The ringgit is a currency masquerading as money
In my previous article, we looked at how money is created and how increasing amounts of it are being created these days. That, as we’ve seen, contributes to inflation and poses problems.
However, some people argue that printing money is normal and nothing to scoff at.
This “print and don’t be damned” approach has seen a renaissance in recent times, thanks to the popularity of Modern Monetary Theory (MMT) – a school of economic thought that posits that “governments with a fiat currency system under their control can and should print as much money as they need to spend because they cannot go broke or be insolvent”.
In fact, at the end of 2020, two popular economists advancing the virtues of money printing commented optimistically that since Malaysia’s headline inflation was negative and the forecast was for low inflation well into 2021, the real risk was deflation and not inflation. I wonder what they have to say about the rising, even skyrocketing, prices of many essential goods since mid-last year.
I think a useful way of diagnosing the problem is by using a physics-based mental model. To do this, let’s undertake a first principles approach by asking ourselves what money is.
For something to be considered money, it needs to be these three things:
- A medium of exchange;
- A unit of account; and
- A store of value.
Most fiat currencies – meaning central bank-issued currencies that are unbacked by an asset such as gold (which include the ringgit, the US dollar and most currencies in the world) – satisfy both the first and second criteria. For instance, the ringgit is widely accepted in Malaysia and so is a good medium of exchange. It is also a good unit of account as it does its job of pricing goods and services without fluctuating wildly.
But, as I’ve demonstrated in my previous two articles, fiat currencies are poor stores of value as they rapidly lose their purchasing power due to today’s prolific money printing.
To evaluate this in a physics-based framework, we can think of money as an energy battery. Sure, it’s also a unit of account and a medium of exchange but fundamentally, if it fails at storing energy effectively, it fails as money.
For instance, as an engineer, I am paid a salary (monetary energy) for converting food (chemical energy) into ideas that eventually become engineering products (kinetic, electrical and thermal energy). Every person in the world earns money (accumulates energy) by converting different forms of energy into others.
This money then becomes something like a lifeforce – the energy that sustains us and allows us to live a comfortable life or lack thereof.
The most important aspect of this concept is the law of conservation of energy, or more commonly known as the first law of thermodynamics. It states that the “total energy of any isolated system is constant; energy can be transformed from one form to another, but can be neither created nor destroyed”.
Inflation via money printing transgresses this fundamental law of physics.
The implicit assumption behind money printing is that banks and governments can issue pieces of paper without a corresponding increase in economic productivity (conversion or transfer of energy) and still have it hold value.
They are trying to create energy out of thin air.
But of course, the rising cost of goods that accompanies money printing is proof positive that you can’t do this. The result of trying to create monetary value (energy) out of thin air is inflation – a relentless reduction in our purchasing power, and lifeforce, over time.
It’s akin to having a battery that leaks energy until it eventually empties out. What good is such a battery?
So, the ringgit – which, in getting inflated has failed at being a store of value – is merely a currency masquerading as money.
Sure, some economists might say that we can’t apply the laws of physics to economics. And some others might say that a certain level of inflation (1% – 3% per annum) is sustainable and in fact should be welcomed as it encourages spending, thereby stimulating the economy.
I might not agree with their arguments but nonetheless see their point of view, considering how the current financial system is designed. However, what is indisputable is that the levels of money printing now are unsustainable.
And I’m not the only one saying this. Sun Guofeng, head of the People’s Bank of China’s (China’s central bank) monetary policy department pulled no punches as he described Modern Monetary Theory as “specious” before stating: “It will impact the price system, distort economic decision making and mark the opposite direction against the goal of economic and financial stability”.
Unfortunately, central banks and governments around the world are now stuck in this ghastly spiral. People are accustomed to getting cash handouts whenever a crisis strikes and governments become desperate for money. Banks want lower interest rates so they can borrow and lend more liberally to ensure their customers don’t default on payments – and cause the financial house of notes to crash.
The problem is, the government is paying for it with our future – a future in which things become increasingly more expensive and out of reach for most of us.
But of course, there is a subset of the population that is benefiting from this profligate money printing, and that is what we’ll explore in my next column.
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