ECONOMYNEXT – Sri Lanka is following in the footsteps of John Law, an 18th century French mercantilist who led France to a monetary collapse with a first central bank, by implementing the so-called modern monetary theory that debauchery money, accused an opposition lawmaker.
Sri Lanka cut taxes sharply in December 2019 as part of a fiscal “stimulus” and began printing in large quantities after several rate cuts in early 2020 as part of a monetary “stimulus”.
John Law returns
“Look at the fiscal policy issues. What was the benefit of lowering taxes? opposition lawmaker Kabir Hashim questioned in parliament.
“Government revenues have fallen and commodity prices have risen. Look at monetary policy. In the 1700s in Britain there was a man called John Law. This is his policy that we are following now, printing money and calling it MMT. “
Law had fled his native Scotland for France following an incident in a duel, but had tried to interest Scottish rulers in the creation of a central bank and national paper money.
Scotland had a series of free banks and a type of short-term cash advance similar to the “interim advances” in the Central Bank Act of Sri Lanka called the “real bill doctrine” had been introduced. used to varying degrees.
However, he failed to persuade the Scottish leader, including the Duke of Argyle, of his plan. After his flight to France, Law befriended the Duke of Orleans, regent of King Louis of France.
In 1720 Law was appointed Controller General of Finances. A private bank created by law was nationalized at the General Bank and it bought public debt.
“He (the law) bankrupted France,” Hashim said. “The same is happening in Sri Lanka. “
By imposing restrictions on free trade, Law created several companies with monopoly mercantilist powers, including the Mississippi Company, driving up stock prices with excess profits.
In Sri Lanka, import restrictions are also pushing up the stock market profits of some so-called import substitution companies, which exploit people who charge high prices and benefit from import duties and import controls.
However, inflation quickly followed, and the stock markets crashed as people demanded gold in exchange for paper money, in the same way people demand dollars in exchange for money printed in one. central bank at fixed exchange rate.
Kabir said hundreds of billions of rupees were printed in 2020.
“Where had his money gone?” he wondered. “There should be a lot of money. Why is the government saying there is no money now? “
Money was leaving the country as a balance of payments deficit as the new currency was exchanged for foreign exchange reserves for business transactions and for debt repayment in dollars.
Excess money exchanged for reserves
The balance of payments deficit in 2020 was US $ 2.3 billion. In 2021 until April, the balance of payments deficit was over $ 900 million.
“The rupee had been severely debauchery (masta baldu),” Hashim said. “Mahinda Rajapaksa reached over 100 rupees per US dollar in 2005. Gotabaya Rajapaksa reached over 200 per US dollar in 2020/2021. “
However, the central bank of the administration in which Hashim was minister also followed a milder version of MMT called “targeting the output gap”, also creating currency crises.
Ironically, the International Monetary Fund provided technical support to calculate a supposedly existing “output gap”.
Printing money to target an output gap created a currency crisis in 2018, pushing the rupee from 153 to 182 per US dollar, forcing the implementation of corrective policies as the balance of payments collapsed , in a so-called political “stop-go”.
The central bank also ditched a “bill-only policy” trying to control the yield curve in the long run, going beyond a short-term “real bill doctrine” to permanent injections of money over the longer term. term in the style of Royal Bank.
It has been claimed that “inflation targeting” was followed, despite the operation of a highly volatile indexed exchange rate, which analysts said would end in disaster.
Sri Lanka could be heading for triple anchor, ‘inflation targeting’ oxymoron, Bellwether says
However, the country does not have a floating rate to prevent a currency collapse when money is printed through open market operations.
After breaking the rupee, the central bank also controlled deposit rates, in an unprecedented double expropriation of the little man for the benefit of leveraged companies and the state in yet another mercantilist intervention.
The central bank has also embarked on real effective exchange rate targeting to resist currency appreciation in 2017, while buying more than $ 1 billion in reserves and canceling dangerous swap deals.
Instead of letting the currency appreciate as in 2010 and 2011, the rupee depreciated another 3 rupees in 2017.
The administration of the day granted “central bank independence” and allowed RRSP targeting, a blatantly mercantilist strategy to gain short-term business advantage by destroying the real wages of export workers.
The cabinet at the time also did not oppose the implementation of “targeting the output gap”, although no cabinet sanction was given for such action that was going to be carried out. against the central bank’s goal of stability.
A policy rate corridor has also been reduced from 150 to 100 basis points, and no action has been taken.
Member of Parliament’s mandate for stability
Overnight money rate targeting then began where large volumes of money were printed to target a rate below the corridor cap, making absurd the idea of having a political corridor in the first place that is to allow rates to increase automatically when a peg is defended.
Critics have pointed out that the central bank has only a stability mandate and no growth mandate for any John Law-like activity other than interim advances for six months, and targeting of the output gap and MMT. violate article 05 of the constitution of the central bank.
However, even in 1950, an economist writing in The Banker magazine warned that the six-month limit was no protection as long as CB could buy treasury bills and had many tools in use in Latin America.
Sri Lanka’s central bank was one of several set up by the Fed in Latin America and Asia in the style of the Argentine central bank.
In 2015, large volumes of silver were initially injected to keep call rates low in the corridor, eventually pushing the rupee from 131 to 151 to the US dollar in early 2017 during the first currency crisis of the last administration.
Analysts have warned that targeting the call rate would be the death knell for the rupee and targeting the RRSP would trigger monetary instability and political turmoil.
However, MMT is much more dangerous.
Analysts have warned that MMT combined with swap deals could render the central bank insolvent, in addition to a possible sovereign default, and could trigger a monetary collapse unless corrective action is taken to stop money printing. .
The story repeats itself
The MMT 2020 exercise was carried out despite the experience of 2015 and 2018, where growth collapsed after cash injections triggered currency crises.
In France, despite John Law’s experience with paper money, a coin called Assignat was printed after the French Revolution. The assignat was not printed for Treasury bills, but land seized primarily from the Church and “assigned” for paper books.
The currency quickly lost value and trade restrictions and currency controls were put in place to maintain its value.
Sri Lanka tightens capital controls, capped outflows from foreign exchange accounts
In August 1793 a law was passed punishing anyone who sold assignats at a price lower than their face value with a twenty-year imprisonment in the chains, and later a law making foreign investments by French people punished with dead.
“Who did this vast depreciation ultimately fall on primarily?” “Asks Andrew Dickson White in his book Fiat Money Inflation in France.
“When that currency had fallen to about one-three-hundredth of its face value and, after that, to nothing, in whose hands was most of it?
“The answer is simple. I will say it in the exact words of that thoughtful historian of whom I have already quoted: “Before the end of the year 1795, paper money was almost exclusively in the hands of the working classes, employees and men of small fortune. , whose property was not large enough to invest in merchandise stores or national lands.
“The financiers and the big guys were smart enough to put as much of their possessions as possible into things of permanent value.
“The working classes did not have such foresight, nor competence, nor means. Upon them finally came the overwhelming weight of loss. After the first collapse came the cries of the hungry. (Colombo / July02 / 2021)