Thread by @ChayuDamsinghe

I'm going to explain a little bit of money printing, why it's sometimes bad, sometimes good, sometimes a necessary evil.

#SriLankaEconomicCrisis #SriLankaCrisis #EconomicCrisisLK #SriLankaCrisis

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This will be an especially simplified one since this is complicated, so I will miss out on some specifics intentionally. Ask questions though.

(2/15)

Let's first differentiate note printing(minting) from money printing (monetization).

Minting is actually making new notes and coins to meet the amount of money in circulation. That is not "money printing".

(3/15)

Money printing is when the Central Bank gives to the system, some new "money" that didn't already exist.

Think of it as you having no money, then writing on a paper "here is 1000 rupees" and if that's accepted, there, you've printed 1000 rupees.

(4/15)

There are 2 main reasons why this happens.

Either the government needs money or the banks need money.

But why would that happen?

(5/15)

The government would need money if its expenses exceed revenue, and it needs money to meet the gap.

The banks need money for similar reasons (liquidity often, not profit/loss).

Usually, either party would either borrow or get money from people (gov-tax, bank-deposits)

(6/15)

But if that doesn't work, they still need the money.

And then the Central Bank steps in and gives them new money.

In that instance, you can see why that's needed. The alternative, is where either gov or banks can't meet their needs. That's quite bad.

(7/15)

So if this is needed, then why is it bad?

The thing is, even if it needed, it still has side effects. Every medicine does.

The main side effect is that now there's more total money in the system.

(8/15)

Often, because banks/gov couldn't get money from people, this means that people overall have more money.

Meaning inflation, I examined earlier.

https://mobile.twitter.com/ChayuDamsinghe/status/1513423661562499073

(9/15)

So that's where money printing becomes clear, not as a good or bad thing, but rather as a tool.

Every time you use it, the benefits have to be weighed against the costs, specially if there are other alternatives.

(10/15)

Taxes, higher rates, are often better alternatives to rising inflation. Inflation itself acts as a tax, but a tax that is only reductive. That value doesn't go to the government to pay for anything. Its just a loss.

(11/15)

So in order for banks and gov to meet their needs, rate increases and taxes work better, or at least, less damagingly.

But until that really comes in, there is no alternative but printing.

(12/15)

Since taxes haven't increased yet, but gov still has enough expenses, including paying for contractors, unless that whole amount can be borrowed, there will still likely be more printing.

Alternative is not pay contractoes, salaries, which is obviously worse.

(13/15)

However, this is also why the rupee side of banks also has a protection. Even if things go wrong, the central bank can always print money.

(don't quote this out of context please)

(14/15)

So yeah, money printing won't disappear overnight. There might even be an increase (and subsequently in inflation) before it goes down.

But we are on the right path. A long and difficult path, but the right one. Hopefully, we see it through.

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