Hi Guys, I wrote this article for my daughter. It is not an academic piece of paper or anything like that. And it is a bit of mish mesh of stuff ... have fun!
There was an economist called Friedman in the Uni of Chicago who said nations will not fall in line with the system unless the economy goes into a meltdown and experience the hardship that comes with it. So he recommended that foreign aid should be tempered with a healthy dose of “shock treatment” so that the nation could be shocked out of their old ways. These politically ill-disciplined are the countries that have strong union and irrational salary schemes ... they can go on a strike at a pin drop. Selfish and abusive of the political system always electing idiots who promise them more of the same. They are socialist in attitude, i.e. Government must give and give, and the citizens can take and take. Or think of a Communist utopia (think Cuba). They imagine all people are born equal, and God be damned. Talk France, Italy, and Greece - I call this sort of countries klepto-democracies. Better publicized are the politically ill-disciplined ones, the klepto-autocracies such as Zimbabwe, Tanzania, Bangladesh (under Ershad), Philippines (under Marcos), and Malaysia (under Najib). Then there are the klepto-idiots such as the anti-American South American socialist countries where the elites are so comfortable that they do not want any sort of changes to their quasi-feudal system that they call democracy.
DADDY ECONOMICS
Dear Aletheia, What is
Economics in relation to geo-politics and social progress? To handle this
question, you must understand how did the modern financial system that which we
call Capitalism arose. This is an
over-simplified guideline. Try and understand each step of the process and ask
questions.
Step one: The Primitive System
1.1
Imagine a
hardworking sheep farmer somewhere in England in the 11/12th century, who sold
his wool to the European neighbours. Say Farmer John decided to travel to
Barcelona (the wool capital of the world during this time) to check out the
market. This is just a few centuries before the beginning of the Industrial
Revolution. He took his gold jewellery and savings (invariably in gold or
silver) and deposited it in a vault that belonged to the goldsmith, for
safe-keeping. [Note: Farmers did not think of building castles or vaults.]
1.2
Goldsmith gives him
a receipt in John’s name with the value of gold marked and stamped on it.
Goldsmith being a clever dude had a brother in Barcelona who was also a Goldsmith
with a vault ... and he will recognize certain receipts (especially if
issued by his own brother) and would dispense gold at the marked value of the
receipt (minus some commission, of course) to anyone presenting the receipt...
not just Farmer John.
1.3
What are the
advantages of this system to Farmer John? How would have Mr Goldsmith’s family
set up their business? What would they have to do to provide this service?
Step Two: The Primitive Bank
2.1 In time (say about 40 years)
the Goldsmith brothers (old and aged as they were) began to take stock of their
gold and the receipts they have issued ... a kind of an internal audit of their
affairs. It became apparent that some of the receipts were not claimed upon,
and for all probability would never be claimed. Receipts were very convenient
to carry and move around. That being said, is also perishable, subject to theft
and of course forgotten. So a certain percentage of Receipts in the Goldsmiths’
vaults would have been inadvertently and more importantly for the understanding
of the Goldsmiths, inevitably lost or
destroyed. So they ended up with the possession of gold in their vaults
that will never be claimed ... though they did not own it, they had control
over its usage. [Note: possession, ownership and control are legally three different
things. Discuss.]
2.2 A digression here: Pawnshop
owners then are the modern Goldsmiths, Kedai Pajak Gadai, Al-Ranhu Outlets etc
... a certain percentage of gold that they issue receipt to are never claimed.
That is how these gold traders really profit.
2.3
So the Goldsmiths
devised a clever plan to utilize their unclaimed gold to their advantage. The Goldsmiths
decided to issue receipt to anyone they deemed worthy or fit without them
having put in a deposit. So, instead of charging a simple commission on
the value of the gold someone deposited, they now charged an interest to an amount written on a receipt that can
be honoured. But the Goldsmith actually kept possession of the gold with
himself. The Goldsmith has conceded control of the gold, not the
possession or ownership. Of course, he would have to be prudent not to write
down an amount more than he could vouch for (i.e. the value of all the gold in
his vault). Their receipt is now called a Promissory
Note. And the amount written on it is called a Debt that are usually backed by the gold, that is the collateral asset or guarantee.
This has two advantages: (a) it encouraged business – promising entrepreneurs took advantage of this to further their business and bring in profits that would have eluded them if they just worked on transacting with gold acting as money; and (b) if the entrepreneur failed for some reasons, the collateral asset can be lawfully seized but the money to the value of the debt has been injected into the economy. A kind of a win-win for all except for the entrepreneur who will have to take the responsibility - and he will be cut off the economic system, i.e. he will be declared a bankrupt – he ruptured his relationship with the bank if he fails to keep his side of the bargain. Still, the economy now has extra purchasing power, and even going bankrupt he has increased the domestic credit of the economy. But too much of this is not good. It shows a lack of banking prudence, and will erode confidence in the economy. That is why Governments keep an eye on bankruptcy rates and Non-Performing Loans.
