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Nexus between money, exchange rate, money printing and inflation

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Money, exchange rates, and money printing are crucial components of a nation’s monetary policy framework, wielding significant influence over economic and financial stability. This intricate relationship between these fundamental factors directly affects financial and economic dynamics. I am going to examine the nexus between these factors, clarifying their roles in the financial system and the implications of their interactions. The relationship between money supply and money printing is symbiotic, with the latter directly influencing the former.

Money

Recently, Emeritus Professor of Economics, Sirimal Abeyratne, explained the meanings of some economic concepts about money and inflation. He emphasised that in economics, money transcends mere physical notes and coins circulating in the system. Similarly, he clarified that money printing does not entail the simplistic act of “multiplying sacks of coins or bundles of notes”, akin to minting physical currency.

Money supply, often referred to as the money stock, encompasses the total quantity of money circulating within an economy at a given time. It includes various forms of money such as currency, demand deposits, and other liquid instruments. Money supply acts as the lifeblood of economic transactions, facilitating exchange, investment, and consumption activities. Central to the concept of money supply are its determinants, including central bank policies, commercial bank lending practices, and public demand for money. Changes in these determinants can influence the quantity of money in circulation, impacting economic activity and price levels.

Reverse causal relationships

Crucially, Professor Abeyratne highlighted the concept of reverse causation between the stock of money, which is determined (a multiplier) by reserve money, and inflation through the mechanism of increased aggregate demand. It suggests that money supply, can impact aggregate demand, subsequently influencing inflationary pressures within the economy. Therefore by understanding the complexities inherent in concepts like money supply, money printing, and their implications for inflation and aggregate demand, policymakers and economists can formulate more informed and effective monetary policy strategies to foster economic stability and growth.

Money printing

According to Dr. Nandalal Weerasinghe, the Governor of the Central Bank of Sri Lanka (CBSL), money printing can be defined as the change in reserve money, denoted as M0, which represents the injection of fresh money into the economy. Reserves consist of the stock of cash and funds, including statutory reserves, deposited by commercial banks with the CBSL. In 2020 and 2021, the increase in M0 (money printing) was LKR 372 billion, while the money stock (M2 broad) rose by LKR 3,024 billion.

CBSL further explains (Janaka Edirisinghe Deputy Director Economic Research Department) that in economic terms, the Central Bank has two primary methods for issuing new money into the economy. Firstly, when the Central Bank extends credit to licensed commercial banks or the government, it effectively creates new money, termed as the accumulation of domestic assets. Secondly, when the Central Bank acquires foreign exchange from the domestic foreign exchange market or government inflows, it generates new money, known as the accumulation of foreign assets. The combined value of these two assets is referred to as reserve money. Therefore, the main way to measure money printing is by looking at the change in Reserve Money. Table 1 shows this indicator along with other measures used to evaluate money printing. (See Table 01)

Money and Economic Growth

Money printing, also known as quantitative easing (QE) when conducted by central banks, involves the electronic creation of new money to purchase financial assets like government bonds or mortgage-backed securities. Central banks employ money printing as a monetary policy tool to achieve specific objectives such as lowering interest rates, boosting aggregate demand, and achieving target levels of inflation.

When central banks engage in money printing through QE programs, they inject newly created money into the financial system, thereby increasing the overall money supply. This liquidity infusion aims to lower interest rates, stimulate borrowing and spending, and ultimately expand the money supply to support economic activity especially during economic downturns or deflationary periods. However, the effectiveness of money printing in achieving these goals is debated due to potential unintended consequences like asset price inflation and currency depreciation.

Conversely, a contractionary monetary policy, such as reducing the pace of money printing or tightening monetary conditions, can lead to a decrease in the growth rate of the money supply or even a contraction. This reduction in money supply growth can dampen economic activity, increase borrowing costs, and potentially contribute to deflationary pressures.

Nexus of financial factors

From a financial perspective, we may have to go beyond analysing the bi-directional relationship between reserve money and inflation, via mediation of aggregate demand. Deeper study is necessary to explore the multi-directional and mutually co-integrated nature of relationships among the most prominent variables in financial market dynamics. While central banks employ money printing to achieve objectives like lowering interest rates and boosting aggregate demand, its effectiveness and potential drawbacks, such as asset price inflation and currency depreciation, remain subjects of debate.

