The depreciating Ringgit - The hidden dimension

IN the past few months, the debate regarding the devaluation of the Ringgit vis-à-vis the US Dollar has been very heated. Politicians from the Opposition say that the fall in the Ringgit's value is proof that the current government has failed to implement economic policies that can protect the welfare of the people. On the other hand, the finance minister said Malaysia's economy is still fundamentally strong. He also argued that other countries' currencies too have depreciated against the Dollar, proving that it is not a result of weakness in our economy. His argument is not without basis because, in reality, the Ringgit is not listed among the world's ten worst-performing currencies against the Dollar.

But before we delve deeper into this issue, we must realise that the Ringgit fluctuations and uncertainty problem is not new. It is a problem that has been with us for decades and will continue to be with us for many more decades. The root cause of the problem is the usurious nature of the global financial system. This system, which grew and became the banking industry in Europe around the 17th century, was the one that introduced the `fiat' monetary system that uses paper as currency.

Before that, the form of money used worldwide was physical and mainly in the form of gold and silver coins. Since they were valuable in the eyes of everyone worldwide, they naturally became the most popular form of money. Merchants involved in export and import activities did not need to exchange the gold and silver coins for any other currency, as is the case now. In other words, everybody uses only one form of money. There was no need to worry about a fluctuating value of the local currency compared to foreign currencies.

A financial system where money is in the form of gold and silver coins is much better because of the system's stability. But the usurious banking industry deliberately changed the form of money from valuable metals to paper money. The primary purpose of this conversion is to enable the banking industry to give out larger-sized loans because they will not be limited by the amount of gold and silver coins in the financial system. Paper currency is also easier to create than gold or silver, which must be extracted or mined.

This paper currency is given different names by the authorities in different countries. For example, in the United States the currency is called the US Dollar, in the United Kingdom it is called the Pound Sterling, in Japan it is called the Yen, in Malaysia it is called the Ringgit. The party that determines the value of the currency is the central banks in the respective countries. They do this by simply printing different values on the paper currencies. Moreover, the central banks are given exclusive authority by law to issue these banknotes. No other party is allowed to print and produce the currencies.

To ensure that this paper currency is used by the general public instead of gold and silver coins, the banking industry also convinced governments in all countries to enact laws that force people to use the paper currency they have created. Hence the term `fiat' which is the Latin word for `authority' or `decree'. Over time, due to the general acceptance of paper currency, gold and silver coins ceased to be used as money.

In 1971, the link between precious metals and money was eliminated worldwide when the United States government announced that it would no longer honour its previous obligation to convert US Dollars to gold.

Actually, unbeknownst to the general public, central banks and the banking industry around the world have also modified the financial system such that the currency used is not only paper money printed by the central banks, but also currencies that do not exist physically. This currency is in the form of records of money borrowed from the banks. The mechanism used is the cheque payment system. When someone borrows money from a bank, the loan amount will be credited to the borrower's account. The borrower can then pay to any party by writing a cheque. For example, if a bank gives a loan to a customer, say, of RM1 million to finance the purchase of a house, the borrower can pay the seller of the home by using a cheque written for the amount of RM1 million. The amount of RM 1 million did not exist before that. It was created out of thin air when RM1 million was recorded in the borrower's account. There is no paper money printed for the purpose. As a result of this, it is easier for the banking industry to give out loans and thus easier for them to earn more profit. Nowadays, the transactions are all in electronic forms which further expedite the creation of new loans and new money.

The currency that the banking industry has created in a particular country is only of value in that country. In other countries, that currency is of little value, except after being converted to the currency used in those countries. For example, we cannot use Ringgit in the United States. We have to convert our Ringgit to Dollars before we can spend it in the United States or pay for imported goods from the US.

The exchange rate of a currency depends on the currency's demand compared to the currency to be exchanged. For example, if the demand for the US Dollar is higher than the demand for the Ringgit, then the value of the US Dollar will appreciate vis-à-vis the Ringgit, which is what has happened over the last few months.

The multitude of factors and their dynamic nature is the main reason the issue of foreign exchange is very complex. However, many factors affect the demand for a currency. These changing factors make it extremely difficult to forecast the movement of the exchange rate. We should also note that most factors are beyond the control of the authorities of a country. For example, the main factor behind the appreciation of the US Dollar relative to Ringgit is the decision by the Federal Reserve in the US to raise interest rates as a measure to curb inflation there. Since inflation is caused by increased demand for products and services among consumers in the United States, raising the interest rate will increase the cost of borrowing, thus reducing consumption and the level of consumer demand in the economy.

The most popular financial instrument is the US government treasury bills which are financial bonds issued by the United States government. When money from other countries is transferred electronically in large amounts into the American financial market, the value of currencies of many countries will depreciate because the demand for their currencies relative to their supply, including the Ringgit, will also fall. In other words, the fall of the Ringgit relative to the US Dollar is not a direct result of negative sentiments toward our country's economic or political situation. But the result of financial investors being attracted to the US financial market as they want to benefit from high interest rates.

Finally, we also need to understand that the fall in the value of the Ringgit currency compared to foreign currencies can benefit specific sectors in Malaysia, especially the tourism sector. Foreign travellers, especially Americans, will find it inexpensive to spend their vacation in our country. Sectors that export products abroad will also benefit from Ringgit's depreciation since the cost of products exported from Malaysia will be cheaper than products from other countries whose currencies have appreciated relative to Ringgit. Obviously, businesses in these export-oriented sectors will experience increased revenue and profits.

But at the same time, the cost of imported goods will be more expensive and may contribute to inflation in our country. Those on low-income will face the most severe problems because the cost of many imported food items will increase.

In conclusion, the current bank-based monetary system bears the main culpability in the change of medium of payment from gold and silver coins to paper and electronic fiat money. This system benefits the banking industry which has grown and generated a lot of profit for itself. However, this system has also produced many problems, among which is massive debts in almost sectors of the economy. Sudden and uncertain changes in the value of currencies can also result in business losses that have little to do with their actual business performance. The people who will suffer most will always be those with low incomes.

It is high time for us to focus on changing the usury-based financial system that depends on banks. Policymakers and the general public should be made aware that the current system primarily benefits the rich at the expense of the poor, contrary to Islam's teachings. Islam aims to create a financial and economic system that is fair to all groups and ensures long-term well-being for all levels of society.

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