This has two advantages: (a) it encouraged business – promising entrepreneurs took advantage of this to further their business and bring in profits that would have eluded them if they just worked on transacting with gold acting as money; and (b) if the entrepreneur failed for some reasons, the collateral asset can be lawfully seized but the money to the value of the debt has been injected into the economy. A kind of a win-win for all except for the entrepreneur who will have to take the responsibility - and he will be cut off the economic system, i.e. he will be declared a bankrupt – he ruptured his relationship with the bank if he fails to keep his side of the bargain. Still, the economy now has extra purchasing power, and even going bankrupt he has increased the domestic credit of the economy. But too much of this is not good. It shows a lack of banking prudence, and will erode confidence in the economy. That is why Governments keep an eye on bankruptcy rates and Non-Performing Loans.
Step Three: The Early Modern Bank
3.1
Now, the biggest
spenders, entrepreneurs, and innovators were the monarchs. They got into the game by borrowing this way too
because they could use Promissory Notes to pay for their expenses. So the
Government that wanted to borrow money from the Bank but not willing to become
beholden to them. (Google: William Paterson of Britain.) The monarchs saw an
opportunity here - there were too many types of Promissory Notes of this nature
floating around. A centralised authority was established called the Treasury that started issuing a fixed
amount Promissory Notes, the minting of which became the monopoly of His
Majesty’s government ... the fixed amount Promissory Notes are called Currency. The goldsmiths now have to
buy the Currency from the Mint owned by the Government. Law was passed that all
taxes must be paid in Legal Tender of
the Nation ... i.e. the national currency. And some of the smarter Goldsmith
changed their name to Banker. It
gives the impression that since Governments issue currency notes with monarch’s
pictures on it, it is the Government who controls it... they do not but issuing
currency is a way for the Government to control Banks.
3.2
Bankers effectively
kept the gold in their vault but the Government issued the Currency. So to
figure out how much Currency to print, Bankers have to report their percentage
of their Gold Reserve... the
amount of gold that is in their control (not owned but merely in possession).
This became a colourful rivalry between Banks and Governments that was not
resolved in the US until 1860. Check Abraham Lincoln; and later by Bretton Wood
in 1944. Most of the time it was not a happy relationship.
“History records that the money-changers (Madison’s term for bankers) have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.” (President James Madison ... one of the America’s Founding Father) Check him out in Wikipedia ... this was a problem that finally led to Abraham Lincoln authorizing the formation of the Federal Reserve in America. Government wants to make “legal tender” (the national privilege of issuing its own currency) and not leave it alone to private banks to decide that. Until Lincoln, money was supplied by banks and governments borrowed. It was largely simple as that. And governments (usually in pursuit of war) always borrowed currency from Banks, and paid in silver or gold and sometimes went bankrupt (leading to national upheaval) and some became beholden to bankers who began dictating national policies.
And it should be obvious to you that this is no more a business idea but something that has become a complex system with banks holding gold; governments in rivalrous relation; and the common people (not just business people) who needs to benefit from this arrangement. Ideally this would work but Bankers were the most willing to bend rules (being corrupt), not worry about consequences of loss to the ordinary people (being wicked), and driven by profits (self-serving) ... which also is an apt description of a normal Government. This drama led to a compromise in the US system which led to the setting up the Federal Reserve - a private enterprise over which the US Government has no control. Why the Federal Reserve is private; or why the US Government has no control over it? Though it is Government that prints the currency? Now, you see.
Anyway, all these were worked out by the Dutch first, which the British learnt from when they set up the Bank of England in 1600 something. Google it up. They thought they have a damn good system worked out for themselves and for their country and they all thought war was bad for business. They never suspected what was coming.
“History records that the money-changers (Madison’s term for bankers) have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.” (President James Madison ... one of the America’s Founding Father) Check him out in Wikipedia ... this was a problem that finally led to Abraham Lincoln authorizing the formation of the Federal Reserve in America. Government wants to make “legal tender” (the national privilege of issuing its own currency) and not leave it alone to private banks to decide that. Until Lincoln, money was supplied by banks and governments borrowed. It was largely simple as that. And governments (usually in pursuit of war) always borrowed currency from Banks, and paid in silver or gold and sometimes went bankrupt (leading to national upheaval) and some became beholden to bankers who began dictating national policies.
And it should be obvious to you that this is no more a business idea but something that has become a complex system with banks holding gold; governments in rivalrous relation; and the common people (not just business people) who needs to benefit from this arrangement. Ideally this would work but Bankers were the most willing to bend rules (being corrupt), not worry about consequences of loss to the ordinary people (being wicked), and driven by profits (self-serving) ... which also is an apt description of a normal Government. This drama led to a compromise in the US system which led to the setting up the Federal Reserve - a private enterprise over which the US Government has no control. Why the Federal Reserve is private; or why the US Government has no control over it? Though it is Government that prints the currency? Now, you see.
