3 March, 2024

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Inflation, Interest Rate & Imperialism

By Ameer Ali

Dr. Ameer Ali

Sri Lanka, like many countries in the neoliberal free market economy zone, is at war with an accursed enemy, inflation. It is fighting this war with the only weapon it has and recommended by the government’s economic advisor IMF, the agent of dollar imperialism. That weapon is to raise the interest rate by the Central Bank. In this war however, it is inflation that is destined to win, because it has imperial connections.    

It is a common belief among economists that a little bit of inflation is healthy to an economy, because it provides an incentive to work hard, produce more and make the economy grow. After all, which salesman or saleswoman for example would not feel happy to see more and more notes and coins filling his/her cash drawer? Yet, it is also said that a little bit of inflation is like a little bit of pregnancy and an unwanted pregnancy has to be aborted. Interest rate is therefore used as an inflation abortionist in modern economies. 

The US Federal Reserve, soon after the collapse of the First Republic Bank which followed the earlier collapse Swan Valley Bank, has raised the interest rate for the tenth time by 0.25% to 5.25%, citing inflation the reason. Fed’s targeted rate is 2% but the current rate has escalated by more than 160%. Money market observers believe that the rate would rise even further. Australia has done the same for the 11th time and the current rate is 3.85%. Bank of England also raised its rate in March this year and for the 11th time to 4.25 %. And, for the first time since 2011, Swiss Bank has raised its rate to 0.5% after years of negative interest rates. Dreaded inflation is creating financial panic in almost all developed economies and developing ones like Sri Lanka, who are part of the international monetary order, have no choice but to follow suit. But, is raising interest rate the answer to reduce inflation? It depends on the factors that cause inflation in the first place.   

Milton Friedman, the Guru of monetarism, inflation is always and everywhere a monetary phenomenon, because it has to be financed, whether it originated from demand-pull or cost-push sources. This is to ignore or deny any political or imperialist origins of inflation, which seems to be the case in the current inflationary wave. Therefore, resorting to interest rate to counter this enemy is going to be counterproductive as will be shown later. 

There were two factors that played a key role in raising price level and consequently cost of living over the past two to three years. The first was Covid-19 Pandemic that started sometime in early 2021. Apart from causing over a million deaths, it debilitated its victims, restricted the mobility of people, and made transport of goods and services, both expensive and hazardous. In short, normal life and ordinary business of people were virtually paralyzed by the pandemic. Supply constraints that resulted from Covid-19 quickly introduced rationing of consumer items and emptied the shelves in supermarkets and other retail outlets. Prices escalated as a result and cost of living increased. The response to this shortage and price increase therefore is to increase production and facilitate transport and distribution rather than to raise interest rate to curtail consumer demand. As it happened, once the pandemic was brought under some control life returned to a new normality, and economic activities start6ed picking up and prices began falling.   

It was then the second factor entered the scene and started reversing the trend. This was the War in Ukraine, which broke out in 2022 and still continues without any sign of abating. This war has now turned out to be a proxy war fought against the Russian enemy by imperial America and its allies. History is witness to show that war and inflation are inseparable twins.  

To cut a long story short, this war would not have occurred had NATO, which was formed in 1949 to counter the threat from former socialist USSR and provoked the signing of the Soviet led Warsaw Pact in 1955, been dissolved once Gorbachev did the same to the Warsaw Pact in 1991. Instead, NATO continued to expanded and threatened to encircle post-Soviet Russia. Shouldn’t Russia counter this threat? Russia’s invasion of Ukraine should be understood in this context before taking side.      

Unlike the pandemic this war meant economic ruination of the two combatants, Ukraine and Russia. The damage it has caused to food and industrial production in Ukraine, which is a bread basket in Europe, and to gas and petroleum and other exports from Russia has been phenomenal. It is this supply constraint generated by this unwanted war that is the primary reason for increasing prices of many consumer items. The upshot is inflation. 

