ECONOMYNEXT – Sri Lanka is on the fast-track to the Korea path, with interventionists getting their wish using a US-built central bank with false monetary policy independence and extreme stimulus to target an output gap.

Sri Lanka has printed over 2.3 trillion rupees since the January 2020 rate cut and lost 9.3 billion US dollars in reserves including 4.0 billion in borrowed reserves up to March 2022.

The rupee has collapsed from 182 to 365 to the US dollar in the same period.

Now inflation is going up, monetary stability has not yet been restored and there signs that the central bank could lose control of reserve money.

In the 2012, 2016 and 2018 currency crises the central bank floated and got control of reserve money and there was typical deflationary style collapsed with a small spike in inflation.

However this time an inflationary blow off is the outcome with monetary stability yet to be restored.

Food prices are rising and people are finding it difficult to eat. Even if there are no actual shortages, the high prices will reduce the calorific intake of the poor, particularly children and put protein out of the reach of many.

The hardest hit would be children of poor families, for whom protein and dairy products will be a super luxury, which can harm their growth for years to come.

Sri Lanka’s central bank printed the money from 2020 saying the new administration was going to create a ‘developmental state’ similar to Korea.

Unlike countries like Hong Kong, Singapore, Malaysia, Thailand and Taiwan, Korea was one country which had severe monetary troubles, trade controls and near starvation due to its US-built central bank like Ceylon.

If monetary stability is not restored Sri Lanka will become more of a ‘Korea’.

Spam a Luxury Food

During lunar New Year in South Korea, Spam, a canned ham considered junk food in the US, is a valued gift found in premium gift hampers.

Hormel Foods, which invented the canned food in 1937 and became a component of military rations reportedly, has the biggest sales outside America of over 200 million dollars, in Korea.

When the Bank of Chosen (Joseon) and later the Bank of Korea was printing money in the immediate post-independent period from Japn, Spam was one of the foods available from post-exchange (PX) stores, which served US soldiers, and other American officials and their families.

As money printing triggered import controls, Spam and meat became luxury foods.

One of the foods that were invented during that time was Budae Jjigae or Amy base stew.

Army base stew was made from food trash thrown away from military eateries and officer’s messes. The saying goes that cigarette butts were removed, pieces of sausages and others were rescued, and mixed with spices and kimchi and vegetables it was boiled in to a tasty soup for the starving Koreans.

Another food that was reportedly invented at the time Dwaeji Gukbap which is a culture food in Busan. It was invented in the early 1950s by refugees and poor families and made with discarded pork bone from US military kitchens.

Gamja-tang, a traditional dish was made with discarded pork bone from military kitchens.

When central banks buy Treasury bill to pay state workers or to keep rates down and the currency collapses, it is not only banks that collapse but the nutrition of people.

In Sri Lanka in the 1970s beggars died on streets.

There are those who remember how they used to scavenge discarded food from offices in Colombo after lunch hour, collect the leftover rice, wash them boil then on the roadside in pot with some vegetables again and eat them.

A central banker will never admit to their mistakes, not only in Sri Lanka but anywhere in the world, but will use big words to confuse bamboozle the helpless public, using the same rhetoric used by Western Mercantilists and escape accountability.

The Korean Central Bank’s wish for Japan reform

The Bank of Chosen was originally private bank. It was forced to print money in the latter stages of World War II under Japanese occupation by purchasing Japanese government bonds.

The officials inside the Bank of Chosen however did not want to print money, since they had a long history before American academic central banking. They wanted to change the law.

They pointed out that the Bank of Japan act was changed in 1948 by Joseph Dodge, a US banker who had worked with Ordoliberals of Germany and was involved in killing inflation and setting up the new Deutsche Mark.

One of the first things Joseph Dodge, who was helicopter dropped into Japan did was to close the Reconstruction Development Bank which (Fukkin Bank) was financed with bonds sold to Bank of Japan which was firing 700 percent inflation and triggering multiple parallel exchange rates.

The Fukkin bank among other Keynesian interventions was the product of the Keynesian-New Dealer Economic Co-operation Agency of the US. Japan was a victim of the agency which was rescued by Dodge who fixed the Yen at 360 and banned deficit finance.

Chalmers Johnson who wrote about Japan in a misleading way, was a Naval officer working out of Japan during the Korean war and was protected from the consequences in Korea. In any case they had the Us officers had the benefit PX stores.

The Yen held till the break-up of the Bretton Woods and appreciated, while Sri Lanka printed and closed the entire economy.

Dodge ended up in Japan on the intervention of US President Harry Truman and the US military, which saw the stability and monetary reform in Germany and was able to undo the damage caused by the ECA.

Fed experts in 1948 had failed to arrest the monetary problems in Japan, people were starving and the military feared a revolt when the military administration took matters in hand and brought in Dodge.

According to the official history of the Bank of Korea, “the Korean government and Bank of Chosen reached a consensus that it was necessary to invite international financial experts to examine the government’s central bank bill.”

“At the proposal of the ECA, the minister of finance requested in June 1949 that the Board of Governors of the Federal Reserve send experts to Korea.

“In response the Federal Reserve dispatched Arthur I Bloomfield, (chief economist of the balance of payments division), a prominent authority in financial theory and John P Jensen (assistant chief of the auditing division) from the Federal Reserve Bank of New York.

Korea gets Argentina Cookie Cutter

The Federal Reserve Board had been sending staff to countries including Paraguay, Guatemala, the Dominican Republic, the Philippines and Sri Lanka since 1943 to support their monetary and banking reforms.