Anyway, all these were worked out by the Dutch first, which the British learnt from when they set up the Bank of England in 1600 something. Google it up. They thought they have a damn good system worked out for themselves and for their country and they all thought war was bad for business. They never suspected what was coming.
Step Four:
The Mess of the Primitive Modern Bank
4.1
One of the craziest outcome of this evolution of
financial system was total misery. Until WW2 kings were engaged in war whose
essential purpose was to plunder as much gold as possible from the occupied
territories so that they can increase their reserve ... i.e. the old economic
system itself encouraged war. We always read of war as military strategy,
political fights, etc but it is almost always all about plunder, pillage and
gold. Underlying all of Islam’s War of Caliphate, Genghis Khan’s Mongolian
Empire, Napoleon Bonaparte’s Conquest of Europe, the Christian Crusades, and
finally Adolf Hitler’s War is plunder and pillage ... politics, strategies, rape
and genocide are all just the side show.
4.2
Money is a concept that arose out of the idea of a gold
reserve (gold, silver, any other precious metal valued in gold, international trade
balances) ... initially the total Promissory Notes reflected the total Reserve
the nation had. But the Government always worked out how much of the money in
circulation will disappear (buried and forgotten in holes & caves, in
fires, in floods, abused, etc) and issue a certain percentage more to
compensate for it. This benefits the Government when it comes to their expenditure.
Within a principled limit, this is ok. But if the Government made the stupid mistake
that currency is money... i.e. more currency means more money .... habislah!
Money is the value but Currency are papers that reflect the value of money in
the government coffers. More currency floating about means less value of money.
Got it? Government will always try to float as much currency as possible
without any devaluation ... because they print the money, they get to spend it
first ... ethics has got nothing to do with this ... it’s a damn clever thing.
Don’t forget Government pays for a lot to deliver the “public good”, compensate
for pilfering and expatriation of money (i.e. money leaving the economy) by
corrupt officials/politicians, and genuine stupidity.
A word on corruption: Politicians or their Goons tend to pocket some, and that is not good. It is not good on many counts: (a) for fairness sake: that money stolen in not accounted for in taxation; (b) for feeling good sake: caught, publicized, humiliated and incarcerated, creates good media coverage ... reinforces a sense of well-being among the proletariat; (c) for real justice sake: if the stolen money is taken out of the economy that created it, i.e. it is siphoned off to another country, then every local citizen becomes a real loser.
A word on corruption: Politicians or their Goons tend to pocket some, and that is not good. It is not good on many counts: (a) for fairness sake: that money stolen in not accounted for in taxation; (b) for feeling good sake: caught, publicized, humiliated and incarcerated, creates good media coverage ... reinforces a sense of well-being among the proletariat; (c) for real justice sake: if the stolen money is taken out of the economy that created it, i.e. it is siphoned off to another country, then every local citizen becomes a real loser.
4.3
Business people have a another sort of sense to motivate
them to do business (i.e. to deliver the public good, at least the essential
ones) ... they will charge a little more each time people could afford to buy
their goods. They feel pressured to make more profit each year but then
otherwise they have a perception that there is no real profit. This encourages
the business people to stay in business, i.e. deliver needed goods and services
to society. This price increasing strategy actually makes the money less worth
than the value on currency. It is called inflation.
Inflation is important for businesses to stay in business and to attract
investments... very visceral, very
psychological, really. However, if people start paying too freely, business
people will know that there is something wrong with the currency and they will
increase the price of goods and services faster. And we will have a bad
inflation or worse a runaway inflation - a nasty called “hyperinflation”, and
the economy will go berserk! Value of money will drop ... and to the ornery
folks the usual salary will not buy the same amount of food, petrol, medicine,
etc. They will blame the politicians and social instability will ensue – throw
in a well timed natural calamity, war, famine or pestilence and you have a
meltdown. Or you can have some stupid demagogue who will blame someone for it,
and soon there will be a genocidal war in our hands. So inflation must be kept
at a minimum ... ideally about 2-4%. How is this wonderful 2-4% calculated? I
don’t know but the Federal Reserves see this number as magic, and I sort of agree.
(If you want to see an economy that works on less than 1% inflation, see
Japan.)
Step Five: The Current Banking System (Bretton Wood
System)
5.1 So after 1947, the most enlightened nations (also the most war-mongering nations) of the world agreed that slaughtering each other’s people for plunder is really not a good economic idea and decided to adopted another way to doing business ... what came to be called the Bretton Wood system. Bretton Wood was the new idea that grew out of the old idea – I am not sure who the geniuses behind this new world vision were but I know at least an Austrian philosopher is in there. The rest were really time-travelling horse-racing punters from the 25th century. It was bold, innovative and very smart. They took stock of all the economic principles and took stock of everything and decided some truisms that blew like a fresh breeze after a long imprisonment in the bottom levels of the city sewerage. Read the Wikipedia article – it gives a good overview of what came into existence – namely the World Bank and the International Monetary Fund to help countries too stupid to understand or politically too ill-disciplined, to fall in line with a new global system.
