ECONOMYNEXT – Sri Lanka’s food shortages are not ‘genuine’ but are the ‘venomous’ acts of a few traders, Foreign Minister G L Pieris said as authorities slapped price controls as money printing triggered forex shortages and inflated the rupee.
Sri Lanka now has shortages of milk after Consumer Affairs Authority, which had previous created shortages in lentils, tinned fish as well as cooking gas refused to let prices go up.
Sri Lanka invoked emergency laws last week and seized sugar stocks of key importers saying they were ‘hoarding’ goods they themselves had imported.
As money was printed to keep rates to a record low, driving dollar yields above that of rupees, importers have also been denied forward foreign exchange cover, leaving traders who bring down food commodities on 90 or 180 day usance bills without a reliable hedge or guide to price their goods.
Rice prices have also gone up with domestic collectors given oligopoly powers by the government with an import ban on rice.
“Now where the government has found it necessary to impose an emergency is not because of a scarcity of essential products,” Foreign Minister G L Pieris, a former law teacher told reporters.
“It is to do with actions by a few traders to hoard these commodities. Commodities are very much there.
“Sugar is there, rice is there. But there are unscrupulous elements that are stashing it away, concealing it hiding it, in order to create artificial shortages.
“Not genuine shortages.”
Minister Pieris did not elaborate on what a ‘genuine’ shortage is.
Young children studying economics and commerce in school for the first time learn that there are no shortages in the absence of price controls and but the price will go up, reducing the quantity demanded and eventually quantify supplied goes up.
That is why there are no shortages in most countries, despite being hit hard with Coronavirus and global shipping bottlenecks disrupting deliveries.
However if the market clearing price is suppressed, quantity supplied will reduce creating a genuine shortage, leading to rationing or empty shelves.
When the price goes up, quantity supplied will eventually go up. If any stocks had underground due to the price control to be sold in the ‘black market’ also comes back.
In the absence of other factors – such as government money printing that has debased the currency – prices will then come down.
Sri Lanka’s National Medical Regulatory Authority also created shortage in 2020 with price controls on masks. Analysts have warned that both the NMRA and CAA will create hardships for the people by creating more shortages as the currency fall if money printing is continued.
Minister Pieris blamed the food shortages on ‘venomous’ traders, going beyond the adjectives currency debasing governments and kings of the past generally use to demonize traders like profiteering and greed.
“And if there are problems because of the malicious, venomous, totally irresponsible behavior of a small minority of traders then the government is duty bound to take all measures at its disposal to protect the innocent public,” he said.
“And the emergency is one such measure.”
From February 2020 to March 2021, the central bank has printed 1.11 trillion rupees triggering balance of payments deficit of over 5.0 billion US dollars in what classical economists call an ‘external drain’ as the new money was redeemed (given convertibility) against foreign reserves.
From around June 2020 suspended convertibility for the rupee for imports, leading to letters of credit rationing and weakening to around 230 to the US dollar for large importers from below 200 at the beginning of the year.
The central bank raised its overnight money printing rate to 6.0 percent lats month and has also raised a deposit margin banks must keep with it.
But bond auctions are failing under price controls (yield ceilings) and bids have dried up beyond 3-month bills, triggering the printing of more money.
Economists have warned in the past that money printing will lead to price controls, the shortages and it has been a time honoured practice for money printers, who are effectively counterfeiting large volumes of money under legal cover, to demonize and scapegoat either consumers or businesses.
Printed money also leads to the re-distribution of wealth from one class of people to the others as its value deteriorates over time.
In Sri Lanka the state salary bill is the largest expense.
“Government paper, as pernicious as it may be, is a relatively straightforward form of counterfeiting,” explains US economist Murray Rothbard, in his work ‘The Case Against the Fed.
“Obviously, too, it is to the interest of the counterfeiters to distract attention from their own crucial role by denouncing any and all other groups and institutions as responsible for the price inflation.
“But since there is an inevitable time lag between the stock of money increasing and its consequence in rising prices, and since the public has little knowledge of monetary economics, it is all too easy to fool it into placing the blame on shoulders far more visible than those of the counterfeiters.”
The Federal Reserve is also printing money, firing a global commodity boom or the Powell Bubble.
Classical economists have called Fed Chief Jerome Powell ‘delusional’ for calling the current inflation a ‘transient’ effect which has nothing to do with money supply growth.
Usual Suspects – Easy Targets
Money printing and inflation is a tax which re-distributes wealth from late recipients to the early recipients, gradually disrupting the way a market economy works.
