By Kumar David –

Prof. Kumar David

There are learned arguments about rescheduling the election and there is the truth, or the tricks political parties play. One learned view says the President should revoke his March 2 Gazette and issue a proclamation sometime later dissolving parliament and fixing a new election date. If it is revoked parliament will stand “undissolved” and functional again until re-dissolved. The President will have to ensure elections are held on a date such that the new parliament’s first meeting is within five years of 2 Sept 2015 – that is before 2 Sept 2020.

The Election Commission’s (EC) proposal is less straightforward. Since parliament was dissolved on 2 March 2020 the new parliament must convene before 2 June 2020. This is impossible the EC says. Therefore, the President faces a constitutional conundrum and must consult the Supreme Court and get a nod for parliament to convene on a date after 2 June. Though this violates the written word of the constitution, in the prevailing circumstances it would be the best course of action. This proposal does not envisage a revocation of the 2 March Gazette fixing a 25 April election. 

The President is determined to stick to his decision and wants elections soon for certain reasons and the opposition for the same reasons, or rather the obverse of the same reasons, wants the election delayed. There are three reasons. The regime calculates that the feelgood effect of Gotabaya Rajapaksa’s November victory is still alive and it can cash in. Second, this country like many others is soaked in racial and religious hate and Gota is the beneficiary of a Sinhala-Buddhist (SB) gush. Third, many say Gota has handled the corona crisis well and it will be good for his side if an election is held soon. 

The government does not need to worry about the second factor. Faith-race prejudice is here to stay for the long haul; it will not go away in months. GR-MR-SLPP are assured of a big majority of the SB vote for the foreseeable future and will do whatever it takes to consolidate this base including pardoning anyone who slits the throat of half-a-dozen children provided they are all Tamils. The outpouring of SB support in the social media for the pardon was overwhelming! Ranil and Sajith will not dare cross the path of the chauvinists and the JVP is lowkey in combating racism. GR-MR-SLPP are on safe ground in laughing off any threat to their extremist SB vote bank.

Feelgood will last for only as long as the economy does not go into a tailspin. The same is true for brownie points scored in handling of the corona-crisis. And this is where the government’s Achille’s Heel lies. People put up with loss of income and the mess created by curfew since they accepted the pandemic as an ‘Act of God’. It is senseless to blame Gota or the government. However, the worst is still to come! The regime is plain foolish to drag on the curfew for longer than necessary; second it is invoking a bootleg industry in illicit liquor. 

But this is small change; what is critical is that the SL economy will do very badly for the next 18 to 24 months in the aftermath of the dislocations it has suffered. The World Bank forecast is that our economy will contract by 0.5% to 3% in 2020 – yes that’s right shrink, not just grow more slowly. Regime and opposition think that the longer elections are delayed the more disadvantageous for the regime. As for me I don’t think deferring elections two-three months will make any difference. There may even be a brief pip as back wages get paid and activity resumes. The economy will be rotten in the long run for no fault of Sri Lanka. But for two-three months? It’s just snakes-and-ladders.   

The fiasco

Global capitalism is careening towards a depression and there is little we can do to save ourselves when after corona is gone. Unlike in the 1930s Great Depression we in Sri Lanka are now deeply enmeshed in the capital-flow circuits, debt-default crises and the supply chains of twenty-first century capitalism. The efforts of Western governments and great central banks to limit depression-damage will flop. This is the context in which Gota et al are desperate for quick elections before the sight of the economy sinking becomes obvious and the opposition wants to play the reverse game. But I say two-three months will make no difference.

First let me provide simple explanations of a few much-used economic terms that some readers may not be very familiar with. Anyway, folks of moderate to low IQ like myself need help since economist have become so crafty that unless you are passé with their latest acronyms you don’t know what they are talking about. Did I hear you say it’s better that way?

IMF Projection of Global Output Loss

Printing Money: It has become a deluge since the corona-depression (CD). I will use the term Fed to collectively refer to the US Federal Reserve, European Central Bank, Bank of England, Japan’s BoJ and the other big ones. This Fed has been printing money ever since the 2008-9 Great Recession but in the last month it went bonkers and opened the flood-gates. Congress and Trump have approved the US Feds scheme to print $2.4 trillion to be followed by more on the same scale. The ECB is matching it.

