LBO Home IndoChina | About Us | To Advertise | Contact Us rss LBO Mobil rss rss rss rss rss
Sun, 19 November 2017 10:01:16
Sri Lanka's axis of evil and occupation currency: fuss-budget
26 Nov, 2007 23:27:57
By Fuss-Budget
Nov 26, 2007 (LBO) - It is now becoming increasingly evident that if the poor of this country are to be saved, the axis of evil that is formed by the Central Bank, the Treasury and state banks that had made the rupee a virtual occupation currency, has to be broken.
The Central Bank has taken a small step in the right direction by restricting access to the discount window. But that is just a minor improvement, in the face of the deadly currency that the Sri Lanka rupee has now become.

It is ironic that the rupee which was created by a real occupation army - the British – was actually pretty benign under colonial rule.

The rupee took on the characteristics of an occupation currency only at the hands of our own vicious post-independence rulers who used it to grow the government like a cancer, making the state the biggest, most profitable and corrupt 'business' in the past 50 years.

This was done with the help of the Central Bank which was created in 1951 by then finance minister J R Jayewardene. Countless deficit budgets financed with printed money followed.

Numerous writers have already exposed the 2008 budget and showed it for the numbers game that it is. So much so that fuss-budget has little to add to it. However it looks like a less deadly budget than the 2007 one.

The last budget has turned out to be viciously anti-poor and a massive shock to the economy as 45 billion rupees was printed in just five months to cover its shortcomings.

It is well on the way to create another inflation record as well as darkening the future of our children with foreign commercial borrowings after creating a balance of payments crisis halfway through the year.

Of course it may be futile to blame the budget per se. The core problem is the current economic framework mostly authored and engineered according to the ideals propagated by the Janatha Vimukthi Peramuna and the rapid militarization of society.

This brings us to the subject of occupation currency.

Military Currency

Under generally accepted international occupation law, a conquering army can automatically confiscate assets of the state and levy taxes that the original government used to charge the population and run the administration.

Occupiers are not expected to confiscate or steal private property. However they can do the next best thing. They can issue their own currency.

By issuing a worthless paper 'military' or 'occupation' currency, an occupying army can 'purchase' goods and services from the occupying country and effectively finance the occupation.

Soldiers and defence contractors who are paid in occupation paper currency can buy the shops out and deprive the local population of goods. The new government can also 'buy' land, buildings and other assets or services by printing the new military currency.

The results are predictable.

Pretty soon the value of the occupation currency falls rapidly resulting in high prices, which is then followed by rationing or price controls and exchange controls. Automatically shortages and black markets also spring up.

This phenomenon was widely seen during the Second World War as Germany and Japan started to occupy Europe and Asia.

It was repeated all over Asia, in Malaya, Burma, Indonesia and the Philippines. In German occupied areas in Europe the situation was only slightly better.

Banana Republic

Japan issued a wide variety of occupational currencies under the Yokohama Specie Bank, Bank of Taiwan (for Pacific islands) and the Bank of Japan.

Of course the British also printed their own currency (hence the suspension of gold convertibility of the Sterling, exchange controls and rationing) but it was much more restrained.

One of the most famous military currencies is the 'Banana money' of Singapore. This was so called because there was a picture of a banana tree. Under Japanese occupation the price of rice increased about a 1,000 times in Singapore. Ration cards were issued.

In the black market, the old British colonial Straits dollars continued to be exchanged.

Then the population was told to grow its own food in home gardens as food became scarce. Manioc and sweet potatoes became staples (Ring any bells?). In reality food was being appropriated by the occupiers.

After the war the Japanese government refused to honour these currencies making people who have already been scammed through these high inflation currencies, completely destitute.

In Singapore the only people who escaped poverty were those who had managed to hide the old Straits currency. The British of course honored the currency as soon as they came back.

The 'banana money' must have influenced people like Dr Goh Keng Swee, who was Lee Kwan Yew's first finance minister, to maintain what he called the 'colonial relic' of a currency board (Read "Why a Currency Board") and shun the creation of a central bank after independence.