War increases the demand for weapons, and allocation of more resources to the armament industry would mean less is available for production of other goods and services. According to the Stockholm International Peace Research Institute (SIPRI) a total of $2.24 trillion or 2.2% of world’s GDP is spent on armaments and in preparation for another war. Against whom? China? Of that total however, US, China, and Russia account for 56%.  

Resource deprivation to other productive sectors would naturally cause scarcity and increase price. More resources are also needed to reverse climate change, which is another phenomenon giving rise to supply constraints. This inflation therefore is not demand-pull but cost-push with imperial roots. But the Central Bank chiefs are not willing to call a spade a spade and speak up to press their governments to stop supporting the imperial war in Europe. Instead, their faith in tight monetary policy and higher interest rates to fight inflation could turn counterproductive. How?

Inflation makes the richest wealthier and masses poorer. Rise in cost of living is therefore creating resentment against governments and people are demanding financial relief to cope with price increases. In Australia for example, the ruling Labour Government is promising that relief is around the corner with its forthcoming budget to be presented to the parliament shortly. The Treasurer is promising to put more money in peoples’ pocket. What this would do is to turn the cost-push into demand-pull inflation, which in turn would necessitate even more interest rate rises. Then real income of people is not expected to recover until 2024 if the Treasurer were to be believed. In fact, the Reserve Bank Governor of Australia has kept the door ajar for future rate increases even though the Governor says that the fall in inflation is faster than expected. The story is not very different in other mature economies also. In Sri Lanka too, President Ranil Wickremesinghe, with consent from IMF, is promising to provide relief to low-income earners and other groups. In the absence of increase in supply, won’t this relief increase demand, increase prices and feed inflation?

Sri Lanka is in a double bind. It has to bring down inflation by producing more goods and services, while earning foreign currency through exports in order to service and settle its foreign debt. It is worth reminding readers what the father of economics Adam Smith had to say on debt. “When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of … (them) having been fairly and completely paid.” He went on to add that “the raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment” (Stephan Legge, “Letter: What Adam Smith said on inflation and debt trap”, Australian Financial Times, January 19 2022). With rising inflation, Sri Lanka has no way of “raising the denomination of the coin” and engage in “pretended payment”. The forthcoming debt restructuring negotiations are therefore going to be a challenging task to local negotiators. 

The current wave of inflation at home and abroad is therefore not caused by increase in demand but by shortages in supply. Shortages at home are the product of a historic mismanagement of the local economy, which is trapped in the machinations of a corrupt and nationalistic political culture and ideology. The shortages abroad are the consequence of an imperial misadventure caught in a banking and financial crisis. Both require increase in production and that is the only answer to inflation. 

*Dr. Ameer Ali, Murdoch Business School, Murdoch University, W. Australia

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Latest comments

  • 5
    2

    ‘In this war however, it is inflation that is destined to win, because it has imperial connections’, is a statement of versatile connotation.
    On a digressive note, our ethnic war remains unresolved for that same reason.
    (I wish to be excused from elaborating my note!)

    • 1
      7

      Dude Nathan the people of Sri Lanka are united against IMF and Euro-American colonialism despite bots like you who are funded to keep the beggars wound of ethnic conflict alive!

      Dr. Ameen: The Covid-19 biowar and lockdown operation was staged by the Deepstate to attack the rise of the BRICS Global South powerhouse economies by supply chain hacking by the US-EU Nato war machine as the US empire crashes and to reboot Digital Colonialism and “frictionless occupation” with AI and Big Data surveillance.. for the great reset and US led Corporate Global Governance but that project is now backfiring.
      Please listen to Robert F Kennedy Jr. s recent interview on this. Hope be becomes president but they’ ll probably kill him first as they did his Uncle JFK and father Robert Kenndy.. The US chickens are coming home to roost despite the 750 military bases all over the world as the truth leaks out! Hope Aussie wakes up to this and dumps AUKUS!

      • 0
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        You look a decent guy, Dinuk. Where did you learn all these dirty words! Don’t worry; I’ll tell you mum that you won’t repeat!!

