The root cause of the current financial crisis.

THE RINGGIT AND THE DOLLAR
By Dr. Mahathir Mohamad on May 12, 2011 7:56 AM | Permalink | Comments (21) | TrackBacks (0)

1. The dollar i.e. the US dollar has been depreciating against the Ringgit. It is now hovering just below RM3.00 to 1 USD. Obviously this currency crisis is not over yet. Obviously the US is still in trouble. Europe is also in trouble and so is the rest of the world. This is the longest financial crisis in history. It is now in the fourth year.

2. This crisis started in the US in 2008 with the banks going bankrupt because the sub-prime loans defaulted and Lehman Brothers went bankrupt. Since then the US Government has been printing money by the trillions to bail out banks, insurance and automobile companies.

3. Currently Greece is still unable to repay loans caused by the switch to the Euro.

4. Malaysia appears to have escaped much of the crisis. Our currency is in fact getting stronger and our economy is growing at a good rate.

5. Why has a serious currency crisis affected the developed countries and not as much the developing countries? The answer is that we have not been trying to get rich quick through playing the money market.

6. I am not a financier of course and my knowledge about finance can be written on the back of a postage stamp. So no one should take what I say about finance seriously.

7. Still, I would like to hazard a theory.

8. The US was, after the Second World War, the richest nation. They have companies like General Motors, General Electric, Caterpillar Tractors, McDonnell Douglas & Boeing, great manufacturers of household appliances, radios and television, machine tools, precision instruments and of course a massive weapons industry.

9. They were so confident of the superiority of their industries that they did not mind teaching the Japanese the importance of quality and expertise in manufacturing.

10. To cut a long story short, the Japanese mastered manufacturing so well that their high quality but competitive products displaced those of the Americans and much of the Europeans in the world market.

11. After Japan came Taiwan, South Korea and then China. The products of these countries even displaced American and European products in their own countries. The last straw is the invasion of East-Asian cars into the American and European markets.

12. Instead of trying to compete, the Americans in particular, and the Europeans opted to surrender the markets to the Asian newcomers. But American and European economies continued to grow and they remain as prosperous as ever.

13. To remain ahead in wealth the Americans and Europeans invented a new market - the money market. They invented ways of making money from money. These they call products although they cannot be eaten or used.

14. The banking system they created was for the purpose of lending money to finance business enterprises. To do this the banks were allowed to lend more money than they have as capital, assets and deposits. In effect this means the banks could create money. In fact in the past banks issued banknotes to pay for goods and services. Later the banknotes were replaced by cheques. Everything can be paid with cheques. No cash is needed any more.

15. It was fine as long as the Government oversees the money created by the banks and limits it to ten times the banks assets. Then the American Government decided that it should not supervise the banks. The market would regulate itself.

16. Freed of Government oversight the banks began to lend far more than ten times their assets. They lent even to people with no income and no capacity to repay the loans, especially for houses.

17. The loans were then either mortgaged or insured. The belief was that they were safe. In any case if the borrower defaulted the property would be worth more than the loans as property prices seem to appreciate all the time.

18. Other ways of making money were invented. Hedge funds, carry trade, currency trade, mergers and acquisitions, investment in 'emerging markets' (formerly known as developing countries), junk bonds, securitised mortgage, commercial paper, short selling, index funds, sub-prime loans, private equity funds, repo market, structured investment vehicles, etc etc

19. Any of these things can give huge profits. For the astute players any of these things can make them millionaires or billionaires overnight, practically overnight.

20. The money market products yield nothing substantial. They create no jobs, no tangible products, no trade in goods or services, no spin-offs in terms of business, no transportation of goods by land, sea or air.

21. Yet the size of the transactions in monetary terms is mind-boggling. The trade in currencies is said to amount to four (4) trillion US dollars a day. It is the size of the total German productivity for a year. Yet no jobs are created, no goods or services are produced, no movement of anything is seen.

22. Of course the people involved in the trade make billions of dollars. Operating out of tax free havens, they report to no one and pay no tax.

23. The money market players and the billions they make contribute to the high GDP and the Per Capita incomes of America and Europe.

24. Then came the collapse. The bubble bursts. And there was nothing spilling from the burst bubbles.

25. The money market players know nothing about other business, about the production of goods and service, about real trade in these things. Actually all of them have become poor.

26. And so they resort to printing money, to remain rich. But the money they print is as valuable as toilet paper.