How Sri Lanka’s Attempt at Modern Monetary Theory Went Horribly Sideways
by Nicholas Baum, Aug. 11, 2022, Fee dot org

Developments over the past few months in the small island nation of Sri Lanka have captured the attention, and concern, of many around the globe. Footage has gone viral on social media of protestors storming the President’s House and occupying the
streets of the capital city of Colombo, prompting the nation’s government to declare a state of emergency.

The upheaval in Sri Lanka is largely the product of an economic crisis that’s seen a chronic shortage of key goods such as food, fuel, and medicine, leaving in its wake an inflation rate upwards of 70 percent. Mainstream economists’ fingers have
pointed to a variety of explanations for these numbers, ranging from a declining tourism industry to the country’s ban of chemical fertilizer to the Russia-Ukraine conflict.

While these factors have each undoubtedly contributed to the economic crisis, there remains a key component almost conveniently overlooked by many economists: the monetization of Sri Lanka’s debt, an economic policy heavily favored by advocates of
Modern Monetary Theory (MMT).

MMT argues that the federal government can spend as much money as necessary to achieve full employment without being constrained by tax revenue or debt issuance. Rather, the government can finance such spending by borrowing money from the central bank,
essentially printing new money into existence in the process known as debt monetization.

Advocates of MMT argue that as long as the economy is below full employment, this tactic of debt monetization will not trigger inflation. Sri Lanka, however, serves to disprove this rather empty belief. Despite its economic crisis being defined by a
critical deficiency of basic needs, such a catastrophe can be traced back to years of inflation under MMT-guided policies.

Particularly, the adoption of MMT in Sri Lanka triggered rampant inflation which, in turn, triggered a currency crisis that prevented the developing economy from importing its most crucial necessities. It’s important, however, to see this process play
out over time.

Sri Lanka and the Attempt at MMT
-------------------------------
On the eve of December 2019, Sri Lankan President Gotabaya Rajapaksa introduced an unprecedented series of tax cuts that saw a 33.5 percent decline in registered taxpayers, not only vastly reducing government revenue but downgrading the country’s
credit rating in its ability to pay off outstanding debt.

As a result, the central bank under Governor W.D. Lakshman embarked on a campaign to increase the proportion of domestic debt through the central bank’s takeover of much of the debt’s financing, arguing that, “domestic currency debt… in a country
with sovereign powers of money printing, as the modern monetary theorists would argue, is not a huge problem.” Economist Mihir Sharma in writing for Bloomberg identifies that with this statement, “Sri Lanka is the first country in the world to
reference MMT officially as a justification for money printing.”

With MMT as official policy, Sharma finds a 42 percent increase in Sri Lanka’s money supply between December 2019 and August 2021. This reflects the findings of Prof. Sirimevan Colombage of the Open University of Sri Lanka, who observed a 156 percent
increase in Bond Currency Derivatives (the Sri Lankan equivalent of Treasury Securities) bought by the central bank in 2021 alone, equivalent to $6.5 billion.

Contrary to MMT advocates’ predictions, however, high money supply growth brought with it a high rate of inflation. Whereas 2019 saw a rate of 3.5 percent, inflation immediately jumped to 5.7 percent in January 2020 then to an unprecedented 17.5
percent in February 2022.

It’s important to recall that this rise in inflation was not in itself the defining issue of Sri Lanka’s economic crisis, but rather a catalyst of it. Nonetheless, the fivefold increase in inflation over a roughly three-year span meant a spiraling
cost of living while economic growth stagnated from the erosion of price signals.

Inflation and the Currency Crisis
-----------------------------
MMT and its corollary of inflation still spell out a much worse scenario for developing countries that rely on imports for much of their economic activity, like Sri Lanka. The small island nation, like many other developing economies, runs a sizable
trade deficit, heavily relying on the importation of everything from food and medicine to oil and machinery.