The nexus between money supply, money printing, aggregate demand, inflation, exchange rate and stock market performance are complex and mutually influential. When central banks engage in money printing, they aim to bolster aggregate demand by injecting liquidity into the financial system. This liquidity expansion can lead to increased consumer spending, business investment, and overall economic activity. Conversely, a contractionary monetary policy, such as reducing the pace of money printing, can dampen aggregate demand by limiting liquidity and tightening financial conditions.

Aggregate Demand

Incorporating aggregate demand into the nexus provides a holistic view of monetary policy’s impact on economic outcomes. Changes in money supply and money printing influence aggregate demand, which in turn affects consumption, investment, and overall economic growth. Moreover, fluctuations in aggregate demand can feedback into monetary policy decisions, shaping central banks’ strategies to achieve macroeconomic objectives.

Foreign Reserves and Exchange Rate

Incorporating the value of money against the US dollar into the nexus reveals another dimension. Changes in money supply and money printing can influence the value of the currency against the US dollar, which in turn affects various aspects of the economy such as trade competitiveness and foreign exchange reserves.

Sri Lanka receives foreign exchange from exports, remittances, tourism, investments, loans, and other sources. Commercial banks handle most inflows for their clients, while the Central Bank manages government transactions. When the government needs foreign currency but lacks it, the Central Bank steps in, reducing its foreign assets. To cover this, the government exchanges Sri Lankan rupees with the Central Bank, possibly reducing the money supply unless it borrows more. Once all foreign exchange needs are met, the Central Bank can buy foreign currency from banks, increasing its assets and injecting new money into the economy.

Conclusion

In conclusion, the nexus between money, money printing, aggregate demand, inflation, exchange rate and stock market performance underscores the intricate relationship between monetary policy actions and economic and financial dynamics. While money printing can influence money supply dynamics, its effectiveness and implications depend on various factors such as economic conditions, policy implementation, and market expectations.

Sri Lanka receives foreign exchange from various sources. When the government requires foreign currency, the Central Bank of Sri Lanka (CBSL) uses its foreign assets to exchange Sri Lankan rupees, potentially reducing the money supply unless the government borrows more. After meeting all requirements, the CBSL purchases foreign currency from banks, increasing its assets and injecting new money into the economy.

Hence, it’s crucial to craft policy tools meticulously, navigating these dynamics to meet the country’s goals of stable prices, sustainable economic growth, and financial stability.

(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT University, Malabe. He is also the author of the “Doing Social Research and Publishing Results”, a Springer publication (Singapore), and “Samaja Gaveshakaya (in Sinhala). The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for. He can be contacted at saliya.a@slit.lk and www.researcher.com)



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Features

US’ drastic aid cut to UN poses moral challenge to world

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An UN humanitarian mission in the Gaza. [File: Ashraf Amra/Anadolu Agency]

‘Adapt, shrink or die’ – thus runs the warning issued by the Trump administration to UN humanitarian agencies with brute insensitivity in the wake of its recent decision to drastically reduce to $2bn its humanitarian aid to the UN system. This is a substantial climb down from the $17bn the US usually provided to the UN for its humanitarian operations.

Considering that the US has hitherto been the UN’s biggest aid provider, it need hardly be said that the US decision would pose a daunting challenge to the UN’s humanitarian operations around the world. This would indeed mean that, among other things, people living in poverty and stifling material hardships, in particularly the Southern hemisphere, could dramatically increase. Coming on top of the US decision to bring to an end USAID operations, the poor of the world could be said to have been left to their devices as a consequence of these morally insensitive policy rethinks of the Trump administration.

Earlier, the UN had warned that it would be compelled to reduce its aid programs in the face of ‘the deepest funding cuts ever.’ In fact the UN is on record as requesting the world for $23bn for its 2026 aid operations.

