In the 18th century in the words of Queen Marie Antoinette in response to the fact that the peasants had no bread “Let them eat cake” (qu’ils mangent de la brioche) she said. This could be interpreted in two ways. First one is that Marie Antoinette was so disconnected from the people while living in the Chateau de Versailles and thought that people could simply replace bread with cake as if cake was widely available. The second way, which I would like to focus on, is that Marie Antoinette knew nothing about basic nutrition and thought that cake could replace bread for daily consumption. Fast forward to the 21st century to Lebanon where the Lebanese government realized that the Lebanese people and the entire system including itself were almost completely out of dollars (money) and the government’s indirect response was “let them use lira” (hence the title “Let Them Eat Lira”). This response is much more serious than the one made by Marie Antoinette back in the 18th century, because this one is backed by so many expert opinions, fascist nationalists, and the inflation advocates (The school of John Maynard Keynes). Little do the so-called experts know that such monetary policies would take the country down the road of endless hyperinflation, impoverishment and a probable authoritarian regime filled with tyranny and the abolishing of civil liberties.
Lebanese Lira is a piece of paper valued by the amount of dollar reserve in the central bank (Banque du Liban) and the amount of dollars circulating in the Lebanese economy, hence Lebanese Lira is simply valued based on its redeemability in dollars (dollar standard). Same could be could said about every other currency in the world. The case was completely different in the 19th century where your piece of paper was actually redeemable with a monetary metal (gold). By the beginning of WWI this changed, fiat money was introduced (unbacked note printing) and by the end of the Breton Woods agreement (1971) the whole world shifted to the dollar standard. Therefore, holding money entails that you are holding a US dollar and that you fall under the risk of the Fed’s monetary policy. However, things become a little bit nastier for the national money holders (i.e. Lebanese Lira holders) because holding such money means that you are falling under two types of risks, which are the US Fed risk and the national risk. If the Fed decides to print a huge amount of dollars the purchasing power of your national currency decreases, and at the same time if your local government or central bank decides to print a huge amount of national currency without backing them with the appropriate amount of US Dollars the purchasing power of the said national currency decreases as well.
Lebanese Lira is national money, it is money used exclusively within the borders of Lebanon, it is only money because the Lebanese society and government believe that it is. Therefore, outside the Lebanese borders Lebanese Lira is nothing but a piece of paper. This creates a liquidity issue. The fact that Lebanese Lira is redeemable in international money (US dollars) at local banks validates its existence and usage as money.
To sum up, Lebanese Lira is in fact dollars, but they are dollars that fall under the risk of the Lebanese monetary policy, political tension and economic climate.
The Road to Lirafication
We are currently witnessing the Lirafication of the Lebanese financial and economic system. Lirafication entails the complete removal of the dollars from the hands of the consumer, saver and investor and replacing them with unbacked and unredeemable Lira. It is somehow similar to the end of the Bretton Woods agreement in 1971 except that US dollars could still be used outside the US borders. On the other hand, Lira can only be used within the Lebanese borders as mentioned above. Lirafication takes away dollars from individuals and put it in the hands of the government. Government becomes your Omnipotent decision maker.
Lirafication has been taking place gradually since October 2019. At First, banks introduced capital controls, you could only withdraw a limited number of dollar bills from your dollar current account, and then Lollars happened, Lollars are Lebanese/local dollars that do not really exist in the bank or in the Lebanses economy, they are just a number on a screen and every dollar payment you send from local bank A to local bank B turn into lollar (indirect confiscation). Lirafication measures took a step further as right now you cannot withdraw your dollars from your dollar account anymore, instead you withdraw Lira at whatever rate set by the bank which does not reflect the actual rate in the market. The central bank issued many circulars setting an artificial rate for USD/LBP at the exchange houses and the Lebanese government worked on giving out tickets and arresting any exchange house owner that deviates from those circulars. Even dollars remittances are being confiscated by the central bank and the receivers are receiving their funds in Lira at another artificial rate set by the BDL.
The End of Civil Liberties
Many experts and politicians through their justifiable critique of the Peg emphasized on the downsides of an economy that relies on dollars to function. One can only deduct that they have little to no understanding about how monetary nationalism works. They do not understand that Lira is dollar to which national risk is added, they do not understand that globalization and economic sophistication needs international trade, they definitely do not realize that there is no such thing as a 100% national product and more importantly they cannot grasp the idea of a deflationary monetary system.
“Let Them Eat Lira” is a monetary policy that will kill whatever is left of the free market in Lebanon and it will destroy freedom and Civil Liberties. In a Lirafied economy, individuals would have no freedom to save or invest, they can only consume whatever the government makes available for consumption. The government will subsidize whatever goods it considers necessary. This policy will kill off creativity and the private sector, make the government even more powerful and allow it to expand even more and put its hand on every other industry. Maybe the government will not be responsible for all the means of production, but it will assign those who are friends with it by giving them an exclusive right to redeem real dollars with lira and thus bring a rise in cronyism, industrial monopolies, and faux capitalism.
However, the bigger concern is now. The decision to Lirafy the economy is bringing us down a road of extreme hyperinflation, endless unemployment and rise in poverty. Confiscating or limiting dollar usage led many companies to simply stop operating and laying off employees, it brought so much price uncertainty that could never allow the market to recover by itself from the current crisis heading towards the biggest depression in Lebanese history. How could all of this have been avoided? Let the market fix itself, let the people use whatever money they think is suitable hence dollarizing the economy.
Dollarization Instead of Lirafication
How it happens?