This matters because most countries finance their imports with a global reserve currency such as the US Dollar, meaning that in order to sustain its imports Sri Lanka has to first swap its own currency, the Rupee, for other currencies like the dollar.
Yet as the rupee has encountered serious inflation through years of MMT policy, it’s steadily depreciated relative to the dollar before crashing in March.

Since December 2019, the cost of a US Dollar, in terms of Sri Lankan Rupees, has nearly doubled. And since imports to Sri Lanka have to be financed with a global reserve currency like the dollar, this means that imports have essentially become almost
twice as expensive. Meanwhile, the collapsing rupee has made it far more expensive to buy or borrow dollars on the foreign exchange market, while the country’s trade deficit means that Sri Lanka can’t generate enough funds through exports.

The result is a dire situation of economic and social collapse in the nation. Drivers have had to wait in line for days for rationed gas. The supply of life-saving medicine has become incredibly scarce, and for some drugs, completely depleted. At the
same time, chronic shortages have left millions in a state of food insecurity.

A Lesson to be Learned
------------------------
Although a somber tale that will continue to take a toll on the country for months to come, the economic crisis in Sri Lanka should serve as a lesson for all other countries contemplating the lure of Modern Monetary Theory. Not only does debt
monetization and seemingly limitless spending bring with it drastic inflation, but potentially economic collapse when a country can no longer afford to import the goods it's reliant upon.

Rather, it goes back to the old adage that if something seems too good to be true, it probably is. MMT, with its promise of reaching full employment through merely printing money, has proved itself to be nothing short of a failure in its first
application in Sri Lanka. Whether other countries can understand this in light of the ideology’s seductive appeal remains to be seen.

https://fee.org/articles/how-sri-lanka-s-attempt-at-modern-monetary-theory-went-horribly-sideways/

--- SoupGate-Win32 v1.05
* Origin: fsxNet Usenet Gateway (21:1/5)

On Sunday, August 14, 2022 at 1:30:02 AM UTC-4, David P. wrote:

How Sri Lanka’s Attempt at Modern Monetary Theory Went Horribly Sideways by Nicholas Baum, Aug. 11, 2022, Fee dot org

Developments over the past few months in the small island nation of Sri Lanka have captured the attention, and concern, of many around the globe. Footage has gone viral on social media of protestors storming the President’s House and occupying the

streets of the capital city of Colombo, prompting the nation’s government to declare a state of emergency.

The upheaval in Sri Lanka is largely the product of an economic crisis that’s seen a chronic shortage of key goods such as food, fuel, and medicine, leaving in its wake an inflation rate upwards of 70 percent. Mainstream economists’ fingers have

pointed to a variety of explanations for these numbers, ranging from a declining tourism industry to the country’s ban of chemical fertilizer to the Russia-Ukraine conflict.

While these factors have each undoubtedly contributed to the economic crisis, there remains a key component almost conveniently overlooked by many economists: the monetization of Sri Lanka’s debt, an economic policy heavily favored by advocates of

Modern Monetary Theory (MMT).

MMT argues that the federal government can spend as much money as necessary to achieve full employment without being constrained by tax revenue or debt issuance. Rather, the government can finance such spending by borrowing money from the central bank,

essentially printing new money into existence in the process known as debt monetization.

Advocates of MMT argue that as long as the economy is below full employment, this tactic of debt monetization will not trigger inflation. Sri Lanka, however, serves to disprove this rather empty belief. Despite its economic crisis being defined by a

critical deficiency of basic needs, such a catastrophe can be traced back to years of inflation under MMT-guided policies.

Particularly, the adoption of MMT in Sri Lanka triggered rampant inflation which, in turn, triggered a currency crisis that prevented the developing economy from importing its most crucial necessities. It’s important, however, to see this process

play out over time.

Sri Lanka and the Attempt at MMT
-------------------------------
On the eve of December 2019, Sri Lankan President Gotabaya Rajapaksa introduced an unprecedented series of tax cuts that saw a 33.5 percent decline in registered taxpayers, not only vastly reducing government revenue but downgrading the country’s

credit rating in its ability to pay off outstanding debt.