If this UN appeal happens to go unheeded, the possibilities are that the UN would not be in a position to uphold the status it has hitherto held as the world’s foremost humanitarian aid provider. It would not be incorrect to state that a substantial part of the rationale for the UN’s existence could come in for questioning if its humanitarian identity is thus eroded.

Inherent in these developments is a challenge for those sections of the international community that wish to stand up and be counted as humanists and the ‘Conscience of the World.’ A responsibility is cast on them to not only keep the UN system going but to also ensure its increased efficiency as a humanitarian aid provider to particularly the poorest of the poor.

It is unfortunate that the US is increasingly opting for a position of international isolation. Such a policy position was adopted by it in the decades leading to World War Two and the consequences for the world as a result for this policy posture were most disquieting. For instance, it opened the door to the flourishing of dictatorial regimes in the West, such as that led by Adolph Hitler in Germany, which nearly paved the way for the subjugation of a good part of Europe by the Nazis.

If the US had not intervened militarily in the war on the side of the Allies, the West would have faced the distressing prospect of coming under the sway of the Nazis and as a result earned indefinite political and military repression. By entering World War Two the US helped to ward off these bleak outcomes and indeed helped the major democracies of Western Europe to hold their own and thrive against fascism and dictatorial rule.

Republican administrations in the US in particular have not proved the greatest defenders of democratic rule the world over, but by helping to keep the international power balance in favour of democracy and fundamental human rights they could keep under a tight leash fascism and linked anti-democratic forces even in contemporary times. Russia’s invasion and continued occupation of parts of Ukraine reminds us starkly that the democracy versus fascism battle is far from over.

Right now, the US needs to remain on the side of the rest of the West very firmly, lest fascism enjoys another unfettered lease of life through the absence of countervailing and substantial military and political power.

However, by reducing its financial support for the UN and backing away from sustaining its humanitarian programs the world over the US could be laying the ground work for an aggravation of poverty in the South in particular and its accompaniments, such as, political repression, runaway social discontent and anarchy.

What should not go unnoticed by the US is the fact that peace and social stability in the South and the flourishing of the same conditions in the global North are symbiotically linked, although not so apparent at first blush. For instance, if illegal migration from the South to the US is a major problem for the US today, it is because poor countries are not receiving development assistance from the UN system to the required degree. Such deprivation on the part of the South leads to aggravating social discontent in the latter and consequences such as illegal migratory movements from South to North.

Accordingly, it will be in the North’s best interests to ensure that the South is not deprived of sustained development assistance since the latter is an essential condition for social contentment and stable governance, which factors in turn would guard against the emergence of phenomena such as illegal migration.

Meanwhile, democratic sections of the rest of the world in particular need to consider it a matter of conscience to ensure the sustenance and flourishing of the UN system. To be sure, the UN system is considerably flawed but at present it could be called the most equitable and fair among international development organizations and the most far-flung one. Without it world poverty would have proved unmanageable along with the ills that come along with it.

Dehumanizing poverty is an indictment on humanity. It stands to reason that the world community should rally round the UN and ensure its survival lest the abomination which is poverty flourishes. In this undertaking the world needs to stand united. Ambiguities on this score could be self-defeating for the world community.

For example, all groupings of countries that could demonstrate economic muscle need to figure prominently in this initiative. One such grouping is BRICS. Inasmuch as the US and the West should shrug aside Realpolitik considerations in this enterprise, the same goes for organizations such as BRICS.

The arrival at the above international consensus would be greatly facilitated by stepped up dialogue among states on the continued importance of the UN system. Fresh efforts to speed-up UN reform would prove major catalysts in bringing about these positive changes as well. Also requiring to be shunned is the blind pursuit of narrow national interests.

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Egg white scene …

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Hi! Great to be back after my Christmas break.

Thought of starting this week with egg white.

Yes, eggs are brimming with nutrients beneficial for your overall health and wellness, but did you know that eggs, especially the whites, are excellent for your complexion?

OK, if you have no idea about how to use egg whites for your face, read on.

Egg White, Lemon, Honey:

Separate the yolk from the egg white and add about a teaspoon of freshly squeezed lemon juice and about one and a half teaspoons of organic honey. Whisk all the ingredients together until they are mixed well.