Military Rupee

Now you can see the parallels. Sri Lanka was set on a path of destruction from 1951 after J R Jayawardene created the Central Bank of Ceylon with money printing powers, after abolishing the colonial era currency board.

The rupee started to take on the first characteristics of an occupation currency during Dudley Senanayake's rule when central bank re-finance was given for agriculture and inflation and balance of payments problems raised their ugly heads.

But the real military currency aspects were seen only during the United Front government of Mrs. Sirimavo Bandaranaike. Pretty soon just like in Singapore we were growing manioc and sweet potatoes.

It is not that food production suddenly went down, causing prices to go up.

In reality government workers, and nationalized companies which were earlier making profits and were paying taxes, but which were now topped up with printed money from the Treasury were appropriating the goods and services of the country.

As a result the paper money was rapidly losing value. Classic inflation, in other words.

That is why the government's 'Api Wawamu' campaign is enough to send cold shivers down our spines. It is just like the Japanese occupation government telling Singaporeans to grow their own manioc and sweet potatoes in the 1940's.

The demonetization of the 50 and 100 rupee note in 1970 was another scam perpetrated on the people, in the name of bringing back 'black money'. This reportedly led some people to suicide. The same thing happened to people who held Military Payment Certificates in Vietnam.

The money for which the government had received valuable consideration from its helpless citizenry was made completely worthless.

Occupying Force

The force that is occupying Sri Lanka is not just the bloated 100 plus ministers. They are certainly the top generals.

But it also includes all the other million minions that live off the blood and sweat of the workers.

This includes the opposition and particularly the JVP which is the main force that is advocating the growth of big government and public sector recruitment. These are all our rulers, whether in government or in opposition.

These are people who can appoint another bunch of henchmen to their personal staff and get pensions for life after working for just five years, courtesy of JR Jayewardene again.

Then of course there are the government officials themselves. Under the British, permanent secretaries were real 'public servants' who paid taxes.

But after independence, and particularly after the changes brought by JR, 'permanent' secretaries became 'impermanent'. They also became political lackeys to ensure their survival. By extension these people became politicians, or worse.

The public sector unions are another set of rulers. These people earn tax-free salaries and tax-free pensions, give bad customer service to the real tax payers, demand salary increases every so often and resist all attempts to trim the government.

Over the last three years 100,000 free jobs have been given to unemployable graduates who have received a tertiary education at state expense.

This is in stark contrast to the girls and boys slaving away in productive jobs in our tea estates and garment factories to earn a real living and produce real goods and services to keep this country going.

A look at the growth of state salaries and the contrast to private sector workers amply demonstrates the way our rulers have been skimming away the blood of the non-state sector citizens.

The corporation workers are less harmful than central government workers because most of them actually produce something. But they also do not even pay their PAYE taxes. The corporation pays it for them.

And when their corporation makes losses and get Treasury subsidies they also contribute to inflation and poverty.

Of course some government workers work hard but are not properly rewarded.

Government for Rulers

Sri Lanka is then a government of the rulers, for the rulers and by the rulers. There is a clever campaign to oppose 'privatization' and preserve loss making firms in public hands, essentially in the hands of our rulers and their henchmen.

To top it all, the government unions and the politicians are engaging in a vicious campaign to demonize what they disparagingly label the 'private sector'. In reality these are the people who work. Instead they promote the growth of government and state enterprises.

They also get tax-free cars and housing interest subsidies after running into tens of thousands of rupees a month.

The designers of the 2008 budget raised car taxes again after giving themselves tax-cut cars. The injustices and the privileges taken by our non-tax paying rulers who call themselves 'public servants' are too numerous to mention.

Then of course there is the final unkind cut. The very provident funds of private sector workers who toil night and day, are now plundered by the state with the help of the Central Bank.

Central Bank employees themselves are getting inflation protected pensions topped up at the expense of the rest of the population while the EPF is taxed to the hilt out of its already meager income.

This then is the stark reality facing the man on the street outside the government. It is these heartless rulers who are dumping 20 percent inflation upon the poor in the name of home grown economics.

The axis of evil

How is this vicious system of government preserved?

The first is through taxes. Nobody questions the 'divine' right the rulers have to tax the rest of the people.

