Currency Wars Part IV

Tun Dr Mahathir fires a shot, with his usual candour:

THE CURRENCY WAR

1. Malaysians, including Malaysian monetary authorities seem quite happy over the appreciation of the Ringgit against the US Dollar. We think that when our currency strengthens it must be because our economy is strong. Therefore we are doing well.

2. But are we doing well? Is it the Ringgit which is appreciating or is it the US Dollar which is devaluing?

3. Actually it is the US Dollar which is devaluing. It is devaluing against most other currencies, especially against China's currency.

4. Why is the dollar devaluing? Could it be the currency traders are selling dollars? Could it be because the balance of payment is not in US favour?

5. Martin Wolf of the Financial Times, an expert on money has this to say. There is a global currency battle going on. "To put it crudely," he says, "the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition; there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world's surrender; the needed changes in nominal exchange rates and domestic policies around the world."

6. Our reserves are represented by the US Dollar, Gold and other currencies which we keep in order to back the value of our Ringgit. The US clearly does not have to hold foreign currencies to back the Dollar. All the US has to do is to create (print) money.

7. When we buy US Dollar bonds, we are in fact lending US Dollars to the US. When we redeem the bonds all the US has to do is to print more dollars to pay us. We are actually exchanging hard-earned money for pieces of paper which some people call toilet paper.

8. I wonder what Malaysia is doing during this currency war. Are we still keeping US Dollars as our reserves? Have our reserves depreciated because the US Dollar has depreciated?

9. Many countries are now "controlling" their currencies. Are we going to go the other way - to remove the last remnants of our control?

10. As I said in a previous article, the daily trade in currency amounts to 4 trillion dollars. Are we going to contribute to that trade?

He gets the broad strokes about right, but some points are plain wrong.

From the limited perspective of the last two years, the Ringgit’s rise has been pretty broad based except against the Indonesian Rupiah and the Thai Baht (our “partners in crime”), and the Japanese Yen:

On that basis, our reserves can’t help but depreciate – my figures are showing something like RM10 billion a quarter. It wouldn’t matter if we diversified our international reserves away from the USD, since the other reserve currency candidates with the exception of the Yen and gold, have largely depreciated on cross rates against the Ringgit. And we’re still well below the 2001 peak for the trade weighted index, when ironically the Ringgit was pegged to the USD and Tun was still the Prime Minister/Finance Minister.

Lastly, the USD4 trillion number is largely irrelevant, since the Ringgit is not internationalised. None of that volume can affect the Ringgit value, since it has to come onshore first.

The commentary in TDM’s post left me a little bemused – gold, pegged currencies, currency baskets? Time to get on my hobby horse again.