The central bank of Ukraine raised interest rates in the first week of March to 30%. According to this article, inflation is expected to hit at least 26% this year. The currency used in Ukraine (the hryvnia) has lost about 80% of its value in less than a year.
I won’t get too much into foreign policy and war in this article, although the violence and conflict in Ukraine is obviously partially a cause of the major economic troubles there.
Ukraine is an extremely poor country. In comparison, Russia is well-off economically. It should not be too surprising that most people in Crimea wanted to join Russia, just looking at it from an economic standpoint alone. If geo-politics weren’t a factor, I’m not sure why Russia would want to absorb Crimea. Why would you want to take on a lot of poor people?
It is interesting though that the central bank had to take these drastic measures just to prevent its currency from being completely abandoned. This is what happens when hyperinflation threatens.
The point here is that there comes a day of reckoning and there are limits to even what a central bank can do. Being in the United States, I know it seems that the Fed can do practically anything without limits. But there really are limits. That limit is massive price inflation, or worse, hyperinflation.
When there was double-digit price inflation in the 1970s, it took Paul Volcker to come into the Fed and allow interest rates to skyrocket. He stopped the monetary printing presses.
There are going to be consequences to the Fed’s previous monetary inflation of the last 6 and a half years. We may fall into another deep recession. If the Fed tries to pump in more money, we are eventually going to hit a point where a lot people start questioning the dollar. The Fed cannot keep injecting massive amounts of money forever. It is on hold right now, but I don’t think it will stay like this if we hit another recession.
I’m not predicting 30% interest rates in the United States. What I am saying is that there are limits to what the Fed can do. At some point, it will have to let all of the misallocations reveal themselves and let the market correct. I don’t think the Fed is going to allow hyperinflation to happen.