How did politicians who have never paid a cent in taxes, but eat subsidized meals in the parliamentary cafeteria ever get the right to criticize an amnesty given to tax payers who at least once in their lives had paid income taxes to the government?

Taxes can only be justified if the citizens get some services of equal value in return.

The other used to prop up the ever-growing state is the paper money system that generates high inflation.

The system is perpetuated through an axis of evil made up of the Treasury, a Central Bank that is subject to fiscal dominance and the banks, especially state-owned ones.

The Treasury forces the central bank to print money, or give up its reserves whenever it feels like it.

The government also borrows from state commercial banks. They in turn borrow from the Central Bank through the discount window. Like the central bank, the state banks are also run for the benefit of their workers, not ordinary people.

Already half the assets of one state bank are lent to the government. State banks have been bailed out three times at the cost of more than 50 billion rupees. A not inconsiderable part of the money has gone to top up the over-generous inflation protected pension funds of their workers.

It is no wonder then that the JVP and other politicians vigorously oppose any attempt to privatize state commercial banks. A vital cog in the wheel will be gone.

Incestuous Relationship

There is a close and incestuous relationship between a central bank and commercial banks, whether private or state-owned.

The Bank of England was created in 1694 by royal charter as a private firm to give a loan of 1.2 million pounds to King William III.

This is the same as the Central Bank of Sri Lanka giving 45.2 billion rupees from May to September 2007 to the government through Treasury Bills and driving inflation to 20 percent.

Though note issue later became a monopoly with Bank of England and it was nationalized in 1946, through the discount window every other bank could also have access to the power of printed money.

As a result every other commercial bank is also an extension of the money printing central bank. This is why it is important to restrict access to the discount window.

The US Federal Reserve has an even more peculiar history and an even more incestuous relationship with private banks - if that is possible. Due to early bad experiences with paper money, the US constitution expressly forbade paper money requiring it to be 'coined'.

However this concept was later diluted as the political power available through paper money overtook good sense, despite many a legal battle being fought. (The Liberty Dollar company which was raided by FBI last week is threatening to take this up again).

Central Banking absurdity

There was strong opposition to central banking in the US and President Andrew Jackson even refused to renew the charter of the Bank of England look-alike: the Second Bank of the United States.

However a banking crisis in 1907 which was averted because JP Morgan organized a lender of last resort facility persuaded a reluctant American public to entertain the idea of a central bank again because they disliked the idea of being dependent on the bankers even more than the control of government.

So great was the opposition that the new entity was not even called a central bank but was named the Federal Reserve.

Unlike the Bank of England which was eventually nationalized in 1946, the Fed is owned through a complex set of regional banks, which are eventually controlled by the big American banks like JP Morgan.

The Federal Reserve bill was hatched in secret by the Morgans, the Rockefellers and the Warburgs. This was not found out until 1916, three years after the Fed bill was passed amidst great difficulty.

It was no accident that on August 17, 2007 the Fed cut the direct discount window rate by half a percent, weeks ahead of the general rate cut for the rest of economy.

True, the big banks were running the payment system of the country and deserved some consideration but it shows the clout the big banks like JP Morgan have on the Fed and also the US government to prevent their profits from being hurt.

(If Ranil Wickremesinghe defaults on the sovereign bond in which JP Morgan was involved this columnist shudders to think of the consequences.)

It was Representative Charles Lindberg who said of the proposed Fed: "The worst legislative crime of the ages is perpetrated by this banking bill" and "This is the strangest, most dangerous advantage ever placed in the hands of a special privileged class by any Government that ever existed."

In 1810 when gold convertibility was temporarily suspended and the Bank of England was losing gold reserves and the ills of paper money were becoming evident, William Cobbet, a radical journalist who later became an MP wrote something similar in a series called Gold Against Paper.

This was around the same time David Ricardo's High Price of Bullion report for parliament (Read "The Thrift Column – Fiat Politics" ) came out.

