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Wednesday January 19th, 2022

Sri Lanka central bank blames usual suspects for inflation after printing money

ECONOMYNEXT – Sri Lanka’s central bank has blamed the usual suspects for surging inflation despite being the sole authority which is able to create or not create inflation by virtue of holding a legal monopoly on money issue in the country.

The central bank blamed “supply side disruptions” and “removal of price controls” and raising “administratively determined prices”, a long time favourite, for inflation of over 8 percent in October.

No mention is usually made in Sri Lanka and other countries with planned economies when administratively determined prices keep down “inflation” in earlier months.

Sri Lanka however started to raise rates in August, and in September lifted price controls on bond auctions which were responsible for most money printing.


Sri Lanka lifts price control on T-bills in key stability move

Administratively prices were raised “to reflect the rising global energy and other commodity prices,” the central bank said.

However there was a “gradual firming of aggregate demand conditions,” central bank taking a little bit of responsibility for the severe monetary instability.

Sri Lanka has been printing record volumes of money to try and push growth up from around August 2019 creating the worst balance of payments crisis since the 1970s with country finding it difficult to import basic goods and energy.

Prices of basic like rice have gone up above global levels with import controls and duties, allowing millers to push up prices.

Sri Lanka’s central bank however was set up in 1950 in the style of a Latin American central bank, abolishing a currency board which cannot depreciate the currency supposedly to pursue “independent” monetary policy.

The rupee has also fallen from 182 to 203 in the latest printing bout and parallel exchange rates have gone to 230 to the US dollar levels amplifying any US generated inflation with is own contribution to exported and imported goods prices.

Ironically, countries with stable pegged monetary arrangements that do not claim to have ‘independent monetary policy’ have been experiencing lower levels of inflation than the anchor US dollar currency.

Hong Kong which has a near-orthodox currency board with the US dollar reported 2.3 percent inflation by the end of the third quarter, less that the anchor US currency.

Maldives which is also keeping its stable peg at 15.40, but has printed some money, has recorded less than 01 percent 12-month inflation in the third quarter with deflation suffered during most of 2020 amid a Coronavirus demand collapse.

Inflation in the UAE, which has a currency-board-like system without active monetary policy turned positive for the first time in August 2021 rising 0.6 percent, after seeing deflation during most of the preceding year .

Saudi Arabia which also has a similar monetary arrangement saw inflation accelerate to 0.8 percent in October from 0.6 percent in September.

Sri Lanka printed record volumes of money through 2020 and 2021 amid repeated warnings from classical economists, analysts and the media that inflation and currency troubles would result from the Keynesian ‘stimulus’ which went to modern monetary theory levels.

Keynesian stimulus became popular after the Federal Reserve created the Great Depression and was taught in Anglo-American universities.

It dominated mainstream economics until the Federal Reserve printed money to target an output gap and the Bretton Woods system and the gold standard collapsed in 1971 under Chairman Arthur Burns. Sri Lanka completely closed the economy in the 1971 with worse economic controls than now.

“The chief root of our present monetary troubles is of course the sanction of scientific authority which Lord Keynes and his disciples have given to the age-old supersitition that by increasing the aggregate of money expenditure we can lastingly ensure prosperity and full employment,” Friedrich Hayek, who had warned Keynes in the 1920 wrote after the US dollar exited the gold peg firing high inflation and low growth in the 1970s.

“It is a superstition against which economists before Keynes and struggled with some success for at least two centuries.”

“The claim of an eminent public figure and brilliant polemicist to provide a cheap and easy means of permanently preventing serious unemployment conquered public opinion and, after his death professional opinion too.”

Von Hayek has said that Keynes, appeared to have little knowledge of UK monetary history and succeeded in “rehabilitating a view long the preserve of cranks.”

Hayek wrote the some time after he won a Nobel prize shortly after the consequences of stimulus became clear in the Great Inflation and stagflation of the 1970s. The UK was also in trouble after value added tax and money printing under the so-called Barber boom.

Both the UK and US tightened policy under Reagan and Thatcher – who reportedly carried Hayek’s Consitution of Liberty in her handbag – creating a long period of stability which ended with the Greenspan-Bernanke bubble, which also burst in 2008/9.

“Yet I fear the theory will still give us a lot of toruble: it has left us with a lost generation of economits who have learnt nothing else,” Hayek accurately said in 1976.

“One of our chief problems will be to protect our money against those economists who will continue to offer their quack remedies, the short-term effectiveness of which will continue to ensure them popularity.”

Fed Chief Jerome Powell who has fired a massive aggregate demand bubble which is pushing up global commodity prices has been nominated for a second term.

US inflation will overshoot target, Powell delusional: Hanke

Classical economists have said he was delusional for saying there was no link between money supply and inflation. (Colombo/Nov26/2021)

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