I wish to write on the behaviour of the ringgit and what we should and should not do in managing it.
1. Global Structural Change
I wish to emphasise that it is not only the ringgit that is weak but all currencies except probably that of the US and the UK.
This is a major change in the global economic fundamentals, or a global structural change.
The major change is that the US has finished with quantitative easing (QE) of the last three decades in order to shore up the US economy which was really in trouble. The US could and can print money to buy goods and services for free because everybody else is willing to hold the US dollar as the currency reserve. Japan and then China were the main accumulators where their people worked their lives off in return for a miserable living wage and inflation whilst their corporates became cash rich. The QE exported inflation to the whole world as the US tried to steal resources from everybody else for its own consumption.
But the real improvement in the US economy came when the US used its trump card of introducing shale gas, as a means to fight off Russia and possibly the Middle East. The US increases the supply of oil in the global market and this cuts the price of oil by almost half.
The two major effects are: (a) the US economy recovers because of the increase in output chiefly from shale gas production; and (b) the drop in the cost of doing business in the US and elsewhere.
For major oil producing countries, particularly the Middle East and Russia including Malaysia, oil revenue drops and this cuts government revenues and raises government deficits. This creates new budgetary problems and how they are tackled have great political implications as they will affect deeply the pockets of the average consumer.
Since the interest rate has been near zero for so long, the only movement for it is up. The question is when is the interest rate going to go up. The answer is" "Anytime now, when the US economy has seen to have recovered." As the UK economy has also been improving as a result of austerity, the UK interest rate is also set to rise as well.
Since the rest of the world seems so miserable, with China and Australia down and the marginal EU economies in debt troubles, the US and the UK seem to be the only two bright lights in the world for those with cash.
2. Regional Currencies
It is a bane of the economic policy of developing countries that they see the stock market as the main measure of the libido of an economy and hence political cleverness in economic management. This is utter rubbish.
The performance of the stock market is not the direct measure of the healthy of an economy. There is an indirect and tenuous relationship between the stock market and the fundamentals of an economy.
But there is a direct relationship between the stock market and the liquidity of an economy. The stock market will always go up whenever there is an increase in the excess liquidity of the economy, in the economy is closed or there are currency controls to keep the excess liquidity within the domestic system. If there are no foreign exchange controls, then an excess liquidity or an increase in excess liquidity will also lead to a depreciation of the currency.
It is therefore inevitable that when there are no more fools in the stock markets, the speculators will sell off the market and take their money and their profits out. A weak stock market and a weak currency always go hand in hand.
(Likewise, we have heard so much foolishness in the past when increased speculation in the stock market was welcomed as a sign of a strong economy argued on the simultaneously strengthening of the currency just because foreign fund managers were coming into the local market to cream off the local speculators.)
The worst that we have seen about increased excess liquidity was when banks and financial institutions were left to lent indiscriminately to fund asset inflation in real estate which are being used as collateral for the loans. There is no great madness than this, to allow banks to create their own collateral values for their loans at the expense of the average savers who were and are being paid nothing for their austerity and thrift.
No doubt the global impact of the US QE has been so great that it would have been impossible for local monetary authorities to sterilise short-term capital inflows. But there must be attempts to limit and restrict these disruptive flows as much as possible, as the police for examples must try to reduce a spate of crimes no matter how rampant. There were no signs of warnings and lecturing to reckless bankers, and everybody seemed to enjoy surfing the wave so long as they have a nice surf board to ride. Everybody else simply got drowned in high waters.
So the speculative funds which have had enough of ravaging the regional bourses, look up and see the two bright spots in the distance and decide to find new pastures. This the another global structural change in thinking.
3. Speculative Momentum
When we are talking about a major structural change, we are not talking about a person going to the toilet during a show in a theatre. We are talking about the entire audience leave the theatre because the show is over. One by one, they got up of their seats and head for the exit door.
Because of the enormous size of the audience, because the show was good, there appears to be a major exodus. And this probably brought the index to 4.