The dispatch of two experts to Korea was in line with this trend.”


The Bank of Chosen officials who wanted to arrest inflation of course had no idea that US academic economists has been completely corrupted by Keynesianism and the Fed was exporting a cookie-cutter Argentina style central banks and Dodge followed classical discipline.

Arthur Bloomfield, a Fed official, later set up a bank in the style of one’s set up in Latin America in a previous decade and in Ceylon by fellow Federal Reserve official John Exter.

The South Korean won (the first version) had depreciated from 15 to the US dollar in 1945 to 6000 by 1953.

The new bank printed a brand new currency called the Hwan. The new currency was born at 100 old Won per Hwan.

Predictably the new central bank was unable to halt inflation.

Political Upheaval

Sygman Rhee, who had opposed Japanese occupation and was considered an independence leader, returned to the country and won Presidential elections and headed what, was called the First Republic.

However the country continued to experience inflation and by 1960 the Hwan had fallen to around 1250 to the dollar.

The first Republic collapsed and Rhee was disgraced as usually happens when currencies collapse as can be seen in Sri Lanka now. Following what was known as the April Revolution he resigned.

The Second Republic lasted only one year. General Park Chung-hee came to office through a coup, promising to end corruption and tackle big business.

After central bank reform a second Won (which is now found in Korea) was set up with 1 won for 10 Hwan (about 135 to the US dollar).

The new was much better and held for long periods though the country experienced BOP troubles and high interest rate and inflation from time to time.

The currency troubles led to import controls – SPAM smuggling became a popular sport – and was criminalized by the military administration and authoritarian rule prevailed.

The Korea central bank law was reformed about a dozen times. The won collapsed in the early 1980s as Paul Volcker tightened (and Latin America went into default). However the last reform reduced monetary and exchange policy conflicts and stability started to come around the mid 1980s

As the currency was stabilizing after the final collapse, people came to the streets in Great Workers Struggle, the dictatorship also collapsed in a massive strike.

A liberal government came to power (officials of the Bank of Korea Busan branch went on strike demanding further tightening of the law) which was allowed by the liberals.

The currency stabilized and appreciated, interest rates (and inflation) collapsed as a consequence and the Korea became an OECD country within a decade.

All kinds of new economic activities came which interventionists could imagine. Korean music which developed partly as opposition to authoritarian rule took Japan and the rest of Asia by storm.

K-drama and other culture products followed, with the film industry being liberalized and facing competition.

In 2020 Hallyu exports were estimated to have topped 10 billion dollars, about the same as total exports of Sri Lanka.

The government got interest in Hally when it realized one year that culture exports topped the revenues exceeded many of the biggest industrial groups, and it started funding drama schools.

The democratization reforms of the 1980s also created private TV channels, which led to an explosion of the industry. A strong currency preserved peoples, incomes allowing them to spend on culture, and restaurants. Girls and boys who would have worked in factory floors became idols.

Today there is a service sector (global production chains) style activity in Hallyu. K-pop bands have stars from Japan, Thailand and China. Music is developed by in collaboration with sound studios in the US and Europe. Korean stars study at Juliard and top music school.

By and by foreign Mercantilists will write about then and say it is happened as a result of some state intervention.

However Sri Lanka can expect no such prospects in the current situation. Almost all the economists in the country are interventionist soft-peggers who want to manipulate interest rates with no thought of the consequences with the notable exception of W A Wijewardena.

Classical monetary theory is unknown in Sri Lanka.

A deadly flexible exchange rate awaits

A deadly central bank reform that institutionalizes monetary and exchange rate conflicts (flexible exchange rate with flexible inflation targeting) and gives ‘independence’ to soft-peggers is waiting in the wings.

It will probably be enacted under the IMF reforms.

There is little prospect of a clean floating regime starting under any IMF program.

While the IMF is good at smashing economies and stabilizing currencies, it cannot prevent the next one.

That is because the seeds of the next crisis is contained in the discretionary and anchor conflicting ‘flexible’ and sterilizing central bank laws it supports.

IMF is replete with Arthur Bloomfields and Robert Triffins, David Groves, and the like who set up sterilizing supposedly counter-cyclical soft-pegs.

They prescribe to the third world what was discarded by the Fed and the Bank of England in the Reagan/Thatcher era after their own currencies collapsed.

The bigger problem is Washington in now against strong pegs, unlike during the Bretton Woods era.

The Treasury believes (falsely) that strong East Asian stable currencies are ‘undervalued’ and they become export power houses at the expense of the US trade deficit.

Monetary instability will continue and the economists/mercantilists will continue to blame imports, the current account deficit and external shocks instead of their own flexible, discretionary and independent policies backed by central bank credit.

Instability will continue until a currency board is brought to tame the Mercantilists or the country goes into spontaneous dollarization. Prospects of a clean float are almost zero under an IMF program which requires pegging to repay its loans.

Sri Lanka earns about a billion dollars in exports, about 500 to 600 million in remittances (part of it diverted to food until recently through informal markets), more as IT and BPO exports, while food imports are around 100 to 200 million dollars a month.

It is a relatively simple thing to keep the nation fed as long as people have some income.

Even there are no price controls and no shortages, food prices will be high. Like in Korea food will be will be out of reach of the poor.

In particularly proteins will become expensive as in Korea. Malnutrition will go up, young children will be stunted.

Sri Lanka’s interventionists and academic economists have got their Korea wish. But there is there is no SPAM, no pork bones, or PX stores to bring relief.