However politicians and the state actors are able to blame private citizens because monetary policy is not clearly understood by the public.
In Sri Lanka the salary bill is the largest item on the state budget. The people who get the printed money first benefits, but as prices go up, the later recipients who get the money through several round of credit in the banking system lose out.
It is therefore a ‘tax’ that re-distributes income from the later recipients to the first.
“The first people who get the new money are the counterfeiters, which they then use to buy
various goods and services,” explains Rothbard.
“The second receivers of the new money are the retailers who sell those goods to the counterfeiters.”
“This tax is particularly insidious because it is hidden, because few people understand the processes of money and banking, and because it is all too easy to blame the rising prices, or “price inflation,” caused by the monetary inflation on greedy capitalists, speculators, wild-spending consumers, or whatever social group is the easiest to denigrate.”
Economic Breakdown, Property Rights
The effects of money printing and currency debasement and goes beyond, inflation.
Eventually property rights are also violated, adding to the disruptions of the price system and inflation, leading to a gradual collapse of the way a market economy works.
“There will be other, and permanent, distortions of the economy away from the free market pattern that responds to consumers and property-rights holders in the free economy,” Rothbard wrote.
“This brings us to an important aspect of counterfeiting which should not be overlooked.
“In addition to its more narrowly economic distortion and unfortunate consequences, counterfeiting
gravely cripples the moral and property rights foundation that lies at the base of any free-market economy.”
Under emergency laws, which are where a military Major-General has been appointed to carry out, 29,000 metric tonnes of sugar kept by private traders were seized.
The emergency laws can be used to confiscate not only food stocks but also vehicles used to transport them and buildings.
“Where any person has been convicted of an offence under this regulation and where the court is satisfied that such premises has been used, or used in connection with, the commission of an offence under this regulation, the Court of Appeal may make an order to confiscate such building or premises, in addition to any punishment imposed by the Court of Appeal in respect of such offence,” regulations published in a gazette notice says.
“Where a competent authority deems it necessary to seize any essential food items including paddy, rice and any vehicle transporting such items for the purpose of providing essential supplies and services to the public, such competent authority may seize such food items including paddy and rice and any vehicle transporting such commodities.”
Sri Lanka’s central bank also printed money in 2015/2016 to target a call money rate, and in 2018 to target an output gap, in a steady deterioration of prudent policy and a drift towards discretionary and flexible policy.
At the time also price controls were place, but with later interest rate hikes money printing was reduced, leaving the economy battered.
Then and Now
State Minister for Money and Capital Markets, Nivard Cabraal, said the Consumer Affairs Authority will give decision on milk powder prices soon.
He said price controls could be distressful, when questioned how the CAA can be prevented from creating shortages for consumers, leading to global headlines.
“It can be a bit challenging as you quite rightly mentioned,” Minister Cabraal told reporters.
“Of course the perennial challenge we have in balancing these competing interests. And sometimes in difficult circumstances the CAA will also have a role to play in that they will set out, what is believed to be a reasonable rate at which a particular item of goods or services would be provided.
“But at the same time I do understand that it can lead to some delays it can lead to tensions, which again can be distressful as well.
“I think we need to balance these competing interests and I take your point that we will need to examine the circumstances of all these different types of activities which can sometimes be helpful but can sometime be a little bit cumbersome as well.”
When Minister Cabraal was central bank Governor in 2008 and 2009 as the Federal Reserve’s Greenspan-Bernanke ‘housing’ bubble collapsed, Sri Lanka was in the midst of a peaking civil war, the was capital flight from bond market, interest rates were high, but there were no food shortages and price system was intact.
However after the war monetary policy has deteriorated in to discretionary or ‘flexible’ policy and a plethora of price controls, critics say.
“There has been the supreme idiocy of imposing price controls, which I thought was something we had left behind in 1977,” Razeen Sally, a professor at Singapore National University said, when the central bank was printing money in 2016.
“The government by creating inflation and by having import protection puts burdens on consumers and then puts burdens on producers and entrepreneurs with price controls.”
In the 1970s, when the central bank also bought most of the Treasury bills, hoarders and blackmarketers were blamed.
Economists and analysts have been calling for laws to curb the ability of the central bank to print money, destroy the currency and distort the market economy, by making it into a currency board or dollarizing the economy.
However it is now too late to build a currency board, after foreign assets have fallen to the level of reserve liabilities.
A China backed Port City will be dollarized protecting from interventionist monetary policy, and providing a safe haven for investors from liquidity injections. (Colombo/Sept05/2021)