Friday, September 26, 2008

PEGGING


As posted by Dr. Mahathir Mohamad at www.chedet.com on September 25, 2008 2:19 PM

1. I am not in the business of advising the Government. When I mentioned the advisability of pegging the Ringgit, it was in answer to a question posed by a reporter. If the Government noticed the report I would feel flattered.

2. Pegging currencies is not as easy as it sounds. The whole thing must be studied very carefully. Even getting agreement by a select panel is not easy. A decision made on the spur of the moment that pegging is not possible cannot really reflect the assessment made together with experts in consultation.

3. Pegging need not be always with the US Dollar. But the fact that the US Dollar is currently not stable is no reason why the idea should be summarily dismissed.

4. There can be other options. Other more stable currencies can be used or a basket of currencies may be used to reduce extreme volatility.

5. The US Dollar is backed by nothing, not even reserves in foreign currencies and gold which other countries hold in order to back their own currencies. The US is a bankrupt nation which means it is not in a position to provide foreign currency backing for its money.

6. The gold in Fort Knox has been depleted long ago and the pegging to gold of a certain amount as agreed to at the Bretton Woods has been done away with by President Nixon. No more gold standards. Yet the US Dollar still commands a certain value in the market. It is still being used for trade payments. This in fact gives the US Dollar a certain value even though the value, in exchange rate terms may change.

7. If the US Dollar is not used in international trading, it will have no value at all. This will of course hurt a lot of countries including Malaysia which carry substantial sums of US Dollar as reserves. Countries like China, Saudi Arabia and tiny Singapore would want to support trade payments made in US Dollar. They do not want their huge reserves of US Dollar to become worthless.

8. What we see here is the importance of international trade payments in sustaining the value of a currency.

9. Long, long ago I suggested the use of a special currency for trade. The currency should be equal in value to a fixed amount of gold. It should not be used domestically as each country would have its own currency pegged to the special trading currency.

10. The price of gold may go up and down but we know that the price of gold today is more than, say, 30 years ago. If we keep gold long enough we will eventually see it appreciating. It is not as volatile as currency notes.

11. So gold is an ideal standard for a trade currency. Effectively we would be going back to the Gold Standard, both for the trading currency and the domestic currency. For the domestic currency the rate against gold can change in keeping with inflation.

12. It was suggested that we call this trading currency the "dinar". Transactions would of course not be in solid gold dinars but with equivalent papers. It is not practical to carry around so much gold dinars but this will not be necessary if a country's export to another country and its import from that country is fairly balanced and only the difference need to be paid.

13. I am not an expert in this area but we can get experts to study whether pegging or the gold dinar are feasible. I would not dismiss the eficacy of these so easily.

14. Perhaps I can make a ridiculous suggestion. Why not make all Malaysian trade payments in Malaysian Ringgit?

15. We are a big trading nation. We export more than 200 billion Ringgit worth of raw material and manufactured goods and we import slightly less than that. Traders cannot just ignore us or boycott us. They need our exports and they need to sell their products to us.

16. All we need to do is to demand payment in Malaysian Ringgit for our exports. We can require payment for our imports in Ringgit according to the current value in an international trading currency or gold.

17. If we do this there will be a constant demand for Ringgit and this will keep the value of the Ringgit at a certain level which we can fix, taking into consideration factors which influence its value.

18. This may sound like a ridiculous suggestion. But not being a trained economist or financier I can allow myself the privilege of unorthodox thinking.