Biznomics

Balance Sheet Economics – Part 5: The “Money Printing” Myth

One of the most repeated claims in modern economic debate is the statement that “printing money causes inflation.”

It is repeated in television debates, policy discussions, and even in university classrooms as if it were an unquestionable law of economics. But when we examine how real economies and real production systems actually work, this claim begins to collapse.

The first step is to understand what money actually is.

💰 is not a commodity like oil, copper, wheat, or steel. It is not a product that is consumed in the production process.

💰 is simply a unit of measurement and exchange. It allows goods and services to be priced and traded efficiently within an economy.

Just as a meter measures distance and a kilogram measures weight, money measures value in exchange.
Printing more measuring tapes does not make objects longer. Likewise, increasing the supply of money does not automatically make prices rise.

Inflation occurs when something much more fundamental happens: the supply of real goods becomes constrained. When supply chains for essential commodities are disrupted energy, food, transport, industrial input, the physical availability of goods declines while demand continues. When this occurs, prices rise.

In other words, inflation is fundamentally a supply-side problem, not a monetary or money supply one.

To understand this more clearly, we need to examine how modern manufacturing actually works. Today’s global manufacturing system operates on scale.

Factories are designed to run continuously, often 360 days per year, and typically operate between 70% and 80% of total capacity. This is not accidental. It is the result of a simple economic reality: large fixed costs must be spread across as many units of production as possible.

The mathematics of manufacturing makes this very clear.

Let us consider a simplified example of a manufacturing company producing electric fans.

Assume the factory has the following annual fixed costs:

Factory building lease: $2,000,000
Machinery depreciation: $1,000,000
Management and administrative salaries: $1,000,000

Total annual fixed costs therefore equal $4,000,000.

In addition to these fixed costs, the factory incurs variable costs for each fan produced—materials, labour, and electricity.

Assume the variable cost per unit is $8 per fan.

Now let us examine what happens when production changes.

🚩Scenario 1: Lower Production

Suppose the factory produces 500,000 fans per year.

Variable costs would be:

500,000 × $8 = $4,000,000

Total production cost becomes:

Fixed costs $4,000,000

Variable costs $4,000,000
= $8,000,000

The unit cost of each fan would therefore be:

$8,000,000 ÷ 500,000 = $16 per fan

🚩Scenario 2: Higher Production

Now assume production increases to 1,000,000 fans per year.

Variable costs would become:

1,000,000 × $8 = $8,000,000

Total cost would now be:

Fixed costs $4,000,000

Variable costs $8,000,000
= $12,000,000

The unit cost would therefore fall to:

$12,000,000 ÷ 1,000,000 = $12 per fan

🚩Scenario 3: Near Full Capacity

Now suppose the factory increases output further to 2,000,000 fans per year, approaching its efficient operating capacity.

Variable costs become:

2,000,000 × $8 = $16,000,000

Total cost becomes:

Fixed costs $4,000,000

Variable costs $16,000,000
= $20,000,000

The unit cost now falls even further:

$20,000,000 ÷ 2,000,000 = $10 per fan

What the Mathematics Reveals: Look at what happened to the unit cost as production increased:

💰500,000 units → $16 per fan
💰1,000,000 units → $12 per fan
💰2,000,000 units → $10 per fan

The mathematics reveals a powerful reality of industrial production: The more units produced, the lower the cost per unit. This is the foundation of modern manufacturing/production economics. And corporate finance 101.

Large global manufacturing companies constantly pursue higher production volumes and larger markets precisely because scale reduces costs and increases revenues.

At large production levels, the traditional textbook idea of an upward-sloping supply curve begins to break down.As both demand and supply curve are one. In real world economic thinking too it's visible. From TVs, Fridges, strawberries, clothes to solar panels and now EV cars.

In reality, industrial production often produces a downward-sloping supply relationship, because increasing output lowers average costs and allows firms to offer lower prices while maintaining profitability.

This is why global manufacturing systems constantly seek bigger markets i.e. Market share, and higher output levels because inventory must be disposed of and cash conversions happens from goods. Only then can debt be settled and credit working capital settled.

However, this entire system depends on one crucial condition.