Cobbett wrote this about the concept of money printing or central bank credit (a central bank buying Treasury bills for example);

"There is something so consummately ridiculous in the idea of a nation's getting money by paying interest to itself upon its own stock, that the mind of every rational man naturally rejects it. It is, really, something little short of madness to suppose, that a nation can increase its wealth; increase its means of paying others; that it can do this by paying interest to itself. When time is taken to reflect, no rational man will attempt to maintain a proposition so shockingly absurd"

History Repeats

This statement remains true even today. That is why borrowing 45.2 billion rupees from the central bank by selling Treasury Bills to keep the current economic framwork ticking is so absurd.

That is also why the Fed and the US economy are now in a pickle. The similarities with 1907 are shocking.

It is also why the Central Bank's move to restrict access to the discount window from next month should be applauded. But printed money is still available at 19 percent. So the axis of evil is still there.

From 1974 Sri Lanka had two 'bank rates' just like the two reverse repo rates we will have from December. But this did not help stop the rot. By 1976 93 percent of Treasury bills in issue were held by the Central Bank.

We seem to have learnt little since then. Just before the sovereign bond came the Central Bank held more than 80 billion rupees worth Treasury bills.

The axis can be broken in several ways. The best is to change the economic framework by improving the general understanding of economics among politicians. But this has not happened for 50 years and it may take as long to do so.

One option is to privatize the state banks. This has been tried and so far failed.

Yet another is to abolish the Central Bank in favour of a currency board. A currency board does not even have a discount window let alone money printing powers. It can only issue notes against foreign reserves. Currency boards are now suddenly in favour.

In addition to countries like Brunei and Hong Kong which have had them for decades (Singapore's currency board now has some central bank characteristics), Estonia, Lithuania, Bulgaria, and Bosnia-Herzegovina now have currency boards.

Belarus is set to have one from next year. The Soviet republics have suffered terribly from Ruble inflation.

Some countries like Ecuador have also opted for dollarization recently.

The other option, as many are now arguing, is to break the link between the Treasury and the Central Bank by making the Central Bank truly independent and introducing an inflation targeting law.

We need to change the system if we do not want to impoverish our people or as Cobbet said, 'pauperise" the rural poor:

"In all countries, where a Paper-Money, that is to say, a paper which could not, at any moment, be converted into Gold and Silver, has ever existed; … the consequence, first or last, has always been great and general misery."

Postcript______________________________

Comments and brickbats to [email protected] You may also use the comments tab .

Interested readers may download a copy of Cobbet's Paper against Gold from this locatio: http://www.archive.org/details/paperagainstgold15cobbrich

Cobbet was a colourful character and is the originator of parliamentary Hansards

Some other points. The United States Military Purchase Certificates were used for completely different purpose from the Japanese. When the US occupied a land, people preferred to use US dollars, resulting in a loss of confidence in the national currency and a fall in its value. In other words inflation.

To prevent it, soldiers were paid in MPCs which were to be used only in military shops and local citizens were prohibited from using them. However local citizens started to use them anyway. Periodic demonetization and exchange for new paper was devised as a means to discourage the practice.

But holders of the paper then lost its entire value.

The Allied occupation currency in Germany however created a problem because the Russians printed large amounts to pay their soldiers after taking the plates from the US. Unlike the US the Russian scrip were not made exchangeable for roubles. A later inquiry showed that the US had redeemed more notes than it originally issued.

British created a currency in North Russia in 1918 which came to be known as the British Ruble based on a sterling-backed currency board. At the time the Bolsheviks were printing money and so were their opponents, leading to rampant inflation.

Research by Steve Hanke and Kurt Schuler has shown that none other than John Maynard Keynes was behind the currency board scheme. A far cry indeed from his last work on deficit spending which ultimately made him famous but impoverished countless millions.

A soft copy of this work can be downloaded from www.cato.org/pubs/journal/cj10n3/cj10n3-3.pdf

Updated

Bookmark and Share
Your Comment
Your Name/Handle
Your Email (Your email will not be displayed)
Location
Country
Your Email
Receivers Email
Your Comment
 
READER COMMENT(S)
23. cunninglion Apr 02
Excellent article. If only you could make the general lay public understand this. Sadly, it usually sails over their heads.

