RM pegging, last resort for stability, should be introduced if there’s volatility, firstly as policy which ‘may’ be enforced.
In PART 1 we saw “Consumers, If United, Can Help Fight Rising Prices. . . China’s Zero Covid-19 Policy contributory factor in rising prices worldwide!”.
PART 2 here looks at the different possibilities for the RM stability.
Generally, inflation may be followed by stagflation, recession — even depression — and deflation. All this may help correct the economy in coping with the cyclical boom and bust syndromes.
Economics is a social science which studies human behaviour in the endless battle between unlimited wants and scarce resources which — the latter — have alternative uses.
When I cited this Definition from Samuelson, used in pre-university (Form 6) economics, an economics lecturer at a local private university was very surprised. He had never heard of the Definition. It isn’t possible to study any Discipline without first understanding the Definition. The Definition is like the Thesis Statement for a Discipline.
Economics has become an abstract, complex and sophisticated multi-disciplinary and inter-disciplinary Discipline which has spread far beyond macro-economics and micro-economics. The phenomenon includes new areas like econometrics — a combination of economics, statistics and mathematics — deciphered much easier by the advent of computer-based innovations, artificial intelligence and block chain technology.
There are opportunity costs in economics. For example, if the choice is between buying a burger or seeing a movie for RM10, the opportunity cost — i.e. real cost — for the burger is the movie sacrificed and vice versa. RM10 isn’t the opportunity cost.
The exchange rate and the stock market aren’t the real economy. There’s no addition to productive assets to create wealth through the production of goods and services.
No matter what the exchange rate, what matters is the hours that an unskilled labourer must put in before being able to buy a burger in Malaysia in RM as sold from the menu and, for comparison purposes, his counterpart in the Singapore in S$ as sold from the menu. This isn’t about the McD Index — Google — which may be based on flawed premises. See here.
Those who want everything to “work” should move to hanging Singapore where there’s rule of law only on paper, no electoral integrity, no consent of the governed, no legitimacy and no sovereignty, only hangings which don’t work.
Former Harvard University Economics Professor Dr Subramaniam Swamy, a student and ardent critic of Samuelson and worked with him, takes the cue from innovations — new way of doing old things — adding to GDP growth in the US by as much as 60 per cent per annum.
Swamy cautions that savings, investments, FDI (foreign direct investments), the reliance on low-wage low-skilled foreign labour, and the low-end economic sectors, as outdated approaches in managing economies. He favours much greater government spending, maintaining lower forex reserves at the central bank and giving direct cash injections to the people by the government simply printing more money. He believes that the new money will not result in more inflation. New money, he has argued in numerous videos in YouTube advocating that India pace the US on innovations, will create new consumer demand and increase the supply side of the economy.
The exchange rate and the stock market are speculative activities which benefit only a small group of people, impoverish the majority and increase the gap between the haves and have-nots.
Speculative activities in any form may be no different from legally allowed “criminal” activities or the drug trade made lucrative by laws against it.
Rising prices for food imports in particular may make local production in Malaysia for the world more attractive if the labour can be made available.
Malaysia’s exporters keep their revenue in US$ accounts. In fact, Bank Negara probably allows them to keep only 70 per cent of their revenue in US$. There was a directive on this when the RM weakened the last time.
The same exporters are also involved in imports.
Malaysia should demand payment in RM for exports. Instead of using the US$, we should pay for imports in the currencies of the exporting countries.
That will help reduce speculative activities on the US$.
Most of those speculating against RM are in M’sia, Singapore, other Asean countries, Hong Kong, Macao, Taiwan, China, South Korea, Japan, the UK, Australia, and New Zealand. The local exporters and importers are engaged in speculative activities.
Tengku Razaleigh On The RM
Gua Musang MP Tengku Razaleigh Hamzah has been quoted in the media as predicting US$1 to RM5.50 by the year end. He can only make such a bold prediction based on experience as a speculator. We know from previous media accounts of the RM weakening that others who heavily bet against the RM were Daim Zainuddin, Mahathir Mohamad and Family. The rich get richer, the poor get poorer. See here.
