ECONOMYNEXT – Central bankers cannot solve economic problems and large liquidity injections will lead to devaluations, though most emerging market currencies including Sri Lanka’s have been relatively stable in the Coronavirus pandemic, a global investor said.
“Central bankers are not in a position to recover economies or generally solve all these economic problems,” Mark Mobius, an emerging market investor said in a webinar with Colombo-based John Keells Stock Brokers.
“But unfortunately people demand the central banks to do something. So the central banks keep on printing money. In the US the central bank is buying bonds – commercial bonds. And this is releasing a lot of liquidity into the economy.
“But I believe that it is important that central bankers aren’t put into that position because they cannot really do much to help the economy.”
He was responding to his view on Modern Monetary Theory, a 21st century revival of the ideas of the like of Scottish Mercantilist John Law, coupled with heavy state interventions.
MMT came to the fore amid a depression style de-leveraging in the US and elsewhere after a massive housing and commodity bubble fired by the Federal Reserve collapsed in 2008, in a repeat of John Law’s Mississippi Bubble.
Keynes, general theory, which some classical economists say should never have been called a ‘general’ theory, gained ground in the depression era when banks were damaged and there was de-leveraging.
The massive money printing recently has not shown much inflation, partly due to productivity gains by companies, Mobius said.
“The result of that is not inflation but devaluation of currencies,” Mobius said.
Most emerging market currencies have been relatively stable in the crisis, he said.
Sri Lanka’s rupee has been relatively stable with a 7 percent devaluation and some recovery. Single digit changes in currency was “not a very big problem” he said.
“You probably not want to have big swings in currency,” Mobius said. “That is not a healthy thing.”
He said central banks were printing money into the banking system but banks would ask ‘why should we put money into companies that are going under?’ he said.
“But I believe that it is important that central bankers aren’t put into that position because they cannot really do much to help the economy,” he said.
“That is why lockdowns will have to end.”
People will have to go back to work to make economies work. Most countries will be forced to re-open economies, Mobius said.
“The solution is not money, the solution is more jobs,” he said.
He expected to global tourism to recover as people were impatient to move after being trapped in lockdowns. (Colombo/June29/2020 – Update II)