  • 15
    2

    I was in Lanka for more than 3 weeks. Though I was stationed at one place, I got to experience few things first hand. My mom underwent a minor surgical procedure and I attended a weeding of my close friend’s child. ( helped me in understanding the current expenses, buying power and inflation compared to my visit last year during, peak of crisis). The long queues for fuel and food may have disappeared. But INFLATION definitely has caught up in a big way where the buying power has declined significantly hurting people in general. Middle and lower income groups are those mostly affected. Even higher income group seems to feel the pinch because of taxation and inflation. I met a young couple who are well to do established professionals, now blessed with a newborn child, who shared their financial burden.

  • 6
    4

    It’s almost noon, and here’s yet another article.
    .
    Thanks Dr Ameer Ali, for proving that even those who live abroad are able to understand the truth even if they can’t know all the details that I know about what life is like for the poor who live in villages.
    .
    Ramona Therese Fernando is another such. Always good-humoured, but never clowning. Even clowns, like nimal fernando, show in their comments that they are on the right side.
    .
    I haven’t really carefully read this article, Dr Ali, but you write so clearly and well that it will get read properly by me within the next couple of days. I’m going on past experience here. I just can’t read everything that appears. And also, I’m not pretending to be the poorest person in the country. However, I did visit the Sunday Fair yesterday. Prices of locally-grown food produce is half or what one has to pay on other days.
    .
    The situation in Lanka is desperate. Our greatest need: The Local Government Elections which are overdue.
    .
    Panini Edirisinhe

    • 1
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      This is a particularly impressive 23-minute speech in Parliament by Anura Kumara Dissanayake.
      .
      https://www.youtube.com/watch?v=1Wy3Z9ZW-VM
      .
      Professor G.L. Peiris seems always to sit next to AKD, and listen intently, but impassively. However, here he nods in agreement many times. GLP certainly knows all the laws!

  • 7
    1

    “Shortages at home are the product of a historic mismanagement of the local economy, which is trapped in the machinations of a corrupt and nationalistic political culture and ideology.”
    Your analysis is abosolutely right but how the inflation rate rise in UK remain high at 10% but in Sri Lanka it went up to 100% and now with further addition to the debt to IMF and other associated institutions it is down to 35-50% artificially while increasing the tension between communities where nation is under threat of war or insurgency. There is a possibility that the war between Ukraine and Russia expanding further and the situation may change against to Sri Lanka.
    .

    • 6
      11

      “Your analysis is abosolutely right but how the inflation rate rise in UK remain high at 10% but in Sri Lanka it went up to 100% and now with further addition to the debt to IMF and other associated institutions it is down to 35-50% artificially…”
      *
      If it was ‘real inflation’ it would have had a pattern of growth.
      What we had was the impact of the almost 100% devaluation of the rupee over a very short time causing almost doubling of all prices of imports and highly import based commodities.
      There was no more jump in prices and YoY inflation naturally declined.
      Our pundits can be utter mediocrities when it comes to simple reasoning.

      • 4
        10

        Then there was the loss of crop owing to fertilizer ban– once again a one-of event.

  • 11
    3

    old codger

    Dr Ameer Ali writes:

    “The current wave of inflation at home and abroad is therefore not caused by increase in demand but by shortages in supply.”

    Is this a true economic situation in this island?
    How come Army and Saffron brigades (350,00 and 67,000) find plenty of sand, stones, steel, mortar, ….. to continuously build stuba/vihares in North East?

    Without Nimal’s admiration for the Saffronistas and Armed forces these secret land grabbing could not take place.

    • 10
      1

      Previously it was secret but now increasingly becoming open and brazen, as they think they can get away with it as no one locally or internationally questions them or called these racist religious bigots to task. As one high-ranking Sinhalese police officer insultingly told a Tamil protestor in Thayiti KKS, when they were protesting about the illegal building of a Vihara by the army on private Tamil land that was confiscated inter the pretext of a high-security zone. “We can do anything with you people and who are you to question? You are a defeated people now under our occupation. ” This comment shows the mindset of the vast majority of the Sinhalese with regards to the Tamils/Tamil speakers, from the time of independence they have never regarded us as their equals or fellow country people but a minority that is third rate and to be oppressed and ultimately destroyed by using their majority power. Sharvendara Silva states this Vihara is built legally and with proper authorization and is needed for the armed forces as a place of worship and the Rajapakses have also now weighed into this. Legally built how? Confiscating and illegally acquiring private Tamil people’s land on the pretext of high security to zones to build illegal Buddhist structures and to bring Sinhalese colonists from the south.

