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Saturday June 3rd, 2023

US inflation likely to stay high in 2022, 2023 even if Fed tightens now: Steve Hanke

ECONOMYNEXT – Inflation in the US is likely to remain at 6 percent or higher in 2022 and 2023 even if the Fed starts tightening now as there is a lag of 12 to 24 months in prices responding to its actions, economist Steve Hanke has said.

US Consumer inflation hit 7.5 percent in January 2022 up from 7.0 percent in December, as forecast by classical economists who watched broad money growth.

The Fed has still not started tightening, but is buying US Treasuries despite raging inflation. ‘Tapering’ means excess liquidity is still being dumped into the banking system, but at a slower pace.

US broad money measured by M2 is currently growth at 12 percent. Typically there is a lag of 12 to 24 months from the time money supply expands to it starting to show up in the price index.

There was also a small possibility that Fed will panic tighten too fast and trigger a recession which would create stagflation, Hanke, is a Professor of Applied Economics at the Johns Hopkins University in Baltimore said.

The Fed will have to bring US broad money measured by M2 to around 6 percent to generate its 2 percent inflation target based on growth trends.

“The Fed is doing a lot of talking but they are not doing any tightening,” Hanke said in a recent interview with an online portal. “Money supply measured by M2 is still growing over 12 percent on a year over year basis.

“And to actually hit their inflation target of 2 percent a year they will have to bring it down to about 5 to 6 percent. That is about half of what it is now.

“Let’s assume they do that right away. We will have inflation over 6 percent over 2022 and 2023 and into 2024.”

Hanke last year accurately predicted a 6 to 9 percent inflation for the US for 2021 in a Wall Street Journal opinion piece after warning much earlier that the Fed would overshoot its 2 percent inflation target.


US inflation will overshoot target, Powell delusional: Hanke“We had no crystal ball. We had the quantity theory of money,” Hanke said. “It is money supply stupid.

“If you have a surge in money supply, after the lag of 12 to 24 months, inflation gets into the system. As Covid exploded in the March of 2020 money supply measured by M2 in the United States has grown over 38 percent.”

Money produced by the Federal Reserve (reserve money or the monetary base) does not necessarily produce strong credit and broader money growth if the banking system is broken and they do not lend, such as in the aftermath of the bursting of the housing bubble.

However if there is a healthy banking system, Fed money is rapidly translated into credit and pyramiding broader money.

The US also gave ‘stimulus’ checks directly to people, further boosting demand, and then blamed ‘supply chain disruptions’ as demand for durable goods in particular came roaring back.

The Fed also dismantled a repo window which had earlier encouraged banks to keep excess money in the agency radically changing the monetary framework from the Janet Yellen years.

Fed is expected to end printing by March and start raising rates to reign in money growth.

The Fed could also tighten too fast and trigger a recession which would result in stagflation as it had done in the past Hanke said.

“I am not going to say it is going to happen. But it might happen,” Hanke said. “This inflation has gone up now. It could spook the fed so much and frighten them that they start increasing interest rates too rapidly and panic – they have done this before, because they really don’t know what they are doing.

“If they panic and raise interest rates too rapidly and too high we could easily have a recession. And then we could have the old stagflation problem. We could have a recession and would have the inflation.”

Powell had articulated unusual views – for a Fed chief – based on post-Keynesian theory despite the agency’s past experience in the 1920s, the 1970s, the 1980s and the run up to the housing bubble.

In a February 2021 congressional testimony, Louisiana Senator Kennedy questioned him about the 26 percent M2 growth at the time.

“Well, when you and I studied economics a million years ago, M2 and monetary aggregates generally seemed to have a relationship to economic growth,” he said.

“Right now, I would say the growth of M2, which is quite substantial, does not really have important implications for the economic outlook. We have had big growth of monetary aggregates at various times without inflation, so something we have to unlearn, I guess.”

Hanke said at the time that Powell was ‘delusional’. (Colombo/Feb10/2022)

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Sri Lanka to ramp up weekend fuel deliveries after petrol price cut

More deaths reported at Sri Lanka fuel queues

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation will be operating on the weekend to complete all fuel deliveries to end vehicle queues forming outside fuel stations after the price revision earlier in the week, Energy Minister Kanchana Wijesekera said.