As a result, the central bank under Governor W.D. Lakshman embarked on a campaign to increase the proportion of domestic debt through the central bank’s takeover of much of the debt’s financing, arguing that, “domestic currency debt… in a

country with sovereign powers of money printing, as the modern monetary theorists would argue, is not a huge problem.” Economist Mihir Sharma in writing for Bloomberg identifies that with this statement, “Sri Lanka is the first country in the world
to reference MMT officially as a justification for money printing.”

With MMT as official policy, Sharma finds a 42 percent increase in Sri Lanka’s money supply between December 2019 and August 2021. This reflects the findings of Prof. Sirimevan Colombage of the Open University of Sri Lanka, who observed a 156 percent

increase in Bond Currency Derivatives (the Sri Lankan equivalent of Treasury Securities) bought by the central bank in 2021 alone, equivalent to $6.5 billion.

Contrary to MMT advocates’ predictions, however, high money supply growth brought with it a high rate of inflation. Whereas 2019 saw a rate of 3.5 percent, inflation immediately jumped to 5.7 percent in January 2020 then to an unprecedented 17.5

percent in February 2022.

It’s important to recall that this rise in inflation was not in itself the defining issue of Sri Lanka’s economic crisis, but rather a catalyst of it. Nonetheless, the fivefold increase in inflation over a roughly three-year span meant a spiraling

cost of living while economic growth stagnated from the erosion of price signals.

Inflation and the Currency Crisis
-----------------------------
MMT and its corollary of inflation still spell out a much worse scenario for developing countries that rely on imports for much of their economic activity, like Sri Lanka. The small island nation, like many other developing economies, runs a sizable

trade deficit, heavily relying on the importation of everything from food and medicine to oil and machinery.

This matters because most countries finance their imports with a global reserve currency such as the US Dollar, meaning that in order to sustain its imports Sri Lanka has to first swap its own currency, the Rupee, for other currencies like the dollar.

Yet as the rupee has encountered serious inflation through years of MMT policy, it’s steadily depreciated relative to the dollar before crashing in March.

Since December 2019, the cost of a US Dollar, in terms of Sri Lankan Rupees, has nearly doubled. And since imports to Sri Lanka have to be financed with a global reserve currency like the dollar, this means that imports have essentially become almost

twice as expensive. Meanwhile, the collapsing rupee has made it far more expensive to buy or borrow dollars on the foreign exchange market, while the country’s trade deficit means that Sri Lanka can’t generate enough funds through exports.

The result is a dire situation of economic and social collapse in the nation. Drivers have had to wait in line for days for rationed gas. The supply of life-saving medicine has become incredibly scarce, and for some drugs, completely depleted. At the

same time, chronic shortages have left millions in a state of food insecurity.

A Lesson to be Learned
------------------------
Although a somber tale that will continue to take a toll on the country for months to come, the economic crisis in Sri Lanka should serve as a lesson for all other countries contemplating the lure of Modern Monetary Theory. Not only does debt

monetization and seemingly limitless spending bring with it drastic inflation, but potentially economic collapse when a country can no longer afford to import the goods it's reliant upon.

Rather, it goes back to the old adage that if something seems too good to be true, it probably is. MMT, with its promise of reaching full employment through merely printing money, has proved itself to be nothing short of a failure in its first

application in Sri Lanka. Whether other countries can understand this in light of the ideology’s seductive appeal remains to be seen.

https://fee.org/articles/how-sri-lanka-s-attempt-at-modern-monetary-theory-went-horribly-sideways/

Stephanie Kelton is a professor at Stony Brook University and a Senior Fellow at the Schwartz Center for Economic Policy Analysis at the New School for Social Research. She strongly advocates the MMT and contributes to make the MMT mainstream. Her book "
The Deficit Myths" spells out why the orthodox view on deficit spending is wrong. Here is the first myth.

