Being in economic lockdown, millions of jobs have been lost all over the world and has placed some third world economies at the brink of collapse.
In response to this dire event, many governments have tried to introduce a “stimulus plan” in an effort to support an economy that isn’t functioning.
These stimulus plans have totalled over $10 trillion dollars globally, which is enough to solve world hunger at least for the next 30 years. Yet, it still doesn’t seem enough.
The United States alone accounted for $3 trillion dollars and another $1 trillion dollars in stimulus plans is already being discussed in Congress. And an image, in case you are curious about what that looks like on a chart.
So why has Malaysia only given out RM280 billion in stimulus? Are they not aware that the Malaysian economy isn’t fully recovered? Why doesn’t the Malaysian Government simply hand out hundreds of billions more money so that SME’s can stop complaining?
Well, the short answer is, the Malaysian economy isn’t as strong as the U.S. and because of that it doesn’t have the MYR as a world reserve currency.
World Reserve Currency
A reserve currency is a foreign currency that is held in significant quantities by Central Banks around the world. Currently, the USD accounts for 60% of global reserves, the EURO which is second place accounts for 20%, and the MYR doesn’t even reach 1%.
This means there is no desire for the MYR outside of Malaysia.
When studying economics the first thing you learn about is supply/demand. When there is a high supply of oranges but low demand, the oranges will be priced cheaply because no one wants it. Conversely, if there is a low supply of oranges but high demand, the oranges will be highly-priced because of its scarcity.
The same economic principle is true for currencies.
When there is a huge demand for a certain currency, it makes the currency stronger because everybody wants it.
But if no one wants a certain currency then what difference is that currency to monopoly money?
If the Malaysian Central Bank issues more MYR we would see an increase in inflation because there would be more MYR circulating within the economy.
The United States can print trillions of dollars without much risk to inflation simply because there is a huge demand for dollars around the world. This demand from foreign countries helps to give the US Dollar its strength.
If we tried to print the same amount in Malaysia, we would have to risk hyperinflation and an increased in the cost of living defeating the purpose of the stimulus plan (and as if it's not expensive enough already).
Benefits of a World Reserve Currency
If you think that isn’t fair, then you have every right to think so.
By having the USD as a world reserve currency, this gives enormous benefits to the U.S. such as large monetary policy response to economic shutdowns ($600 weekly unemployment checks) and huge influence over global trade.
Of course, having a strong currency isn’t without its drawbacks. Having a strong currency is a huge contributor to why the U.S. experience a $600 billion dollar trade deficit and why many large companies are trying to move their operations to China due to its low-cost labour. Which is why we see Trump accusing China of currency manipulation (making the Yuan cheaper than the US Dollar) and claims that they have stolen millions of jobs.
Who even decided that the US Dollar should be the world reserve currency?
What’s important to understand is that the status of a world reserve currency isn’t given, it’s taken.
Right after World War 2, major economies within Europe were essentially broke as they had to fund the war, and up until then, and due to the British Colonial past, the Pound had served as an international currency.
Due to the weakened state of the European countries and a much stronger state of the U.S., from its now large gold reserves (2/3 of global gold reserves is located in the U.S.) which was acquired during the war, it easily took the world reserve status via the Bretton Woods agreement. Which simply states that governments around the world will peg their currencies to the US Dollar, and the US Dollar will then be pegged to its large gold reserves, therefore giving value to paper money.
Fast forward to today, the Bretton Woods agreement has been discontinued but yet the US Dollar still serves as a world reserve currency. Causing negative sentiment among many countries who are displeased with the US Dollar hegemony for various reasons and have attempted ways to sidestep the US Dollar altogether. The BRIC nations (Brazil, Russia, India, China) for example has tried to negotiate a trade deal among themselves with the use of an alternative currency.
And with China being the world second-largest economy, they are no longer afraid of taking bolder steps in challenging the U.S. strong power narrative as we have seen in recent intensifying trade wars.
Although the MYR doesn’t have the special world reserve currency status I am personally pretty happy about how our private banking sector is being managed. Aside from political corruption, our private banks are pretty healthy, at least from the outside.
We do not see large financial asset bubbles (due to large money printing & greedy risk-taking from banks) in our financial markets as we do in the U.S., simply because our monetary policymakers have been more prudent & reasonable in their decision making.
Even the RM280 billion stimulus plan was partly funded by Central Bank reserves and the Employees Provident Fund (EPF) instead of freshly printed money. Most impressively is the fiscal policy that went with it, where the majority of that money went directly to consumers instead of it all being given out to zombie companies (companies that are so bankrupt they aren’t even expected to repay the loan in full).
Say what you will of the Malaysian Government, but there are some incredibly smart policymakers in charge who clearly know what they are doing and to them, I applaud for doing their best to keep our economy stable, through one of the biggest political fraud in history and now an economy surviving through an epidemic.
However, this doesn’t mean that all is well, the economy is still in a fragile state and when the loan moratorium ends in September we may see a huge increase in default rates which may be the start of bigger problems in our banking system.
But for what will actually happen is beyond my knowledge, we will, unfortunately, just have to wait and see. However, I am cautiously optimistic about the future.