Apply this mixture to your face and allow it to rest for about 15 minutes before cleansing your face with a gentle face wash.

Don’t forget to apply your favourite moisturiser, after using this face mask, to help seal in all the goodness.

Egg White, Avocado:

In a clean mixing bowl, start by mashing the avocado, until it turns into a soft, lump-free paste, and then add the whites of one egg, a teaspoon of yoghurt and mix everything together until it looks like a creamy paste.

Apply this mixture all over your face and neck area, and leave it on for about 20 to 30 minutes before washing it off with cold water and a gentle face wash.

Egg White, Cucumber, Yoghurt:

In a bowl, add one egg white, one teaspoon each of yoghurt, fresh cucumber juice and organic honey. Mix all the ingredients together until it forms a thick paste.

Apply this paste all over your face and neck area and leave it on for at least 20 minutes and then gently rinse off this face mask with lukewarm water and immediately follow it up with a gentle and nourishing moisturiser.

Egg White, Aloe Vera, Castor Oil:

To the egg white, add about a teaspoon each of aloe vera gel and castor oil and then mix all the ingredients together and apply it all over your face and neck area in a thin, even layer.

Leave it on for about 20 minutes and wash it off with a gentle face wash and some cold water. Follow it up with your favourite moisturiser.

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Confusion cropping up with Ne-Yo in the spotlight

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Ne-Yo: His management should clarify the last-minute cancellation

Superlatives galore were used, especially on social media, to highlight R&B singer Ne-Yo’s trip to Sri Lanka: Global superstar Ne-Yo to perform live in Colombo this December; Ne-Yo concert puts Sri Lanka back on the global entertainment map; A global music sensation is coming to Sri Lanka … and there were lots more!

At an official press conference, held at a five-star venue, in Colombo, it was indicated that the gathering marked a defining moment for Sri Lanka’s entertainment industry as international R&B powerhouse and three-time Grammy Award winner Ne-Yo prepares to take the stage in Colombo this December.

What’s more, the occasion was graced by the presence of Sunil Kumara Gamage, Minister of Sports & Youth Affairs of Sri Lanka, and Professor Ruwan Ranasinghe, Deputy Minister of Tourism, alongside distinguished dignitaries, sponsors, and members of the media.

Shah Rukh Khan: Disappointed his fans in Sri Lanka

According to reports, the concert had received the official endorsement of the Sri Lanka Tourism Promotion Bureau, recognising it as a flagship initiative in developing the country’s concert economy by attracting fans, and media, from all over South Asia.

Nick Carter: His concert, too, was cancelled due to “Unforeseen circumstances

However, I had that strange feeling that this concert would not become a reality, keeping in mind what happened to Nick Carter’s Colombo concert – cancelled at the very last moment.

Carter issued a video message announcing he had to return to the USA due to “unforeseen circumstances” and a “family emergency”.

Though “unforeseen circumstances” was the official reason provided by Carter and the local organisers, there was speculation that low ticket sales may also have been a factor in the cancellation.

Well, “Unforeseen Circumstances” has cropped up again!

In a brief statement, via social media, the organisers of the Ne-Yo concert said the decision was taken due to “unforeseen circumstances and factors beyond their control.”

Ne-Yo, too, subsequently made an announcement, citing “Unforeseen circumstances.”

The public has a right to know what these “unforeseen circumstances” are, and who is to be blamed – the organisers or Ne-Yo!

Ne-Yo’s management certainly need to come out with the truth.

However, those who are aware of some of the happenings in the setup here put it down to poor ticket sales, mentioning that the tickets for the concert, and a meet-and-greet event, were exorbitantly high, considering that Ne-Yo is not a current mega star.

We also had a cancellation coming our way from Shah Rukh Khan, who was scheduled to visit Sri Lanka for the City of Dreams resort launch, and then this was received: “Unfortunately due to unforeseen personal reasons beyond his control, Mr. Khan is no longer able to attend.”

Referring to this kind of mess up, a leading showbiz personality said that it will only make people reluctant to buy their tickets, online.

“Tickets will go mostly at the gate and it will be very bad for the industry,” he added.

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