It was not so long ago that Bank Negara was involved in a hare-brained RM30b forex scandal. Bank Negara only exited the market after Washington reportedly cautioned it that central bankers should not be involved in forex speculation. The hedge funds and fund managers ganged up against Bank Negara in the forex market and left it literally bleeding to death.
On paper, as in the stock market, it’s possible to make money in forex by buying — i.e. building up positions — as the market moves up and unwinding the positions as the market heads south. There’s some money made from the difference between the first position taken and its selling price viz. in selling, at the current market price, the first position taken. Next, sell the 2nd position taken.
The greater the capital used in speculative activities, the more the money made, and vice versa.
It’s enough to trade in the US$ only in the forex market since it’s the cross trading currency used in fixing exchange rates.
There’s a case for allowing the exchange rate to move within a flexible but narrow range in a controlled manner but only if there’s volatility. For example, the range can be between US$1 to RM4.20 and US$1 to RM4.40. Even a policy announcement on the matter, hinting of imminent controlled pegging, will help quash speculative activities. The US$1 to RM5.50 fate can be avoided.
The control mechanism can be removed if there’s no longer any volatility.
Controlled pegging, i.e. within a narrow range, should only be enforced if there’s volatility i.e. rapid rises and falls in the exchange rate. It doesn’t matter if the currency goes up or down. What matters is whether there’s volatility. If there’s volatility, exporters, importers, wholesalers and retailers won’t be able to price their products, eateries would have to reprint their menu all the time and employers would be helpless in paying wages.
The speculation against RM, if arising from Ukraine, would cease if the “war” there ends. See here.
A 30 per cent exit tax — this is just a guess, the figure may be much lower — should be imposed if hot money, i.e. that ploughed into the stock market, leaves the country within three months. The 30 per cent can be returned if the hot money returns within three months and errant parties redeem themselves. The stock market has been turned into a giant casino. See here.
Bank Negara should classify the RM as a resource-based currency linked to oil and gas, palm oil, rubber and other commodities.
Malaysia can also import and make payments in RM. The exporters can retain the RM in Malaysia for investments and/for imports.
India has an arrangement with Russia in rupees for oil imports at a 30 per cent discount. Sanctions-hit Russia will retain the rupees in India for investments and/or imports.
India will also pay in rupees for armaments from Russia. The US would like to export armaments to India but can’t compete with Russia.
Money is intrinsically worthless. What’s important is the idea that it represents viz. confidence.
If we accept RM10 from a purchaser for goods handed over and/or service provided, it means that we are “confident” that another seller would accept the same RM10 from us for goods that we need and/or for services sought.
Once that confidence evaporates, we may deal in another currency or gold as the medium of exchange.
We might even go back to the cumbersome barter trade mechanism i.e. “I give you this goat, give me 10 chickens.”
In barter trade, we have to look for someone who has what we need, and who at the same time wants what we have. Alternatively, the person does not want what we have but may be willing to risk taking it anyway.
Gold’s value arises from the fact that the amount of the metal, mined and unmined, has always been limited in quantity. The metal could not cope with the expansion of GDP. The gold standard was dropped and the present mechanism, dominated by the US$, emerged.
What is the current value of gold in US$? In June 2021, the price of an ounce of gold fluctuated from roughly US$1,750 to US$1,900. See here.
The ancient philosopher Aristotle, noted a source, wrote that money must be durable, divisible, consistent, and convenient and that it must possess value — read confidence — in itself.
Gold meets all of these characteristics.
While the relationship between the US$ and gold is important, it can be argued that the US$ is not the only factor that affects the price of the precious metal. Other factors that affect both gold and the US$ are interest rates, inflation, monetary policy, and supply and demand. — New Malaysia Herald
About the writer: Longtime Borneo watcher Joe Fernandez keeps a keen eye on Malaysia as a legal scholar (jurist). He was formerly Chief Editor of Sabah Times. He’s not to be mistaken for a namesake previously with Daily Express. References to his blog articles can be found here.
The points expressed in this article are that of the writer and do not necessarily reflect the stand of the New Malaysia Herald.