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

(1/15)
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.



(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.

(15/15)

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More from @ChayuDamsinghe

Apr 13
What will happen to Sri Lanka, economically, over the next few months, especially to its people?

The answer isn't pretty, but it's something to prepare for.

#SriLankaProtests #SriLanka (Also tagging #GotaGoGama #GoHomeGota #OccupyGalleFace #අරගලයටජය for reach)

(1/11)
Let's assume there's some sort of political stability at some point. What that is doesn't really matter too much to this thread's outcomes, it just extends the timeline if it's delayed.

With that out of the way - what will SL need to come out of this?

(2/11)
As long as we keep engaging with the IMF and our creditors, it should hopefully bring enough confidence that there will be some inflows (bilateral, remittances, export conversions, aid) that allow the urgent essential shortages to ease across the next month or two.

(3/11)
Read 11 tweets
Apr 13
Going to explain depreciation, how the official market failed and the unofficial market took it up, and what's needed for the two to come together.

#SriLankaEconomicCrisis #SriLankaCrisis #SriLankaProtests

(1/20)
Exchange rate is basically the value of a currency in terms of other currencies. Eg- 1 USD is worth XX LKR and vice versa.

Depreciation is when 1 currency loses value against another. Eg- 1 USD going from 200 LKR to 300LKR

Appreciation is opposite.

(2/20)
What determines this value?

Simplified, this is through a demand and supply mechanism. The more demand for a currency, the stronger (appreciation) it will get. The less demand for a currency/more supply, the weaker (depreciation) it will get.

(3/20)
Read 20 tweets
Apr 13
Let me go through how remittances work and make a plea, please send money to Sri Lanka.

#SriLankaEconomicCrisis #SriLanka #ProtestLK #EconomicCrisisLK (also #GoHomeGota #GoHomeGota2022 #GotaGoGama for reach)

(1/11)
Think of remittances as when money from outside SL comes into SL on a personal basis.

This can either be

A. From a foreign account to your own local account

or

B. From your foreign account to someone's local account.

(2/11)
Let's take A first.

In this case, your dollars are sent to a bank account held by a local bank. Now, as long as those dollars are there, the bank can allocate those dollars for other purposes, ie for an outflow of dollars.

No Rajapaksas involved.

(3/11)
Read 11 tweets
Apr 13
Going to quickly explain what reserves are and how corruption can/cannot play into it.

#SriLankaEconomicCrisis #SriLanka #ProtestLK #EconomicCrisisLK
(1/9)
Think of reserves as a "portfolio of assets" owned by the Central Bank. It'll have cash, some bonds, some gold, some other assets with the IMF, etc.

Often denominated in USD or another global currency. Ours is USD.

(2/9)
So reserves are used for 3 broad purposes.
1. To bridge any dollar income/expenses gap the country has - release money from reserves
2. To intervene in foreign exchange market to affect the currency
3. To show confidence internationally that the country has backup money

(3/9)
Read 9 tweets
Apr 12
Right let's explain this and why this "default" isn't bad news, why "default" isn't a straightforward term, and what this will look like

#SriLankaEconomicCrisis #SriLanka (also tagging #GoHomeGota2022 #GoHomeGota for the reach)

(1/14)
We've decided to suspend all USD and foreign law debt payments according to this.

That means we won't pay them, we'll collect the arrears, and we'll include all of that in an official restructuring once that begins.

(2/14)
Is this bad?

Well, it's better if we could pay everything, but we can't. So this is far better than running out of money.

But could we have gotten agreement from creditors first?

(3/14)
Read 15 tweets
Apr 11
Okay Hanke is giving his inflation numbers and asking for a currency board again, so let's talk about inflation and what all of this is about before this ends up at a #GoHomeGota #GoHomeGota2022 protest

#SriLankaEconomicCrisis #SriLankaCrisis

(1/25)
Okay first, we know that inflation is an increase in prices, but what exactly are these numbers floating around?

The main measures are an inflation index, and they measure how different prices are this month, compared to a year ago (and you can also compare monthly).

(2/25)
So when you hear "March 2022 inflation is nearly 18%" that means an average item that was 100 rupees in March 2021 is nearly 118 rupees in March 2022.

But wait, surely prices are far higher than just 18%?

(3/25)
Read 25 tweets

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