Our problem has always been not inept leaders nor inept bureaucrats, but ignorant voters. And how do we solve that?

22. David F. Feb 07
Fuss-Budgets use of inflammatory jargon only underlines his ignorance of economics.
21. fuss-budget Dec 31
Hi Deane,

Thanks for the heads up. It was great fun listening to Ron Paul.

He is not actually asking for a return to gold standard (neither is The Thrift Column really) but he is pushing to end the Fed monopoly on note issue and allow competing currencies. Basically a type of free banking I guess.

According to the "news anchor" only two presidential hopefuls have raised the issue of abolishing the Fed in recent years; Ron Paul and Steve Forbes. Of course President Jackson did abolish the 'Fed' of that time.

Those who want to know about alternative monetary regimes to central banking including free banking may read this recent story which appeared on LBO based on what Steve Hanke advocated for Zimbabwe.

"Zimbabwe inflation could be halted with new monetary regime: economist"

Cheers,

Fuss

20. Deane Dec 30
Good one Fuss. I hope you'd write more often, its not often you'd find Cato-linking people writing things here :).

cheers, oh and if you want a return to the gold standard, maybe Ron Paul in the white house might help (http://www.youtube.com/watch?v=abV9tgbG-bA)

Cheers
Deane.

19. lucky Nov 29
To say that economics is an inexact science is pure flattery. It has no scientific basis at all. Monetary systems of today have evolved from the old system of bartering ,where goods and animals were exchanged for other goods and services.

In fact, in some parts of the world bartering is a way of life even today. ie. in Amish communities in USA . Tribal communities in North-West Pakistan still exchange donkeys and camels for goods and services.

Not uncommonly they use camels to ' buy' a wife(not a bad idea but I would rather keep the camels)

Later on ,written notes on Papyrus and other leaves were used for bartering,as not everybody wanted to take home a camel , donkey or a wife, in exchange for some oranges. Unfortunately ,these leaves were not durable and also they were easy to forge.

With the discovery of metals like copper, silver and gold engraved notes ( IOU notes)on bits of metal ( earliest coins)were used instead of papyrus notes, because of long lasting qualities. They were also much more difficult to forge. Ancient Egyptians considered gold to have mystical qualities.

Probably as a result of some con artist( most probably a priest) convinced the rulers that gold can bring good luck and mythical powers. And who or which ruler wouldn't want to acquire mythical powers? Even our Presidents are known to visit Kovils and other places of Worship.

By the way- does anyone know why they release Pigeons ( as opposed to other birds) in Kataragama? Sorry I digress. Thats another story.Our obsession with mythical powers is evident even today( Spiderman , Batman, Superman, etc) From Rasputin in Russia to Popes in Vatican ( and priests here ), all have tried to influence and hold power over rulers since the dawn of history of mankind.

So, gold coins became the most sought after bartering commodity.( Krugerand, Sterling). Because Gold was too heavy move in large quantities and on a daily basis notes were re-introduced. Unfortunately the age old problem remains- it is very easy to print a therefore forge.

It's LKR 110 to the USD and It's 110 Japanese Yen to the USD. Does that mean Japan is seriously in trouble? Hi guys - money is only some numerals on pieces of Paper. Don't take it too seriously.

Brazil , Argentina and Malaysia has shown that all the top economists' at institutions like the World Bank and IMF, ( Alan Greenspan, Henry Paulson) are no better in the game of guessing than the ordinary Joe Public.

18. owllll Nov 28
Of course printing money is just fine as long as that printed money is perceived as having some value.

When the value of that printed money derives its worth from a limited quantity of something - be it gold, or stones on the sea bed or GDP of whatever it may be - that it is perceived as representing, then the more money you print the less a given unit of that money is perceived to be worth.

So now then what does this printing of money get us really? Grandiose visions of wealth I guess. These days I feel really wealthy with all these crisp new Rs 2000/= notes in my wallet.

Cheers to the central bank and cheers to the chinthana and cheers to all the guys like KPM who engineer these fiscal stimuli. I look forward to the Rs 5000/= note next year and I am certain that it will arise from the biggest and most potent fiscal stimulus we have every known.

