US$700 billion bailout is Hippocrates and unjustified

Although US$700 billion (RM2.4 trillion) fund to buy illiquid securities is controversial and could be debated, I couldn't agree more with the US government.


Washington's bailout package though claimed to be unpopular with the public and doubted by some analysts, it is claimed to be the biggest effort yet by the US government to ease the worst global financial crisis since the Great Depression. Yet military power of the US is the main instrument to purge the world to give value to the USD which put the global economy at risk.

Ironically, USD is not being backed by gold although it has been the preferred currency of world trade; it purged the global economy at risk as USD is a worthless paper without any backing of tangible value like gold or silver as required for other countries. The value of the USD paper money is believed moving closer to zero.


It clearly stated by the official web site of the US Treasury that Federal Reserve Notes are backed by nothing.

“Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. This has been the case since 1933. The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are "backed" by all the goods and services in the economy.”


Washington's bailout package is interprets as printing the money without backing of any gold. It created too much fiat paper currency floating around in relation to current gold holdings in the current global financial system. It’s beyond imaginable but is a reality that is unacceptable by simple layman.

It was inevitable that Smithsonian system of fixed exchange rates without gold had smashed apart on the rocks of economic reality in which gold as the banks preferred interest bearing certificates to holding gold bullion. What a ridiculous for once again, the countries were pledged to maintain fixed exchange rates, but with the exception that without backing of gold or world money, US is permitted to print such a big amount of money.


The Smithsonian Agreement December 1971, hailed by President Nixon as the greatest monetary agreement in the history of the world, which was overt and covert by hidden political agenda to exploit the global financial system. It is even more shaky and unsound than the gold exchange standard of the 1920s Bretton Woods.

Undeniably, it is all the fault of Alan Greenspan to reduced interest rates to the point where almost anyone could get a home loan even if they weren't qualified for it. It caused the Lehman Brothers Holdings Inc. filed the biggest bankruptcy in US history after the failure of AIG.


While Asian Financial Crisis gripped much of Asia beginning in July 1997, above and beyond all other consideration, the suggestion of IMF through a series of drastic economic reforms was based on the neo-liberal economic principles - the "structural adjustment package".

The Americans suggested crisis-struck nations reducing deficits by cutting down on government spending, allow the insolvent banks and financial institutions to bankrupt but selling off to Americans investors at fire-sale prices and raise interest rates more aggressively.

Noted the contradiction nature of these move and the gross US external debt was over US$13 trillion as of June 2008, evidently the rescue package of US$700 billion that claimed to stabilize the economy to bailout the bad mortgage manage by looted management is such a Hippocrates and unjustified.

Has dollar pegging paid off for Malaysia?

Pegging is the policy of controlling the value of a currency by linking it to another currency. The US dollar emerged as a currency used as a peg for many currencies including Malaysia ringgit in 1997-98 Asian currency crisis.



Since January 2003, when the dollar depreciated about 27 percent against the Euro, most of the Asian currencies have been appreciating against the dollar, ranging from 6 percent by the Singapore dollar, to 10 percent by the Thai baht and 12 percent by the Korean won.

The Malaysian ringgit was initially pegged to the US dollar following the Southeast Asian economic crisis. It shifted in 2005 from pegging to a managed float against a basket of currencies. Immediacy, ringgit rose on Monday to 3.4200 to the dollar from 3.4610 at the close of Asian trade on Friday.

Undeniably, the record shown that Asian central banks had been intervening foreign exchange market to prevent strengthening of their currencies, through some kind of soft peg against US dollar. Apart from China’s Renminbi, Hong Kong’s dollar and Malaysia’s ringgit, the rest of the Asian currencies did have some degrees of flexibility against the US dollar.


Since the 1997-98 Asian financial crisis, most emerging Asian market economies had implemented de facto or explicit peg against the US dollar, and continue maintaining the policy of undervalued currencies.



A key factor in the dollar's fall was seen to be happened when US has run huge trade deficits over the last couple of years that caused officials from the Group of 20 industrial and major developing countries in Germany called for the US to cut its federal deficit.

The falling of US dollar in value against other currencies has great economic impact toward the economic of the world. It caused the risen of oil prices close to record highs when dollar has touched all-time lows recently. When Brent crude hovered just under $80/bbl, while the euro moved to $1.38 and the dollar sank below its 1995 lows on a trade-weighted basis against major currencies.

The dollar fell 1.6 percent to US$1.4227 against the euro, the strongest since September 18, 2007. The dollar has gained almost 12 percent since touching the all-time low of US$1.6038 per euro on July 15, 2008, the weakest level since euro made its debut in 1999, as the European economy slumped and crude oil dropped more than 30 percent to about US$100.95 a barrel from its peak of US$147.27.


The era of the strong, overvalued dollar had gone with the wind, as a result of weaker US growth, a large and persistent trade deficit, and surging commodity prices. The most recent strong dollar period started in 1995, gradually dissipated after 2003, and now is in clear retreat.

As US is the world's leading importer of goods, the rise of euro means everything is more expensive for Americans. They have to buy at higher prices, but getting easier for manufacturers to sell products overseas more competitively. It costs more dollars for American to buy euro or yen or products from Europe or Japan. The products become more expensive, resulting less attractive to Americans hence huts the standard of living.

China and other Asian export powers have also accumulated dollars by keeping their currencies undervalued. China has accumulated $1.5 trillion in foreign reserves, which it is beginning to deploy. State-controlled natural resource companies in Russia are buying into international energy firms and industries such as aluminum. The Abu Dhabi Investment Authority has an estimated $500 billion to $875 billion pool that it is using to build stakes in foreign enterprises and domestic petrochemicals industries.