5.1 So after 1947, the most enlightened nations (also the most war-mongering nations) of the world agreed that slaughtering each other’s people for plunder is really not a good economic idea and decided to adopted another way to doing business ... what came to be called the Bretton Wood system. Bretton Wood was the new idea that grew out of the old idea – I am not sure who the geniuses behind this new world vision were but I know at least an Austrian philosopher is in there. The rest were really time-travelling horse-racing punters from the 25th century. It was bold, innovative and very smart. They took stock of all the economic principles and took stock of everything and decided some truisms that blew like a fresh breeze after a long imprisonment in the bottom levels of the city sewerage. Read the Wikipedia article – it gives a good overview of what came into existence – namely the World Bank and the International Monetary Fund to help countries too stupid to understand or politically too ill-disciplined, to fall in line with a new global system.
There was an economist called Friedman in the Uni of Chicago who said nations will not fall in line with the system unless the economy goes into a meltdown and experience the hardship that comes with it. So he recommended that foreign aid should be tempered with a healthy dose of “shock treatment” so that the nation could be shocked out of their old ways. These politically ill-disciplined are the countries that have strong union and irrational salary schemes ... they can go on a strike at a pin drop. Selfish and abusive of the political system always electing idiots who promise them more of the same. They are socialist in attitude, i.e. Government must give and give, and the citizens can take and take. Or think of a Communist utopia (think Cuba). They imagine all people are born equal, and God be damned. Talk France, Italy, and Greece - I call this sort of countries klepto-democracies. Better publicized are the politically ill-disciplined ones, the klepto-autocracies such as Zimbabwe, Tanzania, Bangladesh (under Ershad), Philippines (under Marcos), and Malaysia (under Najib). Then there are the klepto-idiots such as the anti-American South American socialist countries where the elites are so comfortable that they do not want any sort of changes to their quasi-feudal system that they call democracy.
Step Six: The
New System
6.1 Each country need to maintain a certain amount of Reserve (gold etc) to
denominate their currency. That way countries with large gold reserve (think
US), or with vast gold mines (think Congo) may have an advantage but now not
every country in the world need to scramble for it to be rivalrously rich... (US
is rich and Congo is like lost). The gold reserve will determine the ‘true
value’ of the nation’s currency only when the entire economy collapses. There
are money-managing institutions who actually keep track of these things.
You can see this played out when nations modernizing their economy by building a certain amount of gold reserve... Russia, Vietnam, Cambodia, Balkan States (former Yugoslavia), now Burma and Sri Lanka. They quietly buy up gold in the market when the price is low but they buy so consistently in large amounts that the price shoots up quickly. In today’s market the price of gold should not fluctuate too much unless aliens from outer space decide to buy our gold. After the present buying “spree” in Sri Lanka which is expected to peak in December 2018, gold price will settle down to its base level. Watch the price and the politics that goes with it.
You can see this played out when nations modernizing their economy by building a certain amount of gold reserve... Russia, Vietnam, Cambodia, Balkan States (former Yugoslavia), now Burma and Sri Lanka. They quietly buy up gold in the market when the price is low but they buy so consistently in large amounts that the price shoots up quickly. In today’s market the price of gold should not fluctuate too much unless aliens from outer space decide to buy our gold. After the present buying “spree” in Sri Lanka which is expected to peak in December 2018, gold price will settle down to its base level. Watch the price and the politics that goes with it.
6.2 The gold in the Central Bank reserve (which could physically be in their
own vaults, or as receipts for the gold paid up but kept in foreign soil ...
usually New York) gives the minimum value of the currency against which it can
be marked as exchange value. Say initially the Malaysian currency RM1 is
equivalent to say USD0.25 in terms of gold reserves of the respective countries.
However, trade can shift that exchange value due to (a) the demand and supply
(foreign exchange) for the dollar which is essentially how much is the US banks
willing to pay for the RM. (b) and that is determined by the demand created by
companies in the US itself who are buying Malaysian products. That means what Malaysia
is clever at selling its products in the US... it is a reflection on the prudent
management of the Malaysian economy itself. After a while the value of RM1 will
exceed the USD0.25 due to market demand. Therefore, the value of a country’s money
will be always more than its actual Reserve. The difference is determined by
how clever a nation is in doing business with the US. Since all money is pegged
against a minimum gold standard, all international trade affects the value of
the RM. This is presently done in real time! Brilliant, isn’t it?
