.

Officials have nothing better to do than scratch their heads in this situation, a truly super-complicated one. Premier Mykola Azarov has been advertising the strategy to design a barrier to the second wave of the crisis within the state budget for 2012. However, financial promises have failed: budget revenues amounted to nearly UAH 337.6bn (plus 13% year on year) while spending hit UAH 361.6bn (plus 7-8% respectively). Having a budget deficit under a constantly declining balance of trade and total sovereign debt of Ukraine, including corporate debt exceeding USD 120bn, is something too expensive to afford. But that’s not the question. Even more shocking is the official expectation of GDP at 5.5% in Ukraine under the upcoming global recession of 2012. Clearly, supporting the government’s pledges to increase budget proceeds with the pressure on the real sector which was unseen before might seem too much. Even with such a priceless asset during crisis times as the government’s optimism regarding economic prospects, the policy aimed at ruining business in order to fill up the state budget is certainly a road to nowhere.

An important thing to realize is that while most powerful international players tilt in pursuit of the lesser evil between the deflation and money printing crisis scenarios, it makes sense to switch to correcting the distorted structure of production from the distribution of national revenues rather than grabble for internal reserves, which is exactly what the Ukrainian government is doing right now. Leading international researchers focus on these very aspects. Over 1952-1986, a relatively stable period, there was not a single year where 1% of the richest households in the US would earn over 0.1% of gross national income. In the mid-80s, according to data from economists Thomas Piketty and Emmanuel Saez, the figure began to soar and hit an incredible 18.3% in 2007, right before the crisis.  The last time a situation like this occurred was in 1929. The American Economic Association interpreted the signals of the growing social inequality as follows: technological progress boosted demand for highly-qualified employees, i.e. IT professionals, advanced PC users and so on. This interpretation was not groundless yet it was also not too convincing. Viktor Suslov, Chairman of Ukraine-Brazil Council for Economic Cooperation, gave a better explanation: “The crisis shows that the life of the entire business sector is an illusion; it is supported by money printing. Top managers of banks and corporations, auditors, consultants and some other professionals face challenges now, as they are spoiled by the ongoing operation of money printing machines. Obviously, the entire social classes have spent the last few years turning good, newly-printed currency into their bad assets.”

Vitaliy Melnychuk, ex-Chairman of the Audit Chamber of Ukraine, says that the assets of the 100 richest Ukrainians grew to USD 80-90bn or 20-30% year on year in 2010, the equivalent of two thirds of the country’s GDP. However, the expert claims, most oligarchs have not changed their strategies since the days they accumulated their initial capital by purchasing assets that churned quick profits. Most tycoons cannot yet boast long-term investment: their empires do not include businesses built from scratch or high-tech companies. Thus, current structural distortions in the economy are deteriorating rather than healing.

Redistribution of national wealth, an ever burning issue for experts, is now growing ever more acute. Raghuram Rajan, an economist at Chicago University, assumes in his latest book entitled ‘Fault Lines’, that the US mortgage boom, the emergence of Fannie Mae and Freddie Mac and their bankruptcy in May 2008, all considered to be the starting point of the crisis, resulted from political reaction to social stratification.

Apparently, some commercial structures circle all money printing centers. Whenever a print machine is launched, this means somebody needs it. In Ukraine, no one is even trying to hide the fact: ever since 2008, foreign currency-denominated liabilities of the corporate sector have been being turned into public liabilities. Surprisingly, the tycoons that had survived the tough times of USSR collapse and grabbing, seem to not see how wrong the rush for cash is in times of currency devaluation, and some vertically integrated holdings and banks risk ending up being totally useless in the global crisis of overproduction and a situation where feeding demand manually is no longer possible. Will the owners of entities close to the money print house door realize how important it is arrange vertical cash turnover within the available business systems at least or, what’s better, within social classes.


Based on its research, the International Labor Organization draws conclusions on the effect of the global recession:

– no chance to provide more jobs to match the pre-crisis employment rate;

– 27 million-worth unemployment rise in developed countries and 80 million-worth increase in the world;

– a decline in the standard of living for most citizens in 69 countries in 2010 (the survey included 118 countries; 2010 was compared to 2006);

– mistrust of most of the population for national governments in 99 countries;

– frustration with the lack of appropriate jobs (50% of the population in developed countries and over 70% of those polled in Greece, Italy, Portugal, Slovenia and Spain);

– volatile food prices (the volatility doubled over 2006-2010).

The ILO survey includes a new point called social concern index. It shows public attitude to the situation on the labour market and distribution of the crisis burden among various social groups. This index has been continually growing in 45 countries for the past few years.

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