One word, organically. As I mentioned in some of my previous articles, individuals (market participants) always tend to choose the harder form of money over the easily inflated one. While I was working at the finance department of one of the bigger market participants in the Lebanese overall market, what happened is that as the devaluation of the Lira took off in October 2019 all other market participants (local suppliers) started demanding payments in dollars, however the Lebanese law “protects” the Lebanese Lira from its complete dumping. The Code of Money and Credit forces market participants to accept payments in Lebanese Lira and normally when it comes to payments people would rather pay with an inflating currency and save up in a relatively more stable one. This was one of the major obstacles along with the Lirafication measures mentioned above that prevented dollarization and the closure of the central bank from happening from as soon as December 2019.
In the late 1990s Ecuador went through a severe economic crisis due to the ever-increasing public-sector spending and a fall in prices of oil (one of the main revenues of the country). In consequence, the value of the national currency (Sucre) fell drastically, and the inflation rate rose to 96.1 percent in 2000. This pushed Ecuadorians to store their wealth in a less risky and ‘‘harder’’ currency, so they started adopting dollars in an effort to avoid losing their purchasing power. Of course none of the Lirafication-like monetary nationalism measures took place in Ecuador, the Ecuadorians had the complete freedom to use dollars as a payment method, exchange sucre for dollars at whatever rate set by the market and most importantly the Ecuadorian government did not play a role in confiscating the dollars of its citizens. Once Ecuador dollarized, hence it adopted a currency which the government could not inflate, it slowed down hyperinflation and ultimately helped to resolve what could have been one of the fiercest economic crises of its history.
Dollarization vs Lira Peg
There is a huge misconception that dollarization is somehow a synonym for pegging the Lira. It is not. The Lira Peg was a monetary policy that served government expansion with little to no risk. The government through pegging the Lira created attractive fake jobs in the public sector and paid for those job via Lebanese pounds backed by big bulks of dollars. The big bulks of dollars were made available through attractive high interest deposits in local banks which were only made possible thanks to the government’s high interest debt with those banks. The government could never default on paying its employees because dollar shortages was a far-fetched concept and in case it would ever happen, they would simply print more Lira notes. This option would not be available in a dollarized economy. The dollar is a currency which the government cannot control but it nonetheless needs. The government normally could have done the same activities under dollarization as it did under the peg but those activities would have consequences on the long run, the government would have to be aware about spending money it cannot create out of thin air, one could say that dollarization would bring skin in the game to the government’s expansion.
Dollarization as A Solution; The Boom & Bust Cycle
“the depression is the “recovery” process, and the end of the depression heralds the return to normal, and to optimum efficiency” — Murray Rothbard (America’s Great Depression)
Austrian Economist Murray Rothbard in his excellent book ‘‘America’s Great Depression’’ perfectly explains how the boom & bust cycle functions (Business cycle), he explains that the beginning of the depression is the end of inflation. The boom phase is the product of inflation made possible through bank credit expansion. Credit expansion could also be defined as increasing the money supply in the economy. Investors easily obtaining loans could consequently lead to a bigger number of malinvestments. This is when we enter the bust phase (called depression if it is severe) during which credit shrinks and therefore lead to deflation (lowering the money supply). The bust is a time when market corrections happen and all malinvestments are liquidated. This surely brings lower prices as the demand for cash increases and the demand for consumer goods and especially capital goods decrease. The unhampered boom & bust cycle sometimes passes by unnoticed, Rothbard makes the case by comparing the 1920 recession with the 1929 depression. Government’s intervention in the money supply by printing a huge amount of unbacked (by gold) dollars during the 1929 bust turned into America’s Great Depression.
In the case of Lebanon, the investor is the government and the easily obtained loans are, ironically, high interest government debt. The Lebanese government engaged in huge malinvestments, normally the bust would require the government to liquidate and the only way it could naturally go through the bust cycle (market correction and liquidation process) is by adopting a currency which it cannot inflate. By dollarizing, the government would be forced to sell its assets and lay off some of its unnecessary employees in order pay its expenditures and more importantly pay off its debt, moreover people will be incentivised to save rather than consume and thus this will reduce prices until it reaches a certain equilibrium. In contrast, lirafying will make it easier for the government to simply print more notes to pay its expenses and hence will bring prices up indefinitely and consequently make it harder for businesses to have a clear pricing model/liquidation process, this will touch both the good investments and the malinvestments (of the private sector) that took place during the boom.
Dollar (Money) Availability in The Market
Artificially printing money will not bring more wealth to the market participants because as mentioned above national money is just a national translation of the dollar in the dollar standard. The economy can simply function with whatever stock of money available at any specific time. If the stock is low, it will be translated in lower consumer goods prices and liquidation that attract money inflow during the bust. When dollars are suddenly not widely available as they used to be in the market, individuals tend to save more and spend less. Spending less will be translated to lower prices, lower prices are ultimately good to get over the bust phase and make the necessary market correction. On the other hand, when hyperinflation of the lira takes place it will prolong the boom, make individuals reluctant on saving, ultimately increase prices and no market corrections will take place.
“Let Them Eat Lira” is a monetary policy based on the availability of lira in the Lebanese economy and hence assumes that this availability brings more wealth to individuals and encourages investment and consumption. However, having more unbacked lira notes does not equate to having “more money” because Lira is simply risky national dollars, the only use of unbacked Lira is to bail out governments when it completely runs out of real money (dollars) and it is forced to pay its government expenditures and more essentially its employees. Dollarization on the other hand, strips away the power of inflating the money supply from the hands of the government and puts the economy under the natural unhampered boom and bust cycle rather than going through the never ending crisis we are currently in.