Manufacturers must have reliable access to stable, predictable or fixes costs of production of inputs, including:

• energy
• raw materials
• labour
• transportation
• global supply chains

As long as these inputs remain stable, predictable and accessible, production can expand, costs can fall, and prices remain stable or even decline. But when those supply chains are disrupted when energy prices surge, when shipping routes break down, when key commodities become scarce, production costs rise.

And that is when inflation appears.

Not because "money" exists.

But because the physical production system of the economy has been disrupted.

History repeatedly shows that inflationary episodes are closely tied to commodity shocks and supply chain disruptions. Energy crises, food shortages, war disruptions, and logistical breakdowns create inflationary pressure, not the mere existence of money.

This is why the simplistic claim that “money printing causes inflation” fails to explain how modern industrial economies actually function with such large amounts of money creation. In many advanced economies, broad money supply (M2) is already extremely large compared to GDP.

For example:

🚩United States: ~ 67% of GDP
🚩United Kingdom: ~ 91% of GDP
🚩Japan: ~ 212% of GDP
🚩France: ~ 147% of GDP
🚩Canada: ~ 140% of GDP

Therefore, Money Printing itself does not create inflation and Central Bank is impotent in this environment.

Supply disruptions do.

Until policymakers begin analysing inflation through the lens of production systems, manufacturing scale, and supply chains, economic policy will continue to misdiagnose the true drivers of price instability. And when the diagnosis is wrong, the policy response will inevitably be wrong as well.

Balance Sheet Economics therefore asks a different question. Instead of fearing the expansion of money or balance sheets, policymakers should ask:

Is the economy expanding its productive capacity and strengthening its supply chains? Because in the end, it is production "not money" that determines the real price structure of an economy.

Balance Sheet Economics – Part 4: When the Government Owes Itself

One of the most persistent myths pushed by old-school economists is the idea that all government debt makes a country poorer.

This argument is repeated endlessly in policy circles, television debates, and economic commentary.

But it collapses the moment you look at the actual balance sheet of the state.

Let’s take a simple example.

⭕️ When the Ceylon Petroleum Corporation borrows money from the Bank of Ceylon to finance fuel imports, the traditional economic narrative immediately frames this as “another burden on the government.”

But what does the accounting actually show?

🚩On CPC’s books, the loan is recorded as a liability.

🚩On the Bank of Ceylon’s books, the exact same loan appears as an asset.

Both institutions are owned by the Government of Sri Lanka.

So from a consolidated public sector balance sheet perspective, the government has essentially created a financial claim within its own system.

In plain English, the government has borrowed from itself.

Yet outdated economic frameworks still treat this as if the country has suddenly become poorer.

This is the analytical equivalent of someone moving money from their left pocket to their right pocket and then declaring bankruptcy.

The truth is that not all debt carries the same economic meaning.

Internal public sector debt — where one state institution owes another — is largely an internal accounting relationship within the national system.

The real constraint on a sovereign economy lies elsewhere.

It lies in external liabilities.

These are obligations owed to entities outside the national financial system, such as the International Monetary Fund, the World Bank, and the Asian Development Bank.

Unlike internal obligations, these debts cannot be settled within the domestic balance sheet. They must be repaid in foreign currency, which means they directly impact the country’s external financial position.

This is where the real vulnerability lies for developing economies.

Yet much of the economic debate continues to treat all forms of debt as equally dangerous, ignoring the fundamental difference between internal balance sheet relationships and external obligations.

This confusion leads to misguided policies.

Instead of focusing on how to expand foreign revenue, build productive industries, and strengthen the national balance sheet, policymakers become obsessed with reducing internal financial flows that are often simply assets and liabilities moving within the same system.

The result is a policy environment driven by fear rather than analysis.

Balance Sheet Economics challenges this outdated thinking.

It asks a very simple question:

What does the consolidated national balance sheet actually look like?

Once you begin to view the economy through that lens, many of the dramatic claims about government debt begin to look less like economic science and more like theories left behind by another era.

Until policymakers move beyond these 1930s-style economic frameworks, countries like Sri Lanka will continue to misdiagnose their problems and apply solutions that weaken growth instead of strengthening the national balance sheet.

And that is a mistake the country can no longer afford to make.