Well, let's see who is going to shout "Fire!"
You know it is very tempting to make that shout. How else can one think, to see everybody leaving, and may be you want to capitalise on it. You are way back in the queue and you have an urgent need to go to the toilet. You are dying for a cold drink. Whatever. You want to move the crowd faster. You want to change the scenario for your own gain.
Very tempting.
4. Currency and Democracy
If you believe in freedom of movement, in freedom of choice, in freedom of gains and losses, then you should let the ringgit be.
The ringgit had been glorious, and went to as high as 2.50. The many waves of speculative foreign inflows had made everybody in Malaysia rich, lifting the standard of living to unprecedented heights and be among the best consumers in the world. We have paid for all these with our oil money and many Malaysians now have the luxury of freely sprouting their views without thinking, though not without agendas. We have learned to be wealthy without working, though not worthy maybe.
Where the ringgit is today is a good reflection of the underlying fundamentals of the economy. Not exactly but thereabouts. More swings are to be expected as the currency market tries to find a fair value for the ringgit. This takes time. Many factors have to be considered, factors now and factors in the future.
At the moment, the last show is over and let's see what is the new show going to be. In the meantime, we all adjourn to another venue.
There are calls for us to get our act together. To start a new, not to replay an old one. The squabble is now over who is going to be the main actor, the star. There is intense competition among producers, over genre as well. Tragedy? Farce? Special effects?
The last thing we should go for is to shut the door and lock those who haven't exited inside. This will create a major loss of confidence.
The call to fix the exchange rate is not without its cost. If there is really a major exodus, then you are threatening to deplete foreign currency reserves which when it is depleted will mean a freefall for the currency because then there will be a total loss of confidence in the ability of the central bank to defend it under any circumstance.
5. Independence of the Central Bank
The independence of the central bank is a sacred doctrine of economists who wish to control inflation.
The head of the central bank is usually called the governor, which means almost like a head of this monetary world.
In principle, the governor of the central bank is to be able to say to the finance minister whose job is to manage the finances of the state that their is a limit to the spending by the government. The government of any country is a sovereign entity but not the head of the government, say the prime minister. The prime minister is keen to stay in power as long as he can, if there is no limit by law. As economies go through cycles, there is a tendency for the head of government to spend his way out of his economic problems. The job of the central bank government is to define that limit for that person heading the government.
We have already compromised the fiscal integrity of this country by having the prime minister taking up also the position of the finance ministership when these two posts should be separated.
If the independence of the central bank is lost, then we fear that the consequences will be dire: high inflation and a weak currency. Socially, poverty and confused social groups.
We need the governor of the central bank to be independent and strong.
6. State of Economy
We have gone past our golden age. The good life of a simple plantation life is over. The good life of an oil-rich economy is over. We have spent it all and we have destroyed the goose that laid the golden egg. We need to find a new economic force.
I am tired. Maybe we shall deal with this another time. Big topic.
Thursday, August 13, 2015
Thursday, August 6, 2015
Global Economic Structural Change
Sorry for the big title. The purpose is to give an alert that what has been festering is likely to happen later this year or early next year. The US has decided to stop printing money - thank God!, the inflation and the arms rampage.
The next thing that is going to happen is that interest rates in the US and the UK are going to rise. This is a major structural change for the world which had been enjoying low interest rates and an abundant supply of money and bank loans.
That is why the US dollar and the British pound are strengthening steadily. Is this high already? Will it reverse soon? Because we think that this is a major structural change for the world, therefore, we expect the strengthening to go on further.
How long will it go on for? Do not think of small incremental changes. Small incremental changes are changes in the margin when there is no structural change. Structural changes bring along big sizeable changes.
