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Sunday June 16th, 2024

Fed to end injections sooner, ‘retire’ transitory, Powell says as inflation rages in Sri Lanka

UNDER FIRE: Inflation has been above 2.0 percent for long enough, under fire Powell admits

ECONOMYNEXT – Federal Reserve Chairman Jerome Powell who has been firing a global commodity boom and asset price bubbles at home, pushing inflation to 30-year highs says liquidity injections may be terminated faster that earlier indicated.

“We haven’t made a decision on that,” Powell told a congressional hearing. “The most recent data particularly since the November FOMC meeting show elevated inflation pressures, a rapid improvement in many labour market indicators, without an accompanying addition of labor supply.

“And also strong spending that signals significant growth in coming months. Remember that every dollar of asset purchases actually add accommodation to the economy.

“But at this point the economy is very strong and inflationary pressures are high and it is therefore appropriate to consider wrapping up the taper of our asset purchases which we actually announced at the November meeting perhaps a few months sooner.

And I expect that we will discuss that at our upcoming meeting in a couple of weeks.”

Sri Lanka’s inflation hit a 12-year high as Powell was giving testimony to the congress.


Sri Lanka inflation hits 12-year high in Nov 2021 amid money printing.

Sri Lanka has been printing money for two years, with inflationists defending their actions pointing to US and other reserve currency central bank money printing, which has now pushed prices to 30 year highs in advanced nations.

Sri Lanka’s rupee is soft-pegged to the US and whenever it depreciates the inflation is amplified.

Powell grilled by a senator on persistent inflation said it may be time to retire the word ‘transitory’.

Senator Pat Toomey, a former Wall Street Banker, roasted the Powell saying the agency’s “new flexible average inflation targeting” framework remains at 2.0 percent but the time frame is unspecified.

Headline inflation which people fell is already above 6.0 percent.

“Core PCE the Fed’s preferred inflation metric is running above 2.0 percent over the past five years, nearly 3.0 percent over the past three years, and 4.1 percent over the past year,” Toomy charged.

“So it is above target, it has been above target, and it is accelerating.

“Yet the Feds maintained an extraordinary emergency monetary policy stance.”

“This framework looks to be like a weakening of the Feds commitment to stable prices.

“Now I know you believe this is transitory. But everything is transitory. Life is transitory. How long does inflation have to rise above your target, before the Fed decides may be it is not so transitory”

Powell admitted that inflation has run above 2.0 percent for “long enough”.

“I think the word transitory has different meanings to different people. To many it has a sense of short lived. We tend to mean that it won’t mean a permanent mark in the form of higher inflation.

‘I think it is a good time to retire that word and explain more clearly what we mean.”

Toomy pointed out that the US economy was “well past recovery” and was in a “full blown expansion” and raging asset prices had made houses were unaffordable to people in many areas.

“And yet the Fed’s going to purchase 35 billion dollars of mortgaged backed securities in December alone. And scheduled to continue purchasing mortgage backed securities for months on end.

“I would strongly urge you to reconsider the pace of the tapering.”

Tighter US policy has always hit pegged nations that do not tighten in tandem, triggering meltdowns and defaults.

Sri Lanka’s rupee fell in 2015 and 2018 as then Fed Chief Janet Yellen first withdrew liquidity in a first tightening cycle in 2014, also raised rates in the second ccle while withdrawing liquidity.

Sri Lanka’s central bank is one of several set up by Fed ‘money doctors’ in Latin America styled after Argentina’s central which go into regular external default.

Sri Lanka’s stocks have also been soaring partly driven by export firms on expectations of a falling rupee.

Laughably rising inflation in the US and has been blamed on supply chains not the worst aggregate demand bubble seen in 20 yeas and the highest money supply growth the US has seen in decades.

Classical economists have said that Powell was delusional for suggesting that there was no link between money supply growth and inflation.


Conditions ripe for global commodity super-cycle: Steve Hanke

US inflation will overshoot target, Powell delusional: Hanke

The Fed is the biggest known global bubble blower in history. It created the Great Depression after stumbling on open market operations in the 1920s triggering the “roaring 20s” bubble and busted a centuries old gold standard in 1971, trying to target an “output gap”

Most recently it created the Great Recession after firing the Greenspan-Bernanke bubble and is now in the midst of the Powell Bubble pushing up food and energy prices across the globe. (Colombo/Dec01/2021)

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Sri Lanka state airport agency swimming in cash after sovereign default

ECONOMYNEXT – State-run Airport and Aviation Services (Sri Lanka) Ltd is swimming in cash after a sovereign default halted debt repayments allowing it to post a profit of 29.7 billion rupees with 10.4 billion rupees in interest income, official data showed.

In April 2022 Sri Lanka declared a sovereign default after printing large volumes of money over more than two years to enforce rate cuts and blowing the biggest hole in the balance of payments in the history of the island’s money printing central bank.

Interest earnings of Airport and Aviation Services also shot up to 10.4 billion rupees in 2023 from 6.1 billion in 2022 and 3.3 billion rupees in 2021 before the sovereign default.

Under the terms of the default or ‘debt suspension’, state agencies like the Airport and Aviation Services, and Sri Lanka Port Authority were also not required to service loans, even if they had the cash to repay loans.