"If you’ve heard someone complain that Washington needs to get its fiscal house in order, you’ve heard a version of the household myth. It derives from the flawed idea that we should look at Uncle Sam’s budget through the same lens we use to manage
our own family budgets. Of all the myths we’re going to explore in the pages ahead, this is undoubtedly the most pernicious.
...
We know people can go broke, and we’ve seen iconic companies like RadioS hack and Toys “R” Us get driven into bankruptcy when they could no longer afford to pay the bills. Even cities (Detroit) and states (Kansas) can run into big trouble when they�
��re not bringing in enough money to cover their expenses. Every family sitting around the kitchen table understands these realities. What they don’t understand is why the federal government (Uncle Sam) is different.

To understand why, we go right to the heart of MMT.
Issuers Versus Users of Currency

MMT takes as its starting point a simple and incontrovertible fact: our national currency, the US dollar, comes from the US government, and it can’t come from anywhere else—at least not legally.
...
Even though you may not have given it much thought before, something inside you probably already understands this basic truth. I mean, think about it. Can you create US dollars? Sure, you can earn them, ..."

Many in the US think MMT is not a problem.
Unfortunately, what may be good for the US is not necessarily good for Sri Lanka.

--- SoupGate-Win32 v1.05
* Origin: fsxNet Usenet Gateway (21:1/5)

On Sunday, August 14, 2022 at 12:24:07 PM UTC-4, ltlee1 wrote:

On Sunday, August 14, 2022 at 1:30:02 AM UTC-4, David P. wrote:

How Sri Lanka’s Attempt at Modern Monetary Theory Went Horribly Sideways by Nicholas Baum, Aug. 11, 2022, Fee dot org
[ . . . ]

Stephanie Kelton is a professor at Stony Brook University and a Senior Fellow at the Schwartz Center for Economic Policy Analysis at the New School for Social Research. She strongly advocates the MMT and contributes to make the MMT mainstream. Her book

"The Deficit Myths" spells out why the orthodox view on deficit spending is wrong. Here is the first myth.

"If you’ve heard someone complain that Washington needs to get its fiscal house in order, you’ve heard a version of the household myth. It derives from the flawed idea that we should look at Uncle Sam’s budget through the same lens we use to

manage our own family budgets. Of all the myths we’re going to explore in the pages ahead, this is undoubtedly the most pernicious.

...
We know people can go broke, and we’ve seen iconic companies like RadioS hack and Toys “R” Us get driven into bankruptcy when they could no longer afford to pay the bills. Even cities (Detroit) and states (Kansas) can run into big trouble when

they’re not bringing in enough money to cover their expenses. Every family sitting around the kitchen table understands these realities. What they don’t understand is why the federal government (Uncle Sam) is different.

To understand why, we go right to the heart of MMT.
Issuers Versus Users of Currency

MMT takes as its starting point a simple and incontrovertible fact: our national currency, the US dollar, comes from the US government, and it can’t come from anywhere else—at least not legally.
...
Even though you may not have given it much thought before, something inside you probably already understands this basic truth. I mean, think about it. Can you create US dollars? Sure, you can earn them, ..."

Many in the US think MMT is not a problem.
Unfortunately, what may be good for the US is not necessarily good for Sri Lanka.

--------------------
Kelton's The Deficit Myth appeared on The New York Times bestseller list for nonfiction in June 2020.
Stanford economist John H. Cochrane gave the book a negative review, saying that her "implications don't lead to her desired conclusions ... her logic, facts and language turn into pretzels". Cochrane asserted that Kelton's analysis of inflation was
biased, and that the book cited "no articles in major peer-reviewed journals, monographs with explicit models and evidence, or any of the other trappings of economic discourse".

NYU economist Alberto Bisin also panned the book, writing, "it's not that the public-spending agenda proposed in the book wouldn't be worthwhile, or that monetization is never a useful tool of monetary policy. ... These are all issues currently studied
and debated in (mainstream) academic and policy circles. But MMT, as exposed in the book, appears to be a very poor attempt at supporting this political agenda, with no coherent theoretical support."

