Katie59
“And you are guaranteed to get your money back because a country with a sovereign currency (ie uses and issues its own currency) can never go bankrupt. It will always be able to pay. “
That’s not true there are plenty of currencies that have gone bankrupt Sri Lanka had to be bailed out this year, in recent past Argentina, Zimbabwe, others too.
Well, funnily enough, KAtie59 I happened upon an article about Sri Lanka just last night.
It wasn't currency issuing that did for Sri Lanka, it was a massive amount of foreign debt incurred by following IMF guidance on growing the economy
MMT economist Fadhel Kaboub talks about Sri Lanka in some of his presentations and that he’s been studying the country for years.
Fadhel is an Associate Professor of Economics at Denison University and President of the Global Institute for Sustainable Prosperity. He brings deeper knowledge of the Sri Lankan economy and the policy decisions that have paved the way for their current predicament.
It takes the form of a dialogue. 'Sharma' is the person who claims that it is MMT that ruined Sri Lanka. This is part of the refutation
KELTON: Sharma argues that it was the “printing of money” that caused inflation to hit record highs. He cites the rate of growth of the Sri Lankan money supply and concludes that inflation hit record highs because the central bank expanded the money supply by 42 per cent from December 2019 to August 2021. Why isn’t this a critique of MMT, and how do you think about the current inflationary pressures?
KABOUB: Sharma is wrong on two fronts here. First, he is assuming that the central bank actually controls the money supply, when in fact the money supply is an endogenous variable determined by the private sector (consumers, business, and banks). The central bank simply accommodates the needs of the market in order to keep short-term interest rates at a stable target, otherwise it will cause all kinds of instability across financial markets. Second, Sharma is assuming that inflation is caused by an increase in the money supply, when in reality, Sri Lanka’s inflation, like many developing countries, imports its inflation via food and energy imports. The higher the pressure on the external balance, the weaker the exchange rate, the higher the inflation pressure from imported goods. Sri Lanka struggled with these pressures for a decade, and managed to muddle through by accumulating more external debt, which quickly became unbearable after the pandemic (loss of tourism, remittances, FDI, and export revenues) and the massive increase in global food and energy prices after the Russian invasion of Ukraine.
The solutions to Sri Lanka’s inflation problems are not in the hands of its central bank. Raising interest rates in Sri Lanka will not end the war in Ukraine, or end the pandemic-induced global supply chain disruptions. The most effective anti-inflation tools fall under fiscal policy. It is the parliament, and the various ministries and commissions that can design strategic investments to boost productive capacity, and have the legal authority to update and enforce antitrust laws. In fact, raising interest rates can often fuel inflation (and inequality) because it is the equivalent of an income subsidy to bond holders, and a tax on actual investors who might be discouraged from increasing productive capacity
KELTON: Sharma appears to know that he has offered a faulty representation of MMT. He anticipates some of the counterpoints that I suspect you and I would both raise. He writes, “proponents of MMT will likely say that this was not real MMT, or that Sri Lanka is not a sovereign country as long as it has any foreign debt.” You have been studying Sri Lanka for a few years now. What, if anything, have policymakers done that suggest that they have been running any kind of “MMT experiment” over the last two years?
KABOUB: Well, this is where Sharma nails it! As I explained above, Sri Lanka’s economic policies don’t even come close to anything informed by MMT insights. Sri Lanka’s government ignored its structural weaknesses, didn’t invest in food/energy and strategic domestic productive capacity, didn’t tax/regulate abusive market power, has a corrupt political system dominated by a single family, and when it was backed into a corner after the pandemic, it doubled down on bad economic decision by claiming that agricultural fertilizers are unhealthy (when they really didn’t have the foreign exchange reserves to pay for the imports), so they destroyed agricultural output, especially rice, in the middle of global food crisis. If the Sri Lankan government was serious about investing in healthy food or a healthy economy, it would have put forward an actual food sovereignty strategy centred on native seeds, it would have discouraged intensive monoculture farming, it would have invested in regenerative farming to undo decades of damage to the soil, and it would have supported farmers to increase yields with well-defined medium and long term strategies. Clearly, this “organic farming” experiment was sloppy at best, but it should not overshadow the fact that the roots of the agricultural vulnerability have been decades in the making.
There is more
gimms.org.uk/2022/05/15/reblog-no-mmt-didnt-wreck-sri-lanka/
It's the same old story in all the countries you cite. Hyperinflation is blamed on increasing the money supply, when in fact it is caused by factors similar to those cited by Fadhel Kaboub.
The only similarity I can see between the UK and Sri Lanka is that of the BoE acting as though raising interest rates will control imported inflation (and I have queried that action on more than one occasion on here).
I did say in my post that there needs to be trust in the currency holding its value.
All currencies, regardless of who issues them, are a matter of 'trust'. As you would have discovered if you'd ever bothered to read the article about 'money' in the BoE Quarterly Bulletin that I have frequently linked to.
Money is a social institution that provides a solution to the problem of a lack of trust.(5) It is useful in exchange because it is a special kind of IOU: in particular, money in the modern economy is an IOU that everyone in the economy trusts. Because everyone trusts in money, they are happy to accept it in exchange for goods and services — it can become universally acceptable as the medium of exchange.
www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/quarterly-bulletin-2014-q1.pdf