Dr Kenneth De Zilwa





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Balance-Sheet Economics – Part 3-The Economy Is Not a Theory. It’s a Balance Sheet.

Most traditional economists view the economy through three numbers:

📣GDP growth
📣Inflation
📣Interest rates

If growth slows, they lower interest rates. If inflation rises, they raise them. But this approach misses the real engine of the economy, balance sheets.

Every economic actor operates through one:

📍Households
📍Businesses
📍Banks
📍Governments

Each has assets and liabilities.

When assets rise relative to debt, confidence grows. People borrow, invest, and expand.

When debt dominates assets, behavior changes. People stop taking risks and begin repairing their finances.

This shift in behaviour can determine the direction of entire economies.

A powerful example came from Japan after the collapse of the .

During the 1980s, Japanese real estate and stock prices soared. Companies borrowed heavily using these inflated assets as collateral. But when the bubble burst, corporate balance sheets were destroyed.

📌Land prices collapsed.
📌Equity values fell.
📌Debt remained.

Suddenly, many companies had more liabilities than assets. Instead of investing and expanding, businesses began aggressively paying down debt. Even profitable companies focused on reducing leverage.

This behavior was studied in depth by economist , who described it as a balance-sheet recession. Despite near-zero interest rates, companies refused to borrow.

Why?

Because their priority was survival, not expansion.

The same dynamic appeared during the .

In the United States, the collapse of the housing market wiped trillions from household balance sheets. Families suddenly found their mortgages larger than the value of their homes.

As a result:

📍Consumers cut spending
📍Banks tightened lending
📍Businesses delayed investment

The financial system had to repair its balance sheets before normal growth could resume.

This principle also applies to countries.

When a nation's debt grows faster than its productive assets, the national balance sheet weakens.

The crisis experienced by in 2022 in Sri Lanka reflected this imbalance. Foreign debt obligations (NIIP) rose while foreign exchange generating assets, such as exports and productive industries, did not grow at the same pace. The result was a severe balance sheet mismatch at the national level. Understanding economics through balance sheets changes how we interpret crises.

Economic slowdowns are not always about demand or interest rates. Often they are about damaged balance sheets across households, companies, banks, and governments.

When balance sheets are strong, economies grow naturally. When balance sheets weaken, growth slows no matter how many policies are introduced.

Because in the real world:

📚Economies do not run on theories.
📚They run on balance sheets.

— Dr. Kenneth De Zilwa
Biznomics Digital

The Debt Trap Economists Forgot

Traditional economic models treat recessions like temporary slowdowns in spending. Lower interest rates, stimulate demand, and the economy will bounce back. But balance-sheet economics tells a different story. When households, companies, or governments accumulate too much debt, the economy enters what economists call a balance-sheet recession a concept popularized by Richard Koo.

In this environment, people stop trying to maximize profit.
Instead, they try to repair their balance sheets. This changes everything.
🚩 Companies stop borrowing to expand.
🚩Families stop spending and start saving.
🚩Banks become cautious lenders.

The entire economy shifts from growth mode to debt reduction mode. And this is where many orthodox policies fail. Central banks assume that lowering interest rates will encourage borrowing.
But when balance sheets are damaged, nobody wants more debt even if money is cheap.
Japan experienced this after the Japanese asset price bubble collapse.

Despite near-zero interest rates for decades, businesses continued paying down debt instead of investing.

The result?
🚩Low growth.
🚩Weak demand.
🚩And persistent economic stagnation.

This is why focusing only on inflation targeting and interest rates misses the real issue.

The true driver of economic cycles is balance-sheet health. When balance sheets are strong → credit expands → economies grow.

When balance sheets are weak → debt repayment dominates → economies slow down.

This lesson matters enormously for emerging economies like Sri Lanka.
If policymakers focus only on fiscal austerity and tight monetary policy while households and businesses are already trying to repair their balance sheets, the result can be economic suffocation rather than recovery.

In other words:

You cannot grow an economy while simultaneously forcing every sector to deleverage.
The solution is not simply austerity or stimulus. It is balance-sheet repair combined with strategic growth investment. Because at the end of the day:

Real Economies don’t run on theories. They run on balance sheets.

— Dr. Kenneth De Zilwa