17. fuss-budget Nov 28
Good one KPM.
However that Fort Knox statement is part of central bank politics. They were used by forces of close to government to justify central banking, which is a gold mine for rulers.

The yellow metal in fact had very good uses.

a) It could be used as a means of payment to any foreign country. No one would accept a treasury bill as a payment.

b) If necessary it could be lent for interest. You know about gold banking? Gold has an interest rate just like dollars.

c) But that was not its biggest value. The biggest value was that it put the breaks on printing. Because rulers had to find more gold to issue money it stopped them from printing and scamming the poor.

d)It kept pace with 'inflation'. That is to say its value kept pace with the rest of the goods and services in the economy and therefore eliminated inflation.

Central Banking is a relatively new type of institution. Most of the organized economies even in the British empire grew up on free banking. This is where private banks issue notes in competition with each other. This worked very well.

Currency boards became widespread later and free banking went off the radar after governments got involved.

The giant rock is a good example. You have to expend valuable consideration to create a rock wheel. Therefore it automatically puts the breaks on expansion.

That is the crux of the matter. It has to be a scarce resource for it to have any value that other people will value. That is the thing that high inflation paper money does not have.

You have to limit supply to make it scarce. You can use whatever mechanism you like, gold, silver, land, a stable foreign exchange (which is actually a currency that is subject to some type of inflation targeting), or inflation targeting itself.

fuss

16. KPM Nov 28
Fuss, you've just stumbled upon one of the great paradoxes of the global financial system, which effectively works on the perceived value of some yellow metal stored largely in Fort Knox, which has few practical uses.

I remember reading a very interesting article about a group of fictitious Pacific Islanders who use giant rocks at the bottom of the ocean as stores of money. The system appears ridiculous, but you eventually realise that it is very similar to the one we use.

The whole point here is that the value of money is based on perception. Sure, perception changes with time, and in the long run there is no difference in an economy regardless of how much money is printed.

But in most economies, it can be used to change short term unemployment and growth, which is sometimes required given the business cycle. All I'm saying is this; don't completely disregard the role a fiscal stimulous can play in an economy. FDR's New Deal is testament to its potency.

15. KPM Nov 28
Harsha has made a good point. The Government's objectives should be separated from the Central Bank's. Central Bank independence is good, but the removal of a Central Bank is going a step too far.

I guess the real disagreement between rational people would be the extent to which growth should be sacrificed in favour of price and exchange rate stability.

Maybe I am biased because I am involved in the export sector, but I think that a steadily depreciating Rupee is not a bad thing. Wild fluctuations don't help anybody, but as long as you can plan for the future, life is not too bad.

At the same time, I believe that infrastructure projects which help shift the country's supply curve outwards are good, even if they can sometimes contribute to short term inflation (within reason, of course).

14. fuss-budget Nov 27
Harsha
Exactly. I mean picture this. A piece of paper (a T-bill) moves from the Treasury at Lotus Road to Janadhipathi Mawatha. Then a bunches of paper bundles are dug out of the vault at Janadhipathi Mawatha and taken to Lotus Road

This is supposed to create growth and employment? Give me a break.

(if we ignore the fact that T-bills are scripless and the public debt department is also at Janadhipathi Mawatha :)

As to the currency board and central bank, inflation targeting is perfectly fine. In fact our own central bankers were well on the way to starting inflation targeting without any help from outsiders when fiscal policy suddenly hit the fan.

A currency board is not really radical however. It is a much more simpler monetary institution than a central bank.

Fuss

13. harsha de silva Nov 27
Fuss
As always a classic. And as usual an interesting discussion.

i like your answer to KPM's relevant comments. i say relevant because this is where most people confuse the the objectives of the government and the central bank.

the way i see it, what a government should aspire to achieve is 'sustainable' high growth and equitable distribution of the dividends of that high growth.

what the central bank must strive to do, is to maintain, as much as possible, stability in the internal and external value of the LKR while the above is being done.

there will be obvious conflicts in implementing such policies what sometimes may seem to be at cross purposes; but that is where the independence of the central bank becomes critically important. sometimes, we may have to forego some growth for price stability or vice versa.

but the moment the central bank tries to advice the president on economic policy and meddle with growth, SME development and what have you... the game is over.

fact is monetary policy can NOT have long-run supply side impacts. we must realize our limits. anyone who has studies monetary economics or central banking would know the limits of monetary policy, i wonder how much depth accounting syllabuses deal with such issues?

fuss, i dont agree that the CBSL should be replaced by a currency board. that is too radical! i think we must legislate inflation targeting and hold the governor reponsible. in many contries such a model has got the job done.