6.3 This forces governments to provide all the conditions necessary for good
business to thrive. (a) Governance that is committed to fight corruption / over-regulation
/ meddlesome-politicians; (b) Strong and efficient judiciary; (c) A free press
/ internet; (c) A government that is committed to the human capital giving rise
to a literate / educated / skilled / labour & entrepreneurial population;
(d) Peaceful borders and friendly neighbours that allows for easy movement of
labour, goods, and services; (e) good economic policies that balances the
interest of the consumer against the interest of business; (f) you get the
idea. This does three things: one, it will attract foreign capital into the
country because they can better assess their profitability and the security of
their capital; two, for the same reasons, local businesses are better able
to re-pay the debts they take from the banks; and (c) if this increases
export it will do well for the exchange rate.
6.4 A digression on exchange rates: A strong ringgit is not always a good
thing. The Government will decide from time to time, if it is the case. A
strong dollar means our exports become expensive, and Malaysians like to go out
of the economy and have vacations to burn money. Now imagine the reverse: a
weak ringgit can mean statistically less students going overseas to study, i.e.
a boost for local universities; less people going overseas for holidays; and
encourage more foreigners (u know the pesky hmm... Singaporeans) to buy
Malaysian properties. I think the convergence of these reasons is the reason
why the Government allows the ringgit to fall against the USD.
(Foreigners purchasing local property is a strange economic thing. One brings money into the country without taking anything tangible out of the country. One should not buy a foreign property unless one wants to live in that country, otherwise it is a way of hiding money. Such assets cannot be sold in time of distress; if children do not move into the country the property remains unused; and in high rise buildings the strata-title value lasts only as the building exists.)
(Foreigners purchasing local property is a strange economic thing. One brings money into the country without taking anything tangible out of the country. One should not buy a foreign property unless one wants to live in that country, otherwise it is a way of hiding money. Such assets cannot be sold in time of distress; if children do not move into the country the property remains unused; and in high rise buildings the strata-title value lasts only as the building exists.)
6.5 This allows the government an upper limit to print more currency without
de-valuing its money to match the market. If there is too much currency in
circulation, then the Government absorbs it back. And this is done by the way
the Bank Negara Malaysia and the Ministry of Finance conduct their Monetary
Policy and their Fiscal Policy. These are two
different things, and yet it is a dance towards the same goal so as not to
upset the value of the currency.
Monetary Policy is implemented by the Central Bank i.e. the Bank Negara Malaysia (BNM). By increasing the BSL (base lending rate) or reducing it, they can sponge money out of circulation or increase it. BSL is the BNM determined percentage of any loans given out by the local banks (Maybank, CIMB etc) There are watchdogs in the BNM who actually sit and calculate the amount of money in circulation and decide when to release more money or reduce the supply. They do this by observing certain markers like (a) how much money is going into savings (a reflection of hard currency, i.e. the old gold in Goldsmith’s vault); (b) how many NPL (non-performing loans) are accumulating; (c) how much money is entering the economy via civil servant salary, contract pay-outs, etc.
The State controls the amount of money in circulation by implementing Fiscal Policies too. It is called fiscal policy because it is implemented by the Government, i.e. the Ministry of Finance. This is the classical example of fiscal policies all countries do but here is a Malaysian example: As a result of economic planning the Government (not sure who but it must be a collaboration of experts from the Treasury, Bank Negara, Ministry of Finance, and the Economic Planning Unit) will work out percentages of how much money should be allowed to be borrowed by the people (i.e. the percentage of the Domestic Credit that should be financed by loans), under these categories: heavy industries, small/medium industries, vehicle, infra structure development, consumer housing, agriculture, and education. This is announced to Bankers on the 4th Thursday of October, just before the announcement of the Budget.
Then each of the banks will look at the amount of money people have entrusted into their savings – this is called the Total Reserve, and BNM will use that individual bank percentage of the Reserve as the share of the credit portfolio they can access to prudently lend out as loans. In a country like ours that amount can be like RM20,000 or more authorised to lent out to every RM1,000 of Reserves in the savings account. Then the Government will decide how much currency will need to be printed and handed over to BNM to distribute to the banks... this created money is called fiat money because its value is calculated according to principles that is not its actual value in gold. Its value will be smaller than the gold reserve but it has effective purchasing power as if it has the value of gold in it, within certain limits that are purely subjective - it is the confidence the people show to the economy managers. (One way to gauge it is to look at the habits of share market.)
Fiscal policies are also implemented via other means too. Take for example, by reducing subsidies, increasing taxation, implementing tolls, fees, etc. the Government can mop up the money they give away for political reasons (e.g. pay rise for civil servants) and for contracts (e.g. infra-structural projects).
Monetary Policy is implemented by the Central Bank i.e. the Bank Negara Malaysia (BNM). By increasing the BSL (base lending rate) or reducing it, they can sponge money out of circulation or increase it. BSL is the BNM determined percentage of any loans given out by the local banks (Maybank, CIMB etc) There are watchdogs in the BNM who actually sit and calculate the amount of money in circulation and decide when to release more money or reduce the supply. They do this by observing certain markers like (a) how much money is going into savings (a reflection of hard currency, i.e. the old gold in Goldsmith’s vault); (b) how many NPL (non-performing loans) are accumulating; (c) how much money is entering the economy via civil servant salary, contract pay-outs, etc.