Have we seen big sizeable changes in the world lately? Yes. The massive inflation around the world. The awakening of the China economy. The cooling of the China economy. The asset bubble in China. The burst of the asset bubble in China. The war in the Middle East, funded by the quantitative easing and the buoyancy of the arms industry. The coming onstream of shale gas, a major strategic and structural change by the US to shore up its economy. The sharp drop in the price of oil. The sharp drop in the price of gold. The economic disaster of fringe EU countries. The coming of 3D printing. The bowing down of Windows in Windows 10.
The debate now is whether the US and UK economies have recovered strong enough for interest rates to go up. Of course, from near zero, everything else would look big. But it is very important that money has a positive value, and we can start with savings deposit rates of at least 3% pa going all the way up to 6% pa. The mark-up should be small because banks are now transacting in massive volumes, which means that base lending rates should be about 4.5% pa to 7.5% pa. I think depositors and borrowers are tired of paying for the incompetence of banks and their reckless lending. This are restraints that central banks can stipulate for those institutions they take care of - what we used to call "prudence" in the old days.
I will brace for the sustained strengthening of the US dollar and the British pound against the ringgit, firstly, because I think the local central bank will not follow those interest rate increase when they come for fear of upsetting the performance of the vulnerable local economy and, secondly, because there is nothing to invest the money kept at home apart from buying another apartment.
The local politicians have to get their act together, whoever is going to be in government. There is no point shaking the confidence of the entire society and economy just for the sack of being in power. There is no glory in that power when we have laid the whole environment in waste. This country is built on hard work, sweat and tears in hope of a better future. Without this hope and commitment, there is no investment and hence no economic prosperity, no matter how much investments the government is going to pour in. The government is only a small group in the entire society.
The next thing that is going to happen is that interest rates in the US and the UK are going to rise. This is a major structural change for the world which had been enjoying low interest rates and an abundant supply of money and bank loans.
That is why the US dollar and the British pound are strengthening steadily. Is this high already? Will it reverse soon? Because we think that this is a major structural change for the world, therefore, we expect the strengthening to go on further.
How long will it go on for? Do not think of small incremental changes. Small incremental changes are changes in the margin when there is no structural change. Structural changes bring along big sizeable changes.
Have we seen big sizeable changes in the world lately? Yes. The massive inflation around the world. The awakening of the China economy. The cooling of the China economy. The asset bubble in China. The burst of the asset bubble in China. The war in the Middle East, funded by the quantitative easing and the buoyancy of the arms industry. The coming onstream of shale gas, a major strategic and structural change by the US to shore up its economy. The sharp drop in the price of oil. The sharp drop in the price of gold. The economic disaster of fringe EU countries. The coming of 3D printing. The bowing down of Windows in Windows 10.
The debate now is whether the US and UK economies have recovered strong enough for interest rates to go up. Of course, from near zero, everything else would look big. But it is very important that money has a positive value, and we can start with savings deposit rates of at least 3% pa going all the way up to 6% pa. The mark-up should be small because banks are now transacting in massive volumes, which means that base lending rates should be about 4.5% pa to 7.5% pa. I think depositors and borrowers are tired of paying for the incompetence of banks and their reckless lending. This are restraints that central banks can stipulate for those institutions they take care of - what we used to call "prudence" in the old days.
I will brace for the sustained strengthening of the US dollar and the British pound against the ringgit, firstly, because I think the local central bank will not follow those interest rate increase when they come for fear of upsetting the performance of the vulnerable local economy and, secondly, because there is nothing to invest the money kept at home apart from buying another apartment.
The local politicians have to get their act together, whoever is going to be in government. There is no point shaking the confidence of the entire society and economy just for the sack of being in power. There is no glory in that power when we have laid the whole environment in waste. This country is built on hard work, sweat and tears in hope of a better future. Without this hope and commitment, there is no investment and hence no economic prosperity, no matter how much investments the government is going to pour in. The government is only a small group in the entire society.
Wednesday, August 5, 2015
Top Five Regrets Of The Dying
This is a copy of an article by Susie Steiner in the Guardian published three years ago on
Bronnie Ware is an Australian nurse who spent several years working in palliative care, caring for patients in the last 12 weeks of their lives. She recorded their dying epiphanies in a blog called Inspiration and Chai, which gathered so much attention that she put her observations into a book called The Top Five Regrets of Dying.