12. fuss-budget Nov 27
Hi truth
There is no need to get more scared. These things have been happening before. Only nobody knew.

When you know what is happening it empowers you. Moreover it also allows you to identify the lies that those in government tells you. That puts you in a better position to make decisions and interpret their actions.

The rupee will not fall (see Thrift Column - Currency Crisis which was published on August 20) provided a few simple monetary actions are done such as reducing printing and avoiding sterilized intervention.

As you all saw, the rupee stabilized within a few weeks of the central bank floating it. The central bank stopped sterilized intervention and started floating the rupee on August 24.

In August 105 million dollar were sold. It could not buy a red cent. In September Central Bank was buying dollars gross. By October it was doing so on a net basis.

The rupee was in fact stopped from appreciating by the central bank which was collecting lost reserves like a busy bee:)

There is a massive structural bias in our economy in favour of an appreciating rupee provided monetary policy is benign. However it takes too long to explain why in this forum.

Hi Unga
As a keen economic student who is trying to understand what is going on around us, this columnist would be happiest if the outcomes of bad policy actions do not emerge. Unfortunately that is not the case.

After all that is the objective of the exercise. I do not want to live in a Zimbabwe anymore than the next person. We should all do what we can to prevent it.

Fuss-budget

11. fuss-budget Nov 27
Hi KPM
You said A Government must try and achieve four broad economic targets to be considered successful from an economic perspective.

1. Low inflation
2. High growth
3. Low unemployment
4. Currency stability

I agree with you. However objectives two and three cannot be achieved by printing money. They can only be achieved by hard work and giving an opportunity for people to work hard (reforms de-regulation, price incentives).

Low inflation is simply another way of saying that the medium of payment is a real store of value, which after all is what money is supposed to do.

The problem is that our money does not have those basic characteristics. As a result we are battling inflation as well as other problems that entrepreneurs and workers have in other countries.

Singapore had very high growth without a central bank. Malaysia which had a central bank had lower growth. In fact in the 70's it had serious problems. When tin prices fell it turned on the printing presses.

It was Tun Daim who came in and fixed the budget. But budgets do not alone fix the problems. You need good practical policies all around.

The problem here is that we have liberalized, and opened up but failed to achieve economic stability. If Singapore had a central bank they would still be growing manioc, like us.

Also the government and the banking sector can print some money - which is what Milton Friedman said - and give the citizens a break by not printing too much money.

A Keynesian stimulus works only because the government and businesses get a chance to under-pay workers for a little while. The reduction in the welfare of workers - low real wages - makes more profits for companies, which can be used for investment.

But an exporting economy does not need to to that at all. Also it defeats the entire purpose of the exercise, by making workers poor.

I am not suggesting that we return to the gold standard. That would be expecting too much. But we must get rid of the idea that a central bank can influence employment. That is why all the major central banks now have only one objective - price stability. This means doing the job it was created to do issuing a low inflation currency, instead of taking on the job of every tom dick and harry and his wife and neighbors as well and imagining that you can grow an economy by printing money. Then we should close down government and only have a central bank. Other govt. departments can do a teeny bit to improve economic growth and employment surely? Just a teeny bit even?

If you cannot do your own job of issuing a good quality currency, how can the central bank do other people's jobs?

The idea is to think about alternative monetary regimes. If we want central banking - fine. But in place of central banking + gold standard then lets at least have central banking + inflation targeting, not the horrific monster we have now.