      • 3
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        sorry under and not inter the pretext.

        • 9
          1

          Who gave the authority to build a Vihara on other people’s lands forcibly acquired?
          The former Sinhalese governor, that is part of the Sinhalese occupation? The very same person who the Mahanayakes refused to accept as a governor of Central province the Kandyan heartland, stating he was a low caste low country Sinhalese. However, all these low castes low country, high caste, Kandyan, and recently Sinhalised South Indian Tamil immigrants, who make up the majority of present-day Sinhalese and Sinhalese Buddhist Fascists all gang up together in destroying the Tamils and Hindu temples. If the army needs to worship Lord Buddha they can build a shrine room inside their camps or visit the Naga Vihara or other recently and illegally built Buddhist structures. Why illegally go around acquiring hundreds of acres of poor Tamil peasant’s lands to build Viharas and settle outside Sinhalese with the excuse that the newly built Vihara needs support, that the surrounding Hindu and Christian Tamils will not provide? Then how come the ancient Naga Vihara has been existing without Sinhalese support? These all ploys to settle Tamil people’s lands chase them from their ancient homeland in the north and east and settle Sinhalese. They have used the same method in the east, especially in Amparai and Trincomalee and now are using the same thing in the north and the eastern Batticaloa district.

          • 9
            1

            Now other departments have also joined in this the Archaeological, Mahaveli, land and forestry all now coming to the north and east under various guises to plunder land from the Tamils, especially in the fertile border areas and give it to outside, Sinhalese to deliberately change the demography and erase Tamil history and symbol s, including ancient Tamil Buddhist sites and shrines now falsely being claimed as Sinhalese, leave alone the Saivite ones. The latest is an attempt to convert the ancient Tamil Buddhist site at Kantarodai into a Sinhalese Buddhist site and the claim is as ancient Sinhalese with a rename, by building a huge Sinhalese Buddhist vihara next to it on land bought by a bhikku (Stange) from the original Tamil owner. Stange, how does a Bikku have lots of money to purchase 6 acres in a prime site and who or what front was used to purchase this site? There are now secret arrangements to give permission to build this huge vihara but it has now come to light. Oh, by the way, the illegally built Vihara on privately confiscated so-called high-security Tamil land has been named ancient historic Thayiti Rajamaha Vihara. What is this is a joke, when did it become ancient historic and a Rajamahavihara?

            • 2
              7

              Is building temples harm to anyone,
              Its lot better than building casinos, bar ,red light area
              Etc
              If we can build sai temple why not I would welcome it…..more.local buissnes opportunity

              • 6
                1

                Yes if the temple is built legally on legally purchased land and is a necessity for the well-being of the local population, where its purpose is really to spread love and understanding and also increase to economy and prosperity of the local population. Not when it is being used as a tool of oppression ethnic cleaning and in order deliberately humiliate the local Tamil population, to show them who the master is and anything can be done to them in the name of Sinhalese Buddhism including openly acquiring and stealing their lands in a brazen manner, under the guise of high-security zones, development zones, wildlife/nature reserves and Maheveli development and then build huge Buddhist Viharas, where no Buddhist live and settle thousands of outside Sinhalese.

                • 6
                  1

                  A deliberate attempt to change the demography to make the island’s Tamils a voiceless minority in their own land and to erase their history, culture and symbols by destroying everything ancient in the north and east and falsely claiming everything as Sinhalese Buddhist, including ancient Tamil Buddhist sites. If building a temple is good why not build a Hindu temple a Christian church or even a Mosque to reflect the religious beliefs of the local Tamil population and earn goodwill and amiability they will also help the local economy. Why are people building Sain temples on stolen lands and ethnically cleansing people? The so-called business opportunity is nil for the local Tamils, who have been displaced and made landless but for the newly settled Sinhalese and Sinhalese businesses that will come through this. The Tamil populations in these regions will get nothing but poverty and being dispossessed. Please think before posting.