The State controls the amount of money in circulation by implementing Fiscal Policies too. It is called fiscal policy because it is implemented by the Government, i.e. the Ministry of Finance. This is the classical example of fiscal policies all countries do but here is a Malaysian example: As a result of economic planning the Government (not sure who but it must be a collaboration of experts from the Treasury, Bank Negara, Ministry of Finance, and the Economic Planning Unit) will work out percentages of how much money should be allowed to be borrowed by the people (i.e. the percentage of the Domestic Credit that should be financed by loans), under these categories: heavy industries, small/medium industries, vehicle, infra structure development, consumer housing, agriculture, and education. This is announced to Bankers on the 4th Thursday of October, just before the announcement of the Budget.
Then each of the banks will look at the amount of money people have entrusted into their savings – this is called the Total Reserve, and BNM will use that individual bank percentage of the Reserve as the share of the credit portfolio they can access to prudently lend out as loans. In a country like ours that amount can be like RM20,000 or more authorised to lent out to every RM1,000 of Reserves in the savings account. Then the Government will decide how much currency will need to be printed and handed over to BNM to distribute to the banks... this created money is called fiat money because its value is calculated according to principles that is not its actual value in gold. Its value will be smaller than the gold reserve but it has effective purchasing power as if it has the value of gold in it, within certain limits that are purely subjective - it is the confidence the people show to the economy managers. (One way to gauge it is to look at the habits of share market.)
Fiscal policies are also implemented via other means too. Take for example, by reducing subsidies, increasing taxation, implementing tolls, fees, etc. the Government can mop up the money they give away for political reasons (e.g. pay rise for civil servants) and for contracts (e.g. infra-structural projects).
6.6 You can see that Banks by giving away 3% interest for Poh’s RM1,000 FD, the
Bank earns about 8% on RM20,000 (which it lends out to promising business
people) ... in this way magically the Banks create RM1,570 of sheer value,
especially the borrower returns the money with full interest payment. This is
how a country creates wealth.
6.7 Of course, this means the money value of the currency is smaller and gets
ever smaller compared to the Gold and Currency Reserve. Yeah... so what? The
economy is humming, and there is economic
confidence. This is modern capitalism in a small magical nutshell. And we
are not exchanging Ringgit to USD based on our Reserve but on demand created by
trade. And if we want to improve the overall health of our economy, we just buy
more gold with the money we have and keep it in our reserve.
6.8 Since there is not much gold to go around the world, gold itself was
commoditized. So that Governments instead of gold can keep foreign currency as
reserves. Of course, it carries a risk: if China decides to de-value their
currency to be closer to their gold reserve (since all governments print more
money than their gold reserve); it will affect the value of all the currencies
of countries who keep Chinese renminbi as part of their reserve. Which is what
happened in Malaysia a few years ago. We lost like 40% of the value of our
Foreign Currency Reserve because China decided to rationalize its value against
the USD.
6.9 Before I move on, remember that the above explanation is roughly correct
for Malaysia. But most countries have their own way of tweaking the economy
depending on how they historically developed the controls, measures, checks and
balances. In UK for example, the banks
determine their own percentage of reserves before lending but then the lending
amount and the lending rates must be coordinated.
Step Seven: World Dominion
of the United States of America
7.1 While most books stops about here there is another element that
keeps the world economy in its place and without nations coveting each others’
wealth and spoiling for war. (The Lord says “Thou shalt not covet thy
neighbours ass...) It is called the American
Financial System ... It is called “American” because they figured this out
first. Most countries in the world maintain a “healthy trade balance” with the
US, i.e. these countries sell their goods, services and labour to US more then
US sells theirs to these countries. In this way these nations are beholden to
US for their national wealth in various measures. As a result the US becomes
the largest consumer nation of the world, and the rest of the world becomes the
beneficiary of US consumerism. So practically, the US becomes the biggest
debtor to the world but the US should be happy about it. And here is why Trump
is befuddling to economists that he thinks otherwise is better.
7.2 Whenever a commodity (palm oil, cocoa, tin, petrol, soy, gold,
whatever, etc) is sold in the international market, it is denominated in US
currency! You know Malaysia produces palm oil. We sell them roughly to the tune
of USD600 million annually. For argument sake, say China buys the entire stock
from us. It has to pay us in USD and not in Renminbi. Where is China going to
get that money ... it does not print USD. It will dig into its currency reserve
accumulated from its own trade surplus with the US or buy the currency from the
US Treasury. What does this mean? It means though you are selling your palm oil
to China but the US has to make the currency ready for it. The US does not own
the natural resources of the world except that which is found in US soil, it
does not even have possession of it, but it has control over it. This
is a new level of understanding and I would like to use the term custodial control of all resources of
the world. That is to say, though you are paid for your commodity, the US must
give the money to your buyer, and it is not free.