“Instructions have been given to CPC and Ceylon Petroleum Storage Terminals to continue fuel deliveries on Saturday and Sunday this week to supply sufficient stocks to all fuel stations,” Minister Wijesekera said in a TWITTER.COM MESSAGE

“To reduce expenses on overtime, CPC and CPSTL have not been operating on Sundays and public holidays in the last 4 months,” Wijesekera said.

“Non-placement of orders by fuel stations from last Saturday, anticipating a price reduction, not maintaining minimum stocks, immediate increase in demand by consumers after the price revision, and quota increase have created shortages in the fuel stations.”

The Minister in April 2023 said all fuel stations would be required to maintain a minimum of 50 percent of stock tank capacity.

“I have asked CPC to review and suspend the license of fuel stations that had not maintained minimum stocks.” (Colombo/ June 02/ 2023)

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Sri Lanka bonds yield up at close, rupee at 291.75/292.50 against the US dollar

ECONOMYNEXT – Sri Lanka’s bonds closed steady on Friday, dealers said, following the central bank’s decision to cut its main policy rate by 250 basis points.

The Spot US dollar closed at 291.75/292.50 rupees, dealers said.

The rupee opened at 290.25/75 to the US dollar Thursday and closed at 292.50/295.50 to the US dollar.

A bond maturing on 15.09.2027 closed at 24.70/90 percent up from 24.50/90 percent a day earlier, dealers said.

A bond maturing on 15.05.2026 closed at 25.75/26.25 percent up from 25.00/26.00 percent a day earlier.

A bond maturing on 01.05.2025 closed at 27.00/30 percent, up from 26.30/27.00 per cent at last close.

A bond maturing on 01.07.2032 closed at 20.25/21.00 percent, up from 20.00/40 per cent at last close.
(Colombo/ June 02/2023)

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Sri Lanka’s shares edge up on positive macroeconomic sentiments

ECONOMYNEXT – Sri Lanka’s shares closed higher in trade on Friday, over positive macro-sentiments encouraging investors to redeem their interest towards buying, an analyst said.

The main All Share Price Index was up 0.72 percent or 62.19 points to 8,753.80,  while the most liquid index S&P SL20 was up 0.68 percent or 16.87 points to 2,487.29.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

Prior to the Monetary Policy investors were quite optimistic that inflation is to lower and interest rates will decrease and since exp, an analyst said.

Sri Lanka Central Bank is waiting for the government proposal on the domestic debt restructuring (DDR), the central bank governor Nandalal Weerasinghe said amid uncertainty over DDR and speculations over instability in the banking sector.

“On debt restructuring, the borrower is the ministry of finance’s treasury. Certainly we will announce what the strategy will be. We are waiting for a government proposal,” Weerasinghe said.

Sri Lanka’s investors are waiting on assurances to be made on debt restructuring and optimization, Central Bank Governor Nandalal Weerasinghe said, “It is up to the government to clear the uncertainty, because from our side we have done that part.”

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

The speculation of DDR has hit the market and the risk premium has kept the market lending rates well above the central bank’s policy rates. The government has yet to present its plans on DDR.

Weerasinghe said the central bank has done its best to reduce the risk premium through bringing down the market lending rates while keeping the policy rates unchanged.

Sri Lanka’s President Ranil Wickremesinghe has discussed progress of International Monetary Fund program and debt restructuring during a visit of Deputy Managing Director Kenji Okamura, statement said.

“The discussion primarily focused on the progress of the IMF program between Sri Lanka and the IMF,” a statement from President’s office said.

“Attention was also paid to the on-going debt restructuring negotiations.”

However Officials from IMF have said Sri Lanka has to focus on expanding taxes.

“We discussed the importance of fiscal measures, in particular revenue measures, for a return to macroeconomic stability,” Deputy Managing Director Kenji Okamura said in a statement.

The finance ministry this week issued rules requiring everyone above 18 year of age to register to pay income tax.

“I was encouraged by the authorities’ commitment to negotiate a debt strategy in a timely and transparent manner.

The market generated a revenue of 738 million rupees, while the daily average was 1 billion rupees.

Top gainers in trade were Vallibel One, LOLC Finance and Browns Investment. (Colombo/June02/2023)

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