Spotlight: Econ Op-eds in Summary (Week ended 7th April '21)

Snapshots

1. MMT, money printing and Keynes

By: Dr. W.A Wijewardena

• Former Governor of the Reserve Bank of Zimbabwe in the 2000’s believed that their Central Bank cannot remain unresponsive and must print money to feed the nation. The Reserve Bank had to choose between the life of a person or the value of a physical commodity. Similarly, today, the world is faced with a similar predicament in terms of COVID-19. Advocates of Modern Monetary Theory (MMT) state that reducing the fiscal deficit during the pandemic was an unmitigated disaster and the most fiscally responsible way to manage this crisis was with higher deficit financing.

• Adam Smith found that nations who accumulate excessive public debt end up in bankruptcy, but are able to conceal this by reducing the metal base of their coins or by increasing the denominational value of a coin. An example of debasing coins to avoid bankruptcy was in ancient Sri Lanka between the 11th and 13th centuries, where coins were debased from gold to copper to extract more resources from the people. In modern times, the printing of money to run budget deficits brings in the same effect to an economy.

• Those who advocate money printing rely on Keynesian economics where Keynes suggested that an inflation tax can be used by a government to avoid defaulting. Printing money will only be an effective strategy given that there is unemployment in the economy and shouldn’t be done at the full employment level. This difference has not been understood by advocates of MMT. Governments post-independence in Sri Lanka have been guilty of issuing more money than real growth in the economy, causing high inflation. Currently, Sri Lanka faces severe structural issues which must be addressed before money printing can generate prosperity.

For the full article – Refer The Daily FT

(Compiled by: Promodhya Abeysekara & Malitha Goonerathne)