AASL’s finance income shot up in 2023 “mainly because the company has invested surplus cash saved by not servicing the foreign loans obtained by the company due to the temporary debt moratorium policy of the country,” the Finance Ministry said in a report.

Sri Lanka’s rupee and foreign currency interest rates also shot up in 2022 and 2023 as rate cuts enforced by money printing were lifted to clear anchor conflicts.

After inflationary rate cuts kill confidence in a currency triggering capital flight and parallel exchange rates, excessively high rates are needed to kill domestic credit and stabilize the currency.

Countries with such flawed operating frameworks in central banks tend to have chronic high nominal interest rates in any case.

AASL’s rupee revenues went up to 48.8 billion rupees in 2023 from 32.2 billion rupees in 2022 as passenger movements increased to 7.5 million from 5.5 million with a recovery in tourism and local traffic.

Sri Lanka’s currency crisis hit in 2022 just as the island was recovering from Coronavirus pandemic triggering fuel shortages and power cuts as money printing triggered forex shortages.

From 2022 March the rupee collapsed from 200 to 370 levels an attempt to float the rupee was failed by a surrender rule (a type of buy-side pegging which pushes the exchange rate down).

In 2023, after hiking rates to kill credit, the surrender rule was removed, leading to a currency appreciation.

The airport agency also made an exchange gain of 6.1 billion rupees in 2023 against an exchange loss of 10.5 billion rupees in 2022 the rupee appreciated. (Colombo/June16/2024)

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Sri Lanka car import relaxing roadmap given to IMF: State Minister

ECONOMYNEXT – Sri Lanka has submitted a roadmap on relaxing vehicle imports to the International Monetary Fund, State Minister of Finance Ranjith Siymabalapitiya said as the country recovers from the worst currency crises in the history of its central bank.

The import relaxation will allow vehicles for public transport, goods transport, then motor cycles and cars use by private individuals and after that, luxury cars, Minister Siyambalapitiya said.

Luxury cars however attract the highest taxes for each dollar spent on imports.

Economic analysts have characterized vehicle import controls as a ‘cascading policy error’ that follows inflationary rate cuts, which then deprive taxes to the state and triggers more money printing and more forex shortages, requiring even higher corrective interest rates and a contraction of economic activities to save the rupee.

According to the latest IMF report car import controls may have led to revenue losses of 0.7 to 0.9 percent of GDP.

Sri Lanka started controlling imports few years after a central bank was set up in 1950 and also tightened exchange controls progressively, so that macroeconomists using post-1920 spurious monetary doctrines taught at Anglophone universities could print money through various mechanisms to suppress rates.

Sri Lanka is working with the IMF as a guide on many issues and the roadmap was submitted to the agency on June 14, Minister Siyambalapitiya said.

The IMF in an economic report released last week the plan was expected to be submitted by June 15.

Whatever the IMF’s faults, which some wags have called ‘progressive Saltwaterism’, the agency does not advocate import controls as solution to balance of payments problems, despite a Mercantilist fixation with the current account deficit in countries with reserve collecting central banks, analysts say.

Import controls have the same effect as import substation on the balance of payments, which is none, classical economists have pointed out and is now mainly a problem associated with macro economists and economic bureaucrats of so-called basket case countries.

Any pressure on the currency or missed reserves targets in the IMF program has come in the past only if the central bank printed money to suppress rates as credit growth picked up from car imports.

Sri Lanka had 3,000 items under import controls when rates were suppressed with printed money from 2020 to 2022 but eventually ended up with the worst currency crisis triggered by macro economists in the history of the country and eventual external default.

A committee made up of the Department of Trade and Fiscal Policy of the Finance Ministry, the Department of Registration of Motor Vehicles, the Central Bank and two associations representing vehicle imports were appointed to come up with the roadmap, he said. (Colombo/June15/2024)

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Chitrasiri Committee presents draft constitution for Sri Lanka Cricket

ECONOMYNEXT – A draft constitution for Sri Lanka Cricket, the governing body for cricket in the island, prepared by a committee headed by retired Supreme Court judge K T Chitrasiri, was presented to President Ranil Wickremesinghe today (15).

The Sri Lanka team were ignominiously knocked out of the Men’s T20 World Cup tournament this week, sparking renewed criticism of the team and the governing body.

Last November, a cabinet sub-committee was appointed to address challenges faced by Sri Lanka Cricket and provide recommendations after consecutive losses became a hot topic in parliament.

After parliament decided to remove the administrators of the sport, the International Cricket Council (ICC) Board suspended Sri Lanka Cricket’s membership.

Based on the sub-committee’s recommendations in its report, the Cabinet then appointed an expert committee to draft a new constitution for Sri Lanka Cricket.

The committee headed by judge K T Chitrasiri includes President’s Counsel Harsha Amarasekara, Attorney-at-Law Dr Aritha Wickramanayake and Chairman of the Sri Lanka Chamber of Commerce Duminda Hulangamuwa.

Deputy Solicitor General Manohara Jayasinghe, and Shamila Krishanthi, Assistant Draftsman representing the Legal Draftsman’s Department, and Loshini Peiris, Additional Secretary to the President were also on the committee. (Colombo/Jun14/2024)

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