How does printing work? The Fed simply makes an electronic entry in the accounts that banks and great corporations hold saying “Your account has increased by so many billion dollars”. (Not quite, as I will explain in a moment). Or in the case of small people post them a check for $1200. It’s like magic. If I could wave a wand, conjure into existence a fat wad of dollars and deposit it in your account – yes that’s it!  The pejorative term for this fiddle is helicopter-money.

Inflation: If fiduciary (officially recognised) currency is bloated up by the Fed but the quantity of goods and services on the market does not increase, there will be inflation. If it gets out of hand, galloping inflation as in the Weimar Republic in the 1920s and Mugabe’s Zimbabwe. Even 10% inflation spells trouble. If you loan me Rs10,000 and I return it to you in 10 years I am actually returning only about Rs 3500 in today’s money if the inflation rate is 10%. You break even if you charge me 10% interest compounded annually.

The US has been printing money for the last 10 years calling it Quantitative Easing (QE), keeping interest rates very low and not increasing its output very much (GDP growth less than 2.5% most of the time). Still it got away with it in the sense that inflation has been very low, below 2%. Well that’s because the US is special; the Fed does not print money; it prints the mighty dollar. So long as all the other suckers in the world are prepared to take the dollar because they have infinite confidence in it, and give America back lots of goods and services, it is equivalent to the quantity of goods and services produced by the US economy increasing to match the dollar expansion. This game can go on for so long as everybody else has supreme confidence in the mighty dollar and believes it will forever remain a true store of value. “In God and Uncle Sam we Trust”. The dollar is the world’s currency so Americans are different from ordinary mortals. But this pack of cards will come crashing down if the credibility in the dollar plummets. 

QE: I did say “Not quite”. In the case of ‘small people’, those with an annual income of less than $75,000; yes, it’s non-refundable money. About 70 million such deposits will be made into bank accounts or cheques posted to those without accounts. But 1200×70 million is $84 billion but the US Fed is injecting $2.4 trillion in the first tranche and more later. What about the other $2.316 trillion? Ha, now you got it! It all goes to big business as Quantitative Easing. That is banks and big businesses give the US Treasury bits of paper called corporate bonds – an IOU for a certain duration say one, three or five years and denominating a dirt low interest rate. This means the Treasury is granting huge loans to big business and the Fed is facilitating the gimmick with a massive game of electronic money printing. 

Who said the Chinese State is pumping money into Chines state enterprises? Never on this scale! Capitalism from its birth used the state, the Royal Navy, the armies of the East India Company, the US military in the Middle East and in Central and South America. Huge injections of state funds as in the Great Depression and the Great Recession of 2008-9 were deployed to ensure capitalism’s survival. Free enterprise is a fake term; capital and state have always been symbiotically welded. 

The notion of “lending’ is a gimmick because this huge asset on the Feds balance sheet (an entry showing that other people owe the Fed $2.3+ trillion) is money will not be returned. Some banks and companies will become insolvent, others will return peanuts depending on inflation and QE loan duration. In simple word most of the so-called stimulus package is helicopter-money from the pockets of the American people to big business.

Who will pay in the end? Take a worst-case scenario as it is simple to explain. Assume that none of the helicopter-money is returned to the Treasury. (The $84 billion public handout is not intended to be returned anyway). This in effect means that $2.4 trillion have been printed and injected into the economy and there is little or no corresponding increase in output – worst case. The hope that private enterprise will use the funding to launch new businesses and build new plant is bollocks. Hardly anything of the sort happened with the QE trillions handed out between 2009 and 2019. Most of the funds went into asset-price (commercial property, stock market and dollar holding value) inflation. American industrial output actually declined and productivity improvement (that is investment in skills enhancement) was minimal. What I am at pains to say is that this time it is not like FDR’s New Deal, it is not an investment in improving American infrastructure, industrial output and worker skills. This time to use a Sinhala term, it is going to be a puss-vedillak.

Since the rest of the world will see America’s distress and its weakness; there will be less willingness to hold US dollars. US Treasury bond yields will rise (prices fall), dollar interest rates will rise and inflation is on the horizon big time. So, who pays? The people! They have to bear the brunt of the backlash from helicopter-money handed out to big business (and the crumps from the table that they are collecting at the moment) as inflation hits, debts go into default, and the dollar declines. It is in this global context that I said the SL economy will do very badly for the next 18 to 24 months if not longer. Poor SOD, the bugger who wins the next election!