                • 0
                  0

                  It doesn’t matter what you says and write, but last 75years of programmes working very well for ther agenda.
                  Kathirhamam,Kiniya,…….
                  Soon will be Koneswaram, Putthur Nilavarai…
                  .
                  In Mullativu judge ordered….But still construction going on.
                  Army chef already insists no way of demolish the Vihara in Mylidy as its being built it for Sinhala army.

                  • 2
                    0

                    It has now come to light that the army is planning to acquire thousands of acres of state lands in the north for themselves in order to settle Chinkallams. The calculation was to acquire these state lands on the basis for every two citizens in the north armed service one person and then give these forcibly acquired state lands to Chingkallam army personnel and to those outside Chingkallam from the south, who have nothing to with the north, especially in the very fertile Vanni areas. Already thousands of Chingkalla fishermen from the deep south have been settled in Mullaitheevu by the army. This had come out during the meeting at Mullaitheevu where a very high-ranking army officer was demanding these lands for them and not for the benefit of the local Thamizh.

                    • 2
                      0

                      These state lands are for the benefit of the local Thamizh population, just like the state lands down south are for the benefit of the local Chingkalla population. These are forestry, grazing and etc and to distribute to the local landless Thamizh population and not to the occupying racist Chingkalla armed forces from the south or to southern Chingkalla peasants. This is why they are so busy acquiring and stealing public and private Thamizh lands to build Buddhist Viharas and other government departments like the fake Archaeological department, Forestry land and Maheveli have all come in as they already have a master plan to settle hundreds of thousands of Chingkallams in the north to change the demography. This is what India the Congress and Chonia gave to us and are still overtly and covertly support this. They and the West helped the racist Chingkallams to win the war on the island’s Thamizh, as the Chingkallams as usual falsely promised once the war is won just Thamizh rights and federalism will be granted.

                    • 2
                      0

                      Mahinda Rajapakse was seen on many Western TV soon after May 2009 promising to grant this. Now they are not following up on this promise but are overtly and covertly supporting the racist Chingkalla state to complete the structural genocide on the Thamizh to woo them over. They know they have had eggs on their faces and been taken for a ride by the Chingkallams but do not care as the victims of all these are the Thamizh and now are trying to win over them from China. They can dream on and will soon realize their folly.

    • 2
      0

      Native,
      “The current wave of inflation at home and abroad is therefore not caused by increase in demand but by shortages in supply.”
      So, Cabral and Lakshman were right all along! 🤣🤣🤣

      • 2
        1

        oc
        What we have is a wealth of experts in single variable analysis and solutions and the resultant poverty of thought.

    • 5
      1

      “Without Nimal’s admiration for the Saffronistas”

      I don’t just admire them …….. I want to be one! …….. If I could only find a yellow sari. A see-through for the right occasion.

      I’m tired of working for a living: want a free ride. …….. And Sinhala_Man to fall at my feet every time he sees me.

      And if Old Codger’s offerings/Dana include a Merc …… and a gal or two ……….. on the side.

      That’s a life worth living …….. as long as I don’t have to read Ranil’s library of Buddhist books.


      Like almost all, I don’t want to know Buddhism ………. or what Buddha was all about.

      • 0
        0

        Nimal,
        “Like almost all, I don’t want to know Buddhism”
        Good for you. In Real Buddhism, your expensive Chinese hi-fi equipment would be forbidden.

