A few weeks ago Mr. Nabiullina, the head of the Russian Central Bank, declared that they reviewed the laws against "currency speculation" in view towards toughening its criminal liabilities. In other words, there are politicians in Russia who want to punish any person who dares to cross the Central Bank by betting on what everybody knows: that the Ruble is…well…rubble! Luckily enough, Mr Nabiullina believes that the current punishment is enough. You can read all the details in the newspaper Argumenty i Fakty searching for the article "The Bank of Russia sees no need to tighten the punishment for currency speculation"
Shame. We were hoping for some really middle-age punishment such as The Knee Splitter, Foot Roasting or The Pear of Anguish. Nothing is bad enough for those evil, evil currency speculators who bet their own money against other peoples' own money as to what will the Russian Central Bank do. Oh… wait… they are betting their money… against private money…soooo… why is the Russian Central Bank involved at all?
The Russian Central Bank gets involved because the FOREX market (the market were currencies are traded) cannot be controlled by any government, not even by a cabal of governments. The G8 tried it, tried it and failed. The whole process works more or less as follows:
- Central Bank makes a stupid move (i.e. they print)
- Inflation is not yet visible
- Smart money knows that the deed has been done
- Smart money bets inflation will go up or its equivalent, that the value of the currency will drop (this is called a "short")
- Not-so smart money begin to realize what smart money is doing
- Not-so smart money gets into shorts
- Dumb money realize what is going on
- Dumb money gets into shorts
- Shorts become prevalent in the FOREX market
- Everybody gets the message and they begin to sell Rubles (nobody wants to keep a currency which will devaluate)
- Massive selling decreases the value of the currency
- Central Bank must step in to prevent "excessive" devaluation of the currency (which will increase prices of imported goods at home) by buying the currency and paying with other currencies (i.e. Dollar, Euro, Yen, etc.)
- Central Bank start losing "reserves"
- Central Bank begins to lose credibility
- Central Bank prints more in order to create "good inflation" and "jump start" the economy
- The more Central Bank prints, the more shorts appear in the FOREX
- The cycle goes on until Central Bank gives up and stops buying its own currency
- By then the economy is destroyed, the shorts are covered and the traders end up making a fortune.
Now, this would seem like a horrible, horrible thing to do, considering that as the economy tanks, millions of people will suffer the consequences so that a very tiny bunch of traders make fortunes. Looked from this perspective, the criminalization of currency speculation seems to make sense. The operative word being "seems".
Let's go back to basics. Take a look at the first point in the list above. Do you see it? It reads:
- Central Bank makes a stupid move (i.e. they print)
This is the trigger point. Without this event the entire chain is meaningless and cannot take place. Furthermore, traders are simply betting that what the Central Bank started will be inevitable (which it is). The only difference is that they accelerate the process, but the outcome is exactly the same.
And so punishing "currency speculators" for betting on something that it is unavoidable seems very, very stupid indeed. And it is. However, when was the last time that something that is gigantically stupid has stopped politicians? Never. Particularly when their jobs are at stake.
You see dear reader; politicians are betting that printing at the Central Bank will go unnoticed until they had the chance to spend the freshly printed money at face value. In other words, they are simply conning people; it’s a scam. And as we all know, governments hate when their scams fail. You can find the details of this process in our article Fake Money For A Fake Economy.
What the Russian government is punishing here is not "speculation" (which is in reality trading) but the fact that the Russian Central Bank will be unable to properly scam the people. In a very accurate sense, they are preventing the actions of private citizens -"vigilantes" if you want- punishing the scammer through the expedient mechanism of exposing the scam. In ultimate analysis it is not the "shorts" that make the damage, but the news that the Central Bank has devaluated the currency through printing. And as trading cannot be stopped in the FOREX, the Russian Federation stops it through the use of brute force embodied by all those people with badges and guns.
Of course this is Russia; fresh out from under communist thinking. Thus, we can't expect miracles, even more considering that a former KGB Colonel is in charge of the whole thing.
The lesson here is that the entire world is doing the exact same thing. They are conning you. The difference is that in former communist countries their political views have not yet shifted enough (please remember that all political evolution is transitional in nature - see Political Systems Lifecycle) and thus they have the tendency to make patently obvious their stupidity and ignorance. What would otherwise have been quietly swept under the rug and kept from public view in the West, is being exposed as an anti-social behaviour in the East.
Nowadays the East is the loud and blabbering town idiot that robs you in daylight with plenty of witnesses while the West represents the politically-savvy backroom dealers and blue-collar scam masters. The result is the same. You get scammed.
Punishing currency speculators (or any kind of speculators for that matter) is a sign of stupidity and impotence. It states clearly and loudly that the government is scamming you and that they hate whistle-blowers.
But then again, you may be of the opinion that currency speculators prevent the proper actions of Central Banks. That's OK. That's your choice. One question though, why is that you consider that robbing you should be understood as a "proper action"?
Note: please see the Glossary if you are unfamiliar with certain words.