7.3 That is why it is desirous for the US to be debtor nation to the
world. That is why the US is a world empire in the true sense. And that is why
the US will go to war to protect this “right”... and therefore they are the
apex military power of the world. Did you read the book Complex I passed to you last year? And now you know why the
Russians, the Chinese and the Islamists grumble about US dominance – not that
they make money selling Coca-Cola or MacDonald; not because they have a
powerful military; but because all their national resources are denominated in
USD. This is real meaning of the US-UK “special relationship”; and why Britain
has no real love for the EU. And now you know how the US see who their enemy is
... those who steal resources from other nations are actually stealing US “resources”.
Those who accept payment in currencies other than the USD are actually creating
enmity with the US.
7.5 It is interesting how the US worked out such a system: In 1910, a group of very
far-sighted men decided to stabilize the US currency while at the same time
take advantage of the Government borrowing: Sen. Nelson Aldtritch and a group
of 6 Bankers: Paul Warburg, Charles Norton, Abe Andrews, Frank Vanderlip,
Benjamin Strong, and Henry Davidson... Google these guys up. They got the
Congress to set up the Federal Reserve that came into being in 1913 as a body
independent of Government interference, and it was signed into law by Woodrow
Wilson. Who owns the Federal Reserve ... the magic six banks. [Find out who are
their directors today? And who are their descendant organizations?] The primary
initial reason for this move was to take advantage of the fact that if they
could lend or allowed to lend more money then they had they would earn handsome
profits. But who is going to create that additional sum or at least guarantee
it other than the State? At that point in time, they all thought this was
morally suspicious, and the public opinion would not favour such a move. So
getting the Congress to approve such fundamental changes in the economy was all
cloak and dagger! Today we think it is all natural.... See point 6.6
7.6 The Federal Reserve controls the amount of currency the Treasury can issue
... that is their primary function.... of course. The Government when it needs
more money than its tax collection (for the deficit in the annual budget), it
asks the Treasury to issue a bond (i.e. essentially an IOU) to the Federal
Reserve to give permission to print all those money. The Federal Reserve than
issues a cheque to collect those newly minted cash. But before the Feds issue
the cheque to pay, they study their claim to see how it will affect inflation,
how much of the GDP it is, and whether the Congress is abusing the system. If
they inject too much money too quickly it can trigger an inflation... that is
their next most important function – monitor inflation. (How does this differ
in Malaysia today? Not much. Bank Negara plays the role of the Federal Reserve
and will work out the amount of money the economy can reasonably contain. And
they will discuss with Treasury and Ministry of Finance on how to distribute
it.)
7.7 In 1971 the Federal
Reserve and the Treasury decided that the US currency need no more be backed by
gold. What it means is that the US domestic economy is stable enough that it need
no more be obligated to stick to a fixed value to the dollar based on gold but
reversed the whole equation by making the value of gold to be determined by the
price fixed by the US. Historically this has an interesting effect: By
decoupling the value of USD from gold, the rationale for war and plunder was
removed. Nations need not pretend to war as in the past. The old world in this
sense passed away very quietly.
7.8 For this
system to work, there must be someone who can police the operation of the USD
in the world outside the US soil. After the end of World War 2, the world was
reeling from the effects of war, and the economy of the great colonial power
the UK was itself was in tatters. Whether you like it or not, the UK economy
was an economy based on plunder but just not of gold. Their was by dominating
the marketplace – creating a demand for UK goods and services more than UK
creating a demand for goods and services from their colonies. They benefitted
because the Industrial Revolution did begin in the UK – they had the legal
infrastructure, access to capital, commitment to science and R&D and such
stuff far in advance to any other countries. But the UK could not economically
survive the war. So they borrowed from the US and decades later it was Margaret
Thatcher who finally paid off the debt. Whatever money the US loaned to UK and
Europe (the Great Marshall Plan) in general was in USD and it took back with
interest all in USD. This way the USD was established as the sole currency for
international transactions in commodity. I am not sure if powers that be in US
at the time (Presidents Roosevelt and Truman and their “New Deal”, and the Feds
– Eccles and McCabe) realized it or not, they laid the foundation for the
Imperial Economy of the US. After securing the denomination of the world
commodity market in USD, it has to be secured. This they did in two ways – one,
by ensuring gold price stabilized; and two, by ensuring that this privilege of
USD in commodity trading is enforceable by coercion if necessary.
7.9 Though the
US declared the decoupling of USD from gold standards, it does not mean there
is no equivalent value. As long as there is a gold market, there will be a USD
denomination for the gold any nation has. This could become the lowest value
for the value of any currency in the world; and as long as gold price is
stable, the USD value of the gold reserve in the country has equitable value
added by its USD reserve. This still determines the basic exchange value of one
currency against another but it is not enslaved to this value. Some countries
like Hong Kong and Singapore have very low gold reserves but they have huge USD
reserve. (So instead of plundering for gold, a nation can go and steal USD!!
