Hungary and Unintended Consequences

Hungary Unexpectedly Cuts Rate as Economy Enters Recession – Bloomberg.

Hungary GDP Growth Rate

Hungary Inflation Rate

The Hungarian central bank just had to cut its benchmark interest rate 25 basis points to 6.75%. Note the charts above. Hungary’s rising inflation rate argues against a rate cut, but its lackluster GDP growth since the onset of the GFC demands it.

The reason for this problem traces it way back to the Eurocrisis. Even though Hungary uses its own currency, it is still right in the middle of the crisis.

Hungary is  a small country with a currency that you have never heard of, the forint. Foreign banks, mostly from their old partner Austria in the Hapsburg dual-monarchy, wish to make loans to the Hungarians, but they do not want the risk of holding forints. The Austrian banks have a surplus of Swiss francs and begin loaning these to the Hungarians who convert the francs to forints to buy houses.

So far, so good. The Austrian banks are making money, and the Hungarians get to buy houses with mortgages.

Enter the eurocrisis. Rich Europeans have been sending money to Switzerland. They withdraw euros from Eurozone banks, buy Swiss francs and place them into the Swiss financial system.

This is too much money for the Swiss. Even though the country is viewed as a haven of sorts, it is a very small country with the population of New York City minus Staten Island. The Swiss franc begins to appreciate rapidly against all other currencies including the forint. Now, Hungarians have to repay more forints for the same Swiss-denominated loan.

In the short-term, the Hungarian central bank keeps interest rates high to defend the currency and particularly borrowers. This tight money policy leads to a recession. Since the forint has lost value, inflation creeps up despite lessening demand from the recession.

Hungary is now caught between a rock and a hard place. The next time that someone tells you that there are no consequences to ECB and Fed money printing, remember little Hungary.

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One thought on “Hungary and Unintended Consequences

  1. The monetarist dynamics you note would disappear if sovereign nations adopted the principles of a credit system as expounded by Alexander Hamilton and his circles. This approach in fact is the only way to defend a currency. Investing in the productive capacities of a sovereign’s people is the means by which a so-called “fiat currency” gains sound value.

    Have you ever seen the Ally Bank commercial where a briefcase of money is left in the hands of strangers and it is revealed that no one steals the money? In a way this reveals the rightly assumed, honest, hard working character of people making a Hamiltonian credit system ideal. This is in contrast to an imperial monetarist system (such as is ours today) whereby fostered is crookedness and dishonesty, such as we see in spades today (“we” as in everybody but the U.S. Justice Department).

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