Ware writes of the phenomenal clarity of vision that people gain at the end of their lives, and how we might learn from their wisdom. "When questioned about any regrets they had or anything they would do differently," she says, "common themes surfaced again and again."
Here are the top five regrets of the dying, as witnessed by Ware:
1. I wish I'd had the courage to live a life true to myself, not the life others expected of me.
"This was the most common regret of all. When people realise that their life is almost over and look back clearly on it, it is easy to see how many dreams have gone unfulfilled. Most people had not honoured even a half of their dreams and had to die knowing that it was due to choices they had made, or not made. Health brings a freedom very few realise, until they no longer have it."
2. I wish I hadn't worked so hard.
"This came from every male patient that I nursed. They missed their children's youth and their partner's companionship. Women also spoke of this regret, but as most were from an older generation, many of the female patients had not been breadwinners. All of the men I nursed deeply regretted spending so much of their lives on the treadmill of a work existence."
3. I wish I'd had the courage to express my feelings.
"Many people suppressed their feelings in order to keep peace with others. As a result, they settled for a mediocre existence and never became who they were truly capable of becoming. Many developed illnesses relating to the bitterness and resentment they carried as a result."
4. I wish I had stayed in touch with my friends.
"Often they would not truly realise the full benefits of old friends until their dying weeks and it was not always possible to track them down. Many had become so caught up in their own lives that they had let golden friendships slip by over the years. There were many deep regrets about not giving friendships the time and effort that they deserved. Everyone misses their friends when they are dying."
5. I wish that I had let myself be happier.
"This is a surprisingly common one. Many did not realise until the end that happiness is a choice. They had stayed stuck in old patterns and habits. The so-called 'comfort' of familiarity overflowed into their emotions, as well as their physical lives. Fear of change had them pretending to others, and to their selves, that they were content, when deep within, they longed to laugh properly and have silliness in their life again."<<
As for this blogger, the simplest way to live is to live the life of a liberal and celebrate liberty. After all, John Stewart Mill defined liberty as (my paraphrase) "the right to live our life in the best way as we see fit without preventing others from doing the same."
In the current climate of ours, we are looking at political infighting. Honesty is the topic of discussion among thieves. And sometimes, honour.
But I am nothing. So, just let me do what I wish to do, so long as I do not prevent you from what you want to do. Likewise, you should not prevent me from doing what I want to do, so long as you get to do what you wish to do.
I think wish for peace over violence, no matter how great the treachery. I can live with treachery but not in violence.
Tuesday, July 7, 2015
China Market Tumble
The China stock market is tumbling by nearly 30% after a year of run-ups of 150%.
This is nothing. Say, if the run-up is from 100 to 250 and if we consider that the run-up had been pure fluff, i.e., "leverage retail investors, egged on by bullish statements by official state media (Bloomberg), then for the index of 250 to return to 100 is 60%. Technically, at 30% down, there is still a lot of fluff.
We are talking in aggregate. If we were to think in spectrum, there may be stocks which have been super-hyped while some may be slow and steady. In the end, in the market, the focus is always on the so-called blue chips, if only we know what they are.
But the official reactions to the market is not something which Malaysians have not seen before.
This is the same old story where the government of a country gets involved in the workings of the stock market, on the illusion that the buoyancy of the stock market is a good indicator that the government of the day is clever.
Their first instinct is to try to intervene in the market, to prevent the market from adjusting to the fundamentals.
In the Malaysian case, they used government funds to prop up the market, prevent people from selling, prevent people from taking their money out of the country (when they had happily welcomed the short-term capital inflows).
No doubt, China may attempt to repeat these little silly tricks. The major consequence will be that the market will become less "real" in the sense of private-sector market determined, and more of a reflection of the delusion of the government of its perceived libido.