  • 3
    1

    “Supply constraints that resulted from Covid-19 quickly introduced rationing of consumer items and emptied the shelves in supermarkets and other retail outlets. Prices escalated as a result and cost of living increased. The response to this shortage and price increase therefore is to increase production and facilitate transport and distribution”
    A rather simplistic prescription, Cabral-like in its dogmatism. How to increase production when the workers can’t work? That includes transport and distribution workers. I wonder why Dr. Ali doesn’t mention agricultural production, which was destroyed by Gota and Ratana, with help from Padeniya.

    • 2
      1

      When one shoots from the hip there is little time to think of everything.
      Be thankful that we are not told that the NPP will solve the global inflation.

  • 2
    0

    All in all at last the Government keeps on increasing the burden on the people by increasing prices and also levying various direct and indirect taxes while reducing the taxes paid by the MPs, most of them are also carrying on businesses directly or indirectly. When are we going to kick these crooks out of the Parliament including the President under whose governance these bias decisions are being made? President is the head of the Cabinet where these decisions are being made.

  • 1
    0

    President don’t like to keep the election there is no success stories not
    Created a country of opportunities. End to Support imperialism and taxing so that people everywhere are free to mould their own destiny.

  • 4
    1

    We have enough of export earnings – M.E. Maids, tea, rubber, coconut, seafood, garments, tourism. It’s the demand that is out of whack. Highways and other infrastructure are built on debt traps. Both China and IMF welcome our debt traps because it balances their equations; maintains their dollar/yuan (unless they start competing with each other). Time to teach them a better balancing equation and do the building up of the Lankan domestic market aka socialized-domestic-capitalism.

    • 2
      0

      Ramona
      You are talking sense today. But are you saying the great economist Dr.Ali has got it backwards?

      • 1
        0

        Old Codger,
        Hmm…..Glad to know you finally (albeit grudgingly) see the light of the Motherland’s woes after reading all of my comments. Why, not too long ago (one day ago), you were all for the Lankan Elite trading in Louis Vuitton designer handbags and shoes with the money of the starving Lankan masses (Ranil’s purview), and actually legitimized it by comparing it to oil-rich Dubai trading in tea that the global masses can enjoy. As per Dr. Ali, this time he is writing a general dissertation on economic affairs, not necessarily related to Mothercountry. Usually he writes entirely for the Mothercountry. I believe he is laying the groundwork for part 2.

  • 9
    1

    These analyses are too theoretical and miss the biggest point. That is that the govt is run against the will of the people. The voters were denied an opportunity to change this utterly corrupt and self-serving system which still squanders millions and embezzles the population in massive proportions. No amount of economic theorizing can depart from these main aspects of the destruction of a once resplendent island that was truly paradise, with a simple and happy population that could at least eat jak fruit, del fruit, had no shortage of rice or other basic foods. Vermin like Gota, Percy, Cabraal, Basil, G Wimale, Siripala, SB, and the porcine Bandooler Guneris still rule over a starving and beleaguered population. What is required is a complete and radical change in the system, brought about by the hugely popular and genuinely diligent NPP. Only the sycophantic corporate and bureaucratic hangers on want to feed off the parasitic scumbags’ leftovers.

  • 5
    0

    I have a question to Professor Amir Ali, As I understand Sirisena-Ranil government doubled our soverign bond annual pay back by the end of 2019.(https://publicfinance.lk/) that was also after IMF funding, and the reason given was that they took loans to repay the loans – so how did the loan burden increase. The doubling of the loan payback is arguably and important reason why we have to default on our payments. Now our foreign remittance and tourism earning are well over 500 million USD per month. The question is is ranil pushing us into further crisis by getting more and more loans, obviously he willnot be there when it becomes a problem. At this rate very soon our annual debt repayment will reach 10 billion USD very soon, people are happy with the status quo, especially the middle class , are we ignoring the trap we are in because of ranil.

  • 1
    1

    Glad to note that the author is getting the story a little correctly about the conflict in Ukraine.
    But to say “Unlike the pandemic this war meant economic ruination of the two combatants, Ukraine and Russia” shows a lack of understanding of the developments.
    The Russian economy is far from ruin. The sanctions had minimal impact on it.
    The bigger victims are in west Europe, mainly Germany. That is the price of being reluctant proxies.

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