Currency boards are another alternative. Free banking is another. Both of those - we have had these remember - have given us better results, than central banking. If you are interested in free banking read up on Larry White who is an international authority on the subject. Links to Prof. White's works are found at the bottom of The Thrift Column - Rate Signals.

fuss

10. UNGA Nov 27
I am surprised at the amount of ignorance shown by the author. Author of this article seems to be living in an unreal and uneducated world.

Inflation is high in SL but so is growth. Low inflation should not be the government's only concern. Low inflation is not a benefit in itself, except for half baked economics students, like the author.

Nothing proves this more than his own previous articles. He has been inveighing against inflation and money printing for several years predicting doom and collapse. All his predictions have come to nought.

Will this one prove just as wrong headed as previous ones? Count on it with confidence .

9. Rajive De Silva Nov 26
As ususal Fuss had hit the nail. Mind you, neither the Govenor not the ST is going to like this as it exposes their ineptitude.

Breaking the axis of evil is very difficult. It is unlikely that either the government or the opposition will agree to abolishing the CB as it amounts to shutting down their printing press. We need a truely 'patriotic' politician to champion this cause. Such beings are non existent in Sri Lanka today. Therefore, the axis of evil will only gather force in the future.

Unfortunately, the masses who vote our inept politicians into power will not understand the gravity of the situation.

Just look at the way consumer prices are increasing. It appears that Sri Lanka is sliding faster towards becoming a Zimbabwe. And, the CB is so useless in controlling inflation. Our 'patriotic' masses will soon haave to eat their patriotism for dinner (notwithstanding manioc and sweet potatos)

8. hothouse Nov 26
This is the best researched article on the subject I have read in some time. Congratulations. The problem is a truly insular approach to economics as viewed by politico's.

Whilst they not only know nothing about cause and effect, they do not want to know because it's not in their interest. As you say, once a feifdom, always a feifdom.

Germany in the 30's Argentina in the 90's and even UK in the late 70's (Hello IMF, fancy lending us a few billion?).

Thatcher and, belive it or not, Putin spring to mind as routes to salvation. One because she crushed the unions, freed the BoE to set independent interest rates whilst abiding to a government set inflation rate and the other because he crushed the opposition but believes in a strong economy. There are few choices left open to us and, if we continue on this path there will be none. Plantins for breakfast, lunch and dinner perhaps?

7. Sam Thambipillai Nov 26
The Sri Lankan ruppee will soon be fit to be used only as "Toilet paper". War has killed us, is killing us and will continue to kill us, unless we kill our desire for weapons and kill others.

The war with the LTTE is never winnable. It is an emotional game that is being played on the racially minded Sinhalese by their leaders.

6. Mohandas Nov 26
Very well written article and probably the most frightning expose of government duplicity that I have encountered.

To believe that the government is keen to safeguard the interests of its country men, is to believe that Central Bankers have the best interest of the people at heart!!!

5. KPM Nov 26
Hi Fuss, nice article, but I think you are being somewhat one-sided. Currency boards and even the gold standard certainly do have their advantages in terms of low inflation, but that is not the be all and end all of macroeconomic policy.

A Government must try and achieve four broad economic targets to be considered successful from an economic perspective.

1. Low inflation
2. High growth
3. Low unemployment
4. Currency stability

Your proposed measures help out in terms of 1 and 4, but limit a Government's ability to do anything about 2 and 3. I agree that in the long term growth and unemployment veer towards trend, but (to borrow a line from a very famous economist) in the long term we're all dead.

I'm certainly no Keynesian, and I strongly believe that the supply side is key to growing an economy. However, in the short term, you need stimuli to try and smooth the growth process to try and make the lives of a country's citizens better, not only in the long term, but in the short term as well. People have to eat and survive today in order to see tomorrow.

A Central Bank need the flexibility to be able to smooth this process by having access to the full powers enjoyed by Central Banks in most of the world's major economies. We need to improve our institutions to ensure these powers are not misused, instead of doing away with the institutions altogether.

4. truth Nov 26
Each time I read LBO reviews on our currency I get scared a little more - hmmm lets see where did I file the imigration lawyers No.?
3. m Nov 26
"axis of evil" you sound like George Bush.
2. saga Nov 26
Well,well, manioc chips are very tasty.
1. AM Nov 26
Oh my god