This is nothing. Say, if the run-up is from 100 to 250 and if we consider that the run-up had been pure fluff, i.e., "leverage retail investors, egged on by bullish statements by official state media (Bloomberg), then for the index of 250 to return to 100 is 60%. Technically, at 30% down, there is still a lot of fluff.
We are talking in aggregate. If we were to think in spectrum, there may be stocks which have been super-hyped while some may be slow and steady. In the end, in the market, the focus is always on the so-called blue chips, if only we know what they are.
But the official reactions to the market is not something which Malaysians have not seen before.
This is the same old story where the government of a country gets involved in the workings of the stock market, on the illusion that the buoyancy of the stock market is a good indicator that the government of the day is clever.
Their first instinct is to try to intervene in the market, to prevent the market from adjusting to the fundamentals.
In the Malaysian case, they used government funds to prop up the market, prevent people from selling, prevent people from taking their money out of the country (when they had happily welcomed the short-term capital inflows).
No doubt, China may attempt to repeat these little silly tricks. The major consequence will be that the market will become less "real" in the sense of private-sector market determined, and more of a reflection of the delusion of the government of its perceived libido.
Greece
The referendum vote of "No" yesterday was no to austerity drive which the creditors demanded if they were to lend more money to Greece. The call for austerity is part of the economic thinking that if a country needs to borrow all the time in order to keep going on, then there is a structural change and one way to restructure is to cut spending and reduce the deficit.
But with many people without jobs, further austerity will mean that more people will be made unemployed and social benefits will have to be cut.
Being in the eurozone means that the Greece economy is tied to the euro whose value is determined basically Germany, the strongest economy and probably the most powerful partner of eurozone. This means that, for Greece, the currency it uses (the euro) is too strong for it which makes it uncompetitive. The major consequence is slow growth or recession and high unemployment.
If Greece gets out of the euro, its own currency (the drachma) will probably depreciate sharply and this could be a boost to its economy, at least to tourism. (Presuming that the current financial fiasco, the banks not opening their doors, ATMs without cash and capital controls are not scaring tourists from the Mediterranean paradise.)
I think the creditors of Greece should cancel off most of the debt (as called for by the IMF) because it is only money and this could save lives, in as much as possible so long as the creditors do not themselves get into bankruptcy.
I think Greece should get out of the eurozone but continue to be part of the European Union, as Britain is.
Wednesday, June 17, 2015
Morality & Rights
If we were to live alone by ourselves in isolation in the middle of nowhere, we can practically do anything we like and we will not bother anyone else. Except probably ourselves only because, maybe, we want to live long - but how long is long we would not know if we were to be all alone - or even healthily, if we know what it is to be healthy if we were to be all alone. There will be no morality and we will have complete rights.
Morality is an issue that comes up when we try to live together in peace and harmony with each other. We try not to offend others nor do we want others to offend us. That is why all communities have their own sets of manners and courtesies and customs. The social rules are usually not made up artificially but after many years of trial and error and the consent of generation after generation.
A community will develop along a strict code of conduct when somebody decides to put down all the commonly acknowledged rules on paper (or carved in stone). This strict code of conduct is likely to be biased, religiously or politically. It will be followed until it reaches its golden age. This happens in the high societies of India, China, Europe and even the more ancient tribal societies of Africa, South America and even Asia.
In their golden age, the societies stagnates because they could not change anymore. Everything has become so rigid that every deviation is immediately eliminated. The form of social manners is unchanging.
This stagnation can go on for a long time, but eventually it will break down. The gene pool deteriorates and society degenerates. Or, new thinking is introduced through interactions with different societies. New ideas are formed that either challenge the existing orthodoxy or new ideas that no one has ever thought of before. The line between right and wrong becomes thinner and blurrier and sometimes disappears completely. As this happens, there is less compulsion from the moral police and more exertions of individual rights.