The huge foreign liquid reserves and a weakening dollar are making US based assets increasingly attractive to foreign buyers. Weaker dollar makes it cheaper for foreign investors to acquire key US assets.

Undoubtedly, the weakening dollar causes US economic growth remains clouded. Investors seem to pile into the Japanese yen when risk aversion spikes, analysis are ambivalent about the near-term direction of the yen/dollar exchange rate. Therefore, it’s believed weaker dollar will manifest itself via European currencies.

In 1994, China devalued its currency and pegged it to the US dollar at around 8.3 yuan to the US dollar within an extremely narrow band that permits no more than infinitesimally small variations in the yuan-dollar exchange rates. Four years later, Malaysia fixed its exchange rate at 3.80 ringgit to the US dollar in the midst of the 1997/98 financial crisis.

Both China and Malaysia have increased their external reserves enormously. China’s reserves have swelled from US$143 billion in 1997 to US$578 billion in 2004, while Malaysia’s reserves have grown from US$21.7 billion to US$66.7 billion during the same period. It is quite obvious that the growing inherent strengths of the fundamentals of these two economies are not reflected in the exchange rates.

Although Malaysia with a small domestic economy but the weakening of dollar definitely harm Malaysian economic too as the exports value is greatly reduced in the US or in other economies tied to the dollar. Malaysian companies will face pressure on their export sales. But in deciding re-pegging, Malaysia seems to follow China's foot steps as China’s Renminbi and Malaysia’s ringgit have one thing in common: they are wedded to the US dollar.


Although it was said Malaysia has the capacity to determine the value of the ringgit because it has sufficient foreign currency and substantial savings, with the Employees Providence Fund alone holding more than RM200bil in its coffers, thus shouldn’t float the currency as the country would lose money if the currency is vulnerable to external forces.

Hypnotically, if Malaysia could strengthen the value of the ringgit by 10%, by pegging the ringgit to the US dollar, the import value should depreciate by 10%. When the price of imported goods is reduced, the impact would immediately be felt by consumers.

China today is very different from what it was in 1994. The Chinese economy has been growing at near-double digit rates year after year. As the second largest economy in Asia, any move by China on the yuan exchange rate will have far reaching impacts on other currencies, with serious financial and economic consequences.

Ironically, a $700bn bail-out for Wall Street is the US government’s political decision to commit such big amount taxpayer money to fixing the problem showed the seriousness economic crisis in US.

US have become increasingly erratic and unreliable on the world stage. The sinking US dollar definitely harm Malaysian economic, should the ringgit consider re-pegging, euro is the only one to be considered.

By and large, the ringgit exchange rate will be more flexible based on market condition and a managed float against a basket of currencies as it is now.

Is US potentially a bankrupt country?

Although the economy of the United States is the world's largest national economy, but the exploiting nature of the capitalist system of economy which being taken advantages of by politicians, landed the country's financial policies benefited the wealthiest Americans for decades.

Interestingly, the economy of US is in a strange situation of being both the world's greatest debtor and the issuer of the world's principal reserve currency. The implication of the scenario is that US is exploiting the wealth of other countries for its consumption.

For decade, the economics and politics are dictated by the US. The fall of the Soviet Union was the biggest debacle of the 20th century, and now the Money System of US is on the verge of collapse is the new destructive debacle.

Lehman Brothers Holdings Inc. filed the biggest bankruptcy in US history after Barclays plc declined to buy the whole of the investment bank and the failure of AIG, the world's largest insurer’s multi-billion-dollar loss jeopodized the US economy and triggered economic slump, the damages caused to the financial system are inestimable if AIG collapsed.

It was reported that the US government using US$85 billion federal loan to bailout AIG which faced three quarterly losses amounting to US$18.5 billion.

The business of AIG covered US$441 billion of fixed-income investments for banks and other parties, including US$57.8 billion in securities tied to sub-prime mortgages. It included almost every financial institution in the world and insured US$88 billion worth of assets including mortgages and corporate loans.

The out-of-scale boom-insider trading, accounting cover-ups and corporate scams to portray unrealistically high profits are believed to be the reasons indentified the causes of the US historical economic debacles.

Ironically, the US is absorbing about 80% of the net flow of international capital and the market is believed to be controlled by powerful person with money and maximizing profit is the ultimate aim. Today China, Middle Eastern oil magnates and other large investors from abroad are voicing that if US interest rates are keep on go down and measure to be taken to devalue the already-sliding dollar portfolios further, they will no longer support with their investments the bloated US trade and fiscal deficits.

The economy of the US is still the world's largest national economy with the gross domestic product (GDP) reported as $13.8 trillion in 2007. As of June 2008, the gross US external debt was over $13 trillion, thus without ability to borrow abroad; US practically cannot continue to consume $800 billion dollars more each year than the economy produces as well as carry out the role of internationally polis and conduct the claimed anti-terrorist wars.

The US dollar has lost 60% of its value during the current Bush administration. A few years ago the value of euro was 85 cents but today it worth $1.48. This is an enormous decline in the value of the US dollar and a huge drop in the value for those who hold the dollar.

The US economy succumbs to the pressure of balance-of-trade imbalances and money market fluctuations. It’s facing the worst financial crisis in decades and the stock market plunged up and down. The irony of course is the US had to put its financial house in order as well as to improve the trade imbalances.