ASIAN COMMUNITY: It’s time to act on currency plan
2009/10/27

S.M. MOHAMED IDRIS for Consumers Association of Penang

MALAYSIANS have a vague idea that the global economic slowdown started in the United States and spread to other countries. Since we trade with the US, this has affected our economy.

Business has suffered, companies have closed down and Malaysians have lost their jobs. The problem continues to be aggravated.

The root cause of the recession is the US monetary system and if the world were not so dependent on the US dollar, the scenario today could have turned out differently.

That is why the call by new Japanese Prime Minister Yukio Hatoyama for an East Asian Economic Community (or Asian Community) to be set up with own currency should be welcomed by Malaysia.

The suggestion for an Asian currency to replace the use of the US dollar is nothing new. Former prime minister Tun Dr Mahathir Mohamad suggested it in 1990s.

Abig flaw of the US dollar is that it is not backed by anything (though it was backed by gold until August 1971).

Not being backed by anything means that there is no limit to the amount that may be printed and injected into the economy.

However, the US Federal Reserve is not the only body with the “p owe r ” to create money out of thin air; the banking institutions too can “c r e at e ” mon - ey on their own.

Banks create money by giving out loans. Compounding interest causes money and debt to grow exponentially, way beyond the level that can be achieved by the real economy.

Prior to it becoming fiat money (not backed by gold), the US dollar could be redeemed at a set price of US$35 per ounce. But without any asset backing it, the US dollar derives its value based only on whatever it is perceived to beworth and that iswhy the value of the US dollar is subject to fluctuations.

This can be a great disadvantage for countries using the US dollar in international trade.

The US dollar’s days as the key global currency are numbered, as it should rightly be.

Even the UN Conference on Trade and Development has said that the world needs a new global monetary system to prevent speculation and to avoid large trade imbalances.

For us in Asia, having our own currency unit is a move in the right direction.

Asia is a force to be reckoned with. Former Indian central bank governor Y.V. Reddy pointed out that Asia has 67 per cent of the world’s currency reserves, 55 per cent of the wo r l d ’s population and a significant share of the world’s gross national product.

The proposed Asian currency should be based on real money so that it will be stable, as this is needed for economic development. It should preferably be backed by gold, as previously suggested by Dr Mahathir.