In modern societies, it is the sacred right of individuals to defend common sense and fight against the tyranny of the ignorant. The ignorant are usually self-serving persons who exercise the little power that they have to the great annoyance and irritation of everyone else whom they can bully. They do not know what they are doing but they wish others to know that they are important because they have this power, small though it may be.
Ignorance is everywhere and the only solution is honesty, integrity, and common sense which all together comes under the word "wisdom".
Morality is an issue that comes up when we try to live together in peace and harmony with each other. We try not to offend others nor do we want others to offend us. That is why all communities have their own sets of manners and courtesies and customs. The social rules are usually not made up artificially but after many years of trial and error and the consent of generation after generation.
A community will develop along a strict code of conduct when somebody decides to put down all the commonly acknowledged rules on paper (or carved in stone). This strict code of conduct is likely to be biased, religiously or politically. It will be followed until it reaches its golden age. This happens in the high societies of India, China, Europe and even the more ancient tribal societies of Africa, South America and even Asia.
In their golden age, the societies stagnates because they could not change anymore. Everything has become so rigid that every deviation is immediately eliminated. The form of social manners is unchanging.
This stagnation can go on for a long time, but eventually it will break down. The gene pool deteriorates and society degenerates. Or, new thinking is introduced through interactions with different societies. New ideas are formed that either challenge the existing orthodoxy or new ideas that no one has ever thought of before. The line between right and wrong becomes thinner and blurrier and sometimes disappears completely. As this happens, there is less compulsion from the moral police and more exertions of individual rights.
In modern societies, it is the sacred right of individuals to defend common sense and fight against the tyranny of the ignorant. The ignorant are usually self-serving persons who exercise the little power that they have to the great annoyance and irritation of everyone else whom they can bully. They do not know what they are doing but they wish others to know that they are important because they have this power, small though it may be.
Ignorance is everywhere and the only solution is honesty, integrity, and common sense which all together comes under the word "wisdom".
Thursday, June 11, 2015
Ringgit
Since he mentioned it, I thought I might just as well add in my bit of understanding of our recent economic history.
I disagree that the weakening of the ringgit in the past during his tenure was due to currency traders who were speculating on the ringgit in order to make money out of the ringgit. Of course, it is the business of currency traders to make money out of currency trading, either up or down, but not unchanged and hence the currency trading business was killed (along with a major portion of the financial industry) with the subsequent currency peg. The currency controls that were installed to reduce the outflow of currency were at the very centre of the subsequent loss of investor confidence in Malaysia as a country where you can trade without the rules being changed halfway at the convenience of top politicians. The loss of investor confidence has not recovered even until today, so that the slight sign of trouble is a signal to get out of this country, literally.
The ringgit was trading at around 2.70 against the US dollar for a while in late 1980s. When money flowed in to invest in privatised infrastructure companies, the ringgit went up to 2.50 and our foreign reserves swelled. Everybody was happy and congratulated themselved on a job well-done in running a successful economy. The stock market was up because of the inflow of short-term speculative funds and the government was using this temporary to fund long-term infrastructure. In so far as the foreign stock traders are concerned, they were waiting for the signal to get out of the Malaysian stock market. The signal came from Thailand when the Thai Farmers Bank could not pay back an offshore loan syndication for a private real estate development. The Thai central bank refused to support the Thai Farmers Bank and this was rumoured as the Thai central bank running out of money. All the stock investors from Europe bailed out, or tried to bail out out of Asia and this exodus of funds is now called the Asian Financial Crisis of 1997.
It must be obvious when funds which had been accumulating year by year for twenty years suddenly wanted to exit within a day or a week, it is similar to the crowd trying to rush out of a cinema in panic. As the central bank refused to support the currency, the value of the currency dropped. This gave opportunity to currency traders to short the ringgit in the hope of selling ringgit cheap and honouring the trade with cheaper rinngit later. But the market should be self correcting because once the currency traders think that the currency cannot go down any more, they will then have to quickly reverse their position and in the process strengthening the ringgit subsequently. Rumour had it that the policymaker panicked and was angry and slapped his close buddy who shorting the ringgit as well. Then he imposed the peg.
