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Malaysia's Mahathir Mohamed Goes For Gold

Last week in Tokyo, while addressing the 25th International Conference on the Future of Asia (Nikkei Conference), Malaysia’s Prime Minister, the venerable Mahathir Mohamad, went for gold. He brought the audience to attention by proposing an Asian currency linked to gold. Dr. Mahathir argued that such a currency would promote regional stability, while avoiding the so-called “dollar trap” (read: dollar dependency). This time around, the ninety-three-year-old Mahathir is onto something—something that would deliver its advertised benefits.

Dr. Mahathir’s comments on currencies are, of course, legendary. Remember the Asian Financial Crisis of 1997-1998? That is when Prime Minister Mahathir lashed out against currency speculators, particularly George Soros, and imposed capital controls on September 1, 1998 to “save” the hapless Malaysian ringgit from a meltdown. He trumpeted the plan, proudly proclaiming that there “would be no more foreign exchange trading.”

Initially, the controls were met with some praise, even among some economists. But, assessments after the controls were lifted on September 1, 1999 were decidedly negative. For perhaps the clearest and most scathing critique of Malaysia’s capital control legacy, one should pull David DeRosa’s book, In Defense of Free Capital Markets, off the shelf.

Well, as they say, “time heals,” and with time Dr. Mahathir has turned away from what turned out to be a phony currency quick fix to a real elixir—indeed, the real thing: gold.

Just how could Dr. Mahathir implement his idea? He could start in Malaysia. The Malaysian ringgit would be changed from a fiat currency to a gold-backed ringgit that would trade at a fixed rate of “X” grams of fine gold per ringgit. A currency board system would ensure that the ringgit was fully backed by gold and redeemable on demand for gold at a fixed rate.

Currency boards have existed in more than 70 countries, including Malaysia. A number are in operation today, most notably in Hong Kong. A currency board is a monetary institution that only issues notes and coins. These monetary liabilities are freely convertible into a reserve currency (also called the anchor currency) at a fixed rate on demand. The reserve currency is a convertible foreign currency or a commodity, such as gold, chosen for its expected stability. For reserves, such a currency board holds low-risk, interest-earning securities and other assets payable in the reserve currency.
By law, a currency board is required to maintain a fixed exchange rate with the reserve currency and hold foreign reserves equal to 100% of the monetary base. This prevents the currency board from increasing or decreasing the monetary base at its own discretion. A currency board system is passive and automatic
 
Now, let us come to the Malay Peninsula and the relevant surroundings. The Straits Settlements established a currency board in 1899. By 1906, the Straits Settlements dollar had switched from a silver basis to a gold basis, like the Netherlands Indies (Indonesia), India, and the United Kingdom. The Malay States used Straits Settlements currency but shared none of the profit from the issuance. The currency board was reconstituted several times, with the most important occasion being in 1938, when the Malay States joined together with the Straits Settlements to form the “All Malaya” currency board, eventually bringing in the Borneo territories in 1952.
 
The Currency Ordinance of 1938 officially gave the Board authority to operate as the sole currency issuer on the Malay Peninsula. It also gave all member governments shares in the profits. The currency board system fixed the Malayan dollar to the British pound sterling at 2 shillings 4 pence (or Malayan $60 = £7, the same as the old Straits Settlements dollar). It was backed with reserves of at least 100% and was redeemable at 2 shillings 4 pence. That was equal to 0.290299 grams of fine gold. The official name of the board was initially the Board of Commissioners of Currency, Malaya, but it was popularly known as the Malayan Currency Board or Malayan Currency Commission. After 1967, the Bank Negara Malaysia became a full-fledged central bank, and it took over Malaysia’s currency issuance.
 
A gold-backed currency board would provide Malaysia with a “Great Escape” from the U.S. dollar trap. By reestablishing such a currency board in Malaysia, the ringgit would literally be as good as gold. Others might follow Malaysia’s lead. Yes, Iran, Turkey, Russia, and so on, might also go for gold. And, from one day to next, a significant gold bloc would be established.

Past Blogs

Africa, Flying Blind And Miserable

June 05, 2019

Each year, I construct a Misery Index. The idea of such an index to measure economic misery was introduced by economist Art Okun in the 1960s as a way to provide President Lyndon Johnson with an easily digestible snapshot of the economy. When we dive down into the depths of misery (read: high scores on the Misery Index), we hit Venezuela, 2018’s most miserable country. It’s score was an amazing 1,746,439.1. Hyperinflating Venezuela was followed by Argentina, another Latin America country that is crisis-prone. To list but a few of Argentina’s currency crises: 1876, 1890, 1914, 1930, 1952, 1958, 1967, 1975, 1985, 1989, 2001, and 2018. You would think the Argentines would wise up and dump the peso, replacing it with the greenback. But, this has yet to happen. That brings me to the third most miserable country, Iran. It also brings me to the countries in the country group—the Middle East and North Africa (MENA)—that Iran belongs to.

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The Three M's: Milosevic, Mugabe, And Maduro

May 29, 2019

What do Slobodan Milosevic, Robert Mugabe, and Nicolás Maduro have in common? Other than being leaders who kept the Communist Manifesto at their bedside, all three ushered in devastating hyperinflations. Hyperinflations are rare. They have only occurred when the supply of money has been governed by discretionary paper money standards. No hyperinflation has ever been recorded when money has been commodity-based or when paper money has been convertible into a commodity. Since 1900 there have been 57 episodes of hyperinflation. And, five of those episodes can be claimed by Yugoslavia, Zimbabwe, and Venezuela.

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Turkey's Inflationary Woes

May 23, 2019

Today, Turkey’s annual inflation rate is 49 percent. How do I measure elevated inflation? The most important price in an economy is the exchange rate between the local currency – in this case, the lira – and the world’s reserve currency, the U.S. dollar. As long as there is an active free market for currency and the data are available, changes in the exchange rate can be reliably transformed into accurate measurements of countrywide inflation rates. The economic principle of purchasing power parity (PPP) allows for this transformation. The application of PPP to measure elevated inflation rates is both simple and very accurate.

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China Throws Trump A Counterpunch

May 17, 2019

Trump and his trade team embrace the notion that the U.S. trade deficit, something the U.S. has registered every year since 1976, is a “bad” thing, something that should be dramatically reduced (or eliminated) if America is to be First. They also believe that the culprits for this “bad” state of affairs are unfair trade deals and unfair trade practices employed by foreign countries. Their elixir to eliminate the trade deficit is a strong dose of tariffs and other anti-trade policies imposed on foreign exports. The U.S. trade deficit, is just the mirror image of what is happening in the U.S. domestic economy. If expenditures in the U.S. exceed the incomes produced in the U.S., which they do, the excess expenditures will be met by an excess of imports over exports (read: a trade deficit).

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Hanke's Annual Misery Index 2018: The World's Saddest (And Happiest) Countries

May 02, 2019

The human condition inhabits a vast continuum between "miserable" and "happy." In the sphere of economics, misery tends to flow from high inflation, steep borrowing costs and unemployment. The most surefire way to mitigate that misery is economic growth. All else equal, happiness tends to blossom when growth is strong, inflation and interest rates are low, and jobs are plentiful. Many countries measure and report these economic metrics on a regular basis. Comparing them, nation by nation, can tell us a lot about where in the world people are sad or happy.

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