Former ECB chief economist Otmar Issing gave the book a negative review in an article criticizing the Modern Monetary Theory.
--
--

--- SoupGate-Win32 v1.05
* Origin: fsxNet Usenet Gateway (21:1/5)

On Sunday, August 14, 2022 at 7:48:39 PM UTC-4, David P. wrote:

On Sunday, August 14, 2022 at 12:24:07 PM UTC-4, ltlee1 wrote:

On Sunday, August 14, 2022 at 1:30:02 AM UTC-4, David P. wrote:

How Sri Lanka’s Attempt at Modern Monetary Theory Went Horribly Sideways
by Nicholas Baum, Aug. 11, 2022, Fee dot org
[ . . . ]

Stephanie Kelton is a professor at Stony Brook University and a Senior Fellow at the Schwartz Center for Economic Policy Analysis at the New School for Social Research. She strongly advocates the MMT and contributes to make the MMT mainstream. Her

book "The Deficit Myths" spells out why the orthodox view on deficit spending is wrong. Here is the first myth.

"If you’ve heard someone complain that Washington needs to get its fiscal house in order, you’ve heard a version of the household myth. It derives from the flawed idea that we should look at Uncle Sam’s budget through the same lens we use to

manage our own family budgets. Of all the myths we’re going to explore in the pages ahead, this is undoubtedly the most pernicious.

...
We know people can go broke, and we’ve seen iconic companies like RadioS hack and Toys “R” Us get driven into bankruptcy when they could no longer afford to pay the bills. Even cities (Detroit) and states (Kansas) can run into big trouble when

they’re not bringing in enough money to cover their expenses. Every family sitting around the kitchen table understands these realities. What they don’t understand is why the federal government (Uncle Sam) is different.

To understand why, we go right to the heart of MMT.
Issuers Versus Users of Currency

MMT takes as its starting point a simple and incontrovertible fact: our national currency, the US dollar, comes from the US government, and it can’t come from anywhere else—at least not legally.
...
Even though you may not have given it much thought before, something inside you probably already understands this basic truth. I mean, think about it. Can you create US dollars? Sure, you can earn them, ..."

Many in the US think MMT is not a problem.
Unfortunately, what may be good for the US is not necessarily good for Sri Lanka.

--------------------
Kelton's The Deficit Myth appeared on The New York Times bestseller list for nonfiction in June 2020.
Stanford economist John H. Cochrane gave the book a negative review, saying that her "implications don't lead to her desired conclusions ... her logic, facts and language turn into pretzels". Cochrane asserted that Kelton's analysis of inflation was

biased, and that the book cited "no articles in major peer-reviewed journals, monographs with explicit models and evidence, or any of the other trappings of economic discourse".

NYU economist Alberto Bisin also panned the book, writing, "it's not that the public-spending agenda proposed in the book wouldn't be worthwhile, or that monetization is never a useful tool of monetary policy. ... These are all issues currently studied

and debated in (mainstream) academic and policy circles. But MMT, as exposed in the book, appears to be a very poor attempt at supporting this political agenda, with no coherent theoretical support."

Former ECB chief economist Otmar Issing gave the book a negative review in an article criticizing the Modern Monetary Theory.
--
--

Totally agree with the above reviewers.

MMT could work as long as other nations continue to lend to the US.
Else US issuing money without corresponding increase in goods and services would
heighten inflation. Borrowing to satisfy consumption is like drinking poison to stop
the thirst.

Kelton did write "Sure, you can earn them..." implying the US, unlike you, can just print
money without having to earn them. However, the time will come when the US MUST
earn every dollar the government spends. Whether the US CAN earn them when it needs
to, however, is still uncertain.

MMT is the same MMT, in Sri Lanka or in the US. The difference is the scale. IMF and
some concerted lending from some larger nations can save Sri Lanka's economy. If the
US economy is going down the drain, a large part of the world would go down with it.

--- SoupGate-Win32 v1.05
* Origin: fsxNet Usenet Gateway (21:1/5)