Why we need the Asian currency

Why we need the Asian currency
16
Oct
2009
The Sun


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

That is why the call by the new prime minister of Japan, Yukio Hatoyama, for the setting up of an East Asian Economic Community (or Asian community) and its very own currency should be welcomed by Malaysians.

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

A big flaw of the US dollar is that it is not backed by anything. (Though it was backed by gold until August 1971). It not being backed by anything means that there is no limit to the amount that can be printed and injected into the economy whenever the need arises. However, the central bank of the US is not the only body with the “power” to create money out of thin air, the banking institutions too can “create” money 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.

The excess money in the economy was used by investment banks and big institutions to invest in complicated investment vehicles called CDOs (collaterised debt obligations) and MBS (mortgaged backed securities). Both the CDOs and the MBS are connected to the sub prime housing loans.

When the housing property bubble burst, and loans could not be repaid, falling prices of MBS and CDOs got these financial institutions into trouble and it spread beyond the US because major European institutions had also bought heavily into the CDOs and MBS.

Before it became fiat money (not backed by gold) the US dollar could be redeemed at a set price of US$35 an ounce. But without any asset backing the US dollar derives it value based only on whatever it is perceived to be worth and that is why 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. Even Unctad (UN Conference on Trade and Development), has said that the world needs a new global monetary system to prevent speculations 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. After all as pointed out by the former governor of India’s central bank, Y.V. Reddy, Asia has 67% of the world’s currency reserves, 55% of the world’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 and stability is needed for economic development. It should preferably be backed by gold as previously suggested by Dr Mahathir.

Source: The Sun – October 16, 2009