It is incredible that Malaysia, which has undergone a major economic policy change to open up the economy and to encourage growth such as that is now such a deficit of labour that we have to import many foreign workers for almost all economic sectors, has been suffering from a weakening of the ringgit since 1997. Why couldn't the ringgit go back to 2.50 or 2.70?
It is clear that there has been a persistent outflow of funds from Malaysia ever since we opened up the economy for rapid growth since the late 1980s. While we have seen the rapid development of real estate as plantation lands are converted, we are also seeing a heavy congestion of our roads as we expand our national car project. Instead of encouraging savings and investment, we are encouraging consumption and speculation in the stock market and the property market. The main driver for the economy seems to be the government spending itself to bankruptcy.
Could it be that the money that is being made from consumer indebtedness and government spending is causing the outflow of funds as Malaysia becomes less an attraction for investment as it is being overpriced?
I disagree that the weakening of the ringgit in the past during his tenure was due to currency traders who were speculating on the ringgit in order to make money out of the ringgit. Of course, it is the business of currency traders to make money out of currency trading, either up or down, but not unchanged and hence the currency trading business was killed (along with a major portion of the financial industry) with the subsequent currency peg. The currency controls that were installed to reduce the outflow of currency were at the very centre of the subsequent loss of investor confidence in Malaysia as a country where you can trade without the rules being changed halfway at the convenience of top politicians. The loss of investor confidence has not recovered even until today, so that the slight sign of trouble is a signal to get out of this country, literally.
The ringgit was trading at around 2.70 against the US dollar for a while in late 1980s. When money flowed in to invest in privatised infrastructure companies, the ringgit went up to 2.50 and our foreign reserves swelled. Everybody was happy and congratulated themselved on a job well-done in running a successful economy. The stock market was up because of the inflow of short-term speculative funds and the government was using this temporary to fund long-term infrastructure. In so far as the foreign stock traders are concerned, they were waiting for the signal to get out of the Malaysian stock market. The signal came from Thailand when the Thai Farmers Bank could not pay back an offshore loan syndication for a private real estate development. The Thai central bank refused to support the Thai Farmers Bank and this was rumoured as the Thai central bank running out of money. All the stock investors from Europe bailed out, or tried to bail out out of Asia and this exodus of funds is now called the Asian Financial Crisis of 1997.
It must be obvious when funds which had been accumulating year by year for twenty years suddenly wanted to exit within a day or a week, it is similar to the crowd trying to rush out of a cinema in panic. As the central bank refused to support the currency, the value of the currency dropped. This gave opportunity to currency traders to short the ringgit in the hope of selling ringgit cheap and honouring the trade with cheaper rinngit later. But the market should be self correcting because once the currency traders think that the currency cannot go down any more, they will then have to quickly reverse their position and in the process strengthening the ringgit subsequently. Rumour had it that the policymaker panicked and was angry and slapped his close buddy who shorting the ringgit as well. Then he imposed the peg.
It is incredible that Malaysia, which has undergone a major economic policy change to open up the economy and to encourage growth such as that is now such a deficit of labour that we have to import many foreign workers for almost all economic sectors, has been suffering from a weakening of the ringgit since 1997. Why couldn't the ringgit go back to 2.50 or 2.70?
It is clear that there has been a persistent outflow of funds from Malaysia ever since we opened up the economy for rapid growth since the late 1980s. While we have seen the rapid development of real estate as plantation lands are converted, we are also seeing a heavy congestion of our roads as we expand our national car project. Instead of encouraging savings and investment, we are encouraging consumption and speculation in the stock market and the property market. The main driver for the economy seems to be the government spending itself to bankruptcy.
Could it be that the money that is being made from consumer indebtedness and government spending is causing the outflow of funds as Malaysia becomes less an attraction for investment as it is being overpriced?
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