3xha!)
So for nations to covet the USD, the gold stockpile of the US must have a stable value. But the US has an advantage, by decoupling the gold standard, it made gold a trading commodity denominated in nothing but USD. And there is a genuine gold commodity market ... gold is used for industrial purposes, sheer cultural greed for jewellery, and to create reserves for the new economic systems for countries like in recent years Russia after the fall of the Soviet Empire, Burma presently, and last year Sri Lanka, and in the future, many African countries. And the US ensures a stable market by stockpiling.
So for nations to covet the USD, the gold stockpile of the US must have a stable value. But the US has an advantage, by decoupling the gold standard, it made gold a trading commodity denominated in nothing but USD. And there is a genuine gold commodity market ... gold is used for industrial purposes, sheer cultural greed for jewellery, and to create reserves for the new economic systems for countries like in recent years Russia after the fall of the Soviet Empire, Burma presently, and last year Sri Lanka, and in the future, many African countries. And the US ensures a stable market by stockpiling.
US as of
2017 has a stockpile of 8,133 metric tonnes of gold. Is this a lot? Its allies
(those who do not grumble about the USD denomination of commodities) jointly
control about twenty thousand metric tonnes of gold. The Grumblers – the
Russians and their allies control about three thousand metric tonnes; and the
China bloc controls about two thousand metric tonnes. Therefore, if anyone
nation were to manipulate the price of gold, the US has enough to draw upon
their stockpile and push price down, or mop up any excess gold that enters the
market. By the way, stable prices does not mean fixed price but price that does
not experience extreme swings. (https://www.gold.org/)
7.6 The second
aspect of Imperial Economy is the monopoly on military power. That is why the US has militarised
itself in ways beyond imagination. It has infused the entire economy by an annual
budget of about USD560 billion as of 2016. It is 54% of their total budget but
to get a comparison the entire Malaysian budget for 2016 is USD280 million.
Military funds in the US goes beyond weapons, and military – they go into
universities, R&D, entertainment, food and so forth. No company in the US
can antagonise the military and hope to survive in the economy. The Complex is a book that outlines this
development. This way the US elite consolidated their power in the domestic
front – no citizen is left out of the military complex. Every development comes
through military funds.
Second, they found that military R&D spins off consumer goods; and by having access to their products they can consolidate their power in the foreign front. The key to all this is their invisibility. Stupid Trump does not know that – he wants a military parade in Washington! Take for example, the amount of legal protocol to get the private data of a single individual in the US or worse someone in foreign soil ... but not if you have access to Facebook – they get it for free. It is a diplomatic fiasco if the US military satellites are found to be mapping foreign soil but freely taken if countries willingly provide information vide Google Map or Waze both of which were military funded watered down version of US military application.
Apart from the fact that the military sell their weapons in the hot zones, weapon development keeps the arms race going, and the pace creates a huge market for weapons. The US not only battle-test weapons in such places they also sell superior weapons to governments; and sell outdated ones to rebels to keep the hot zones burning. In 2017, the Saudis committed themselves to buy USD500 billion worth of weaponry and payment of bills for the maintenance of a military base on their soil. That is the annual budget of the US military... but then to the Saudis this is pocket money for the mercenary services of the US.
Now, you should know that China cannot take oil out of the Scarborough Shoals that belong to Philippines. Duerte sort of agreed to the theft in the sly saying China is very strong and then they are bringing development into his country. It will tantamount to buying oil in Chinese currency ... it is a Philippine betrayal of US interests! It is an experiment in economic policies that govern the world but allowing China to “take” oil from foreign soil is a declaration of war against the US! You saw the consequences. Now there is a US naval presence at the Scarborough Shoals – not to shoot but to see if the Chinese will build an oil platform.
But Trumps strategy is not to use weapons or stress the budget for war. In Congress he has a better leverage in shifting economic policies that will stress out the economy of loud and rude nations by cutting off the flow of capital that they use to fund their misadventures in foreign soils. It is simply unfortunate that Pakistan, Iran, and North Korea developed nuclear capability and policies for the eradication of Israel at the expense of their own domestic economy. Surprisingly, even the Chinese economy is vulnerable to slight stresses in their export market. This is a superior form of warfare – war without bloodshed. You use trade sanctions to shift your own domestic public opinion against you and your policies. Maybe Trump may be a yahoo but certainly not stupid.
Second, they found that military R&D spins off consumer goods; and by having access to their products they can consolidate their power in the foreign front. The key to all this is their invisibility. Stupid Trump does not know that – he wants a military parade in Washington! Take for example, the amount of legal protocol to get the private data of a single individual in the US or worse someone in foreign soil ... but not if you have access to Facebook – they get it for free. It is a diplomatic fiasco if the US military satellites are found to be mapping foreign soil but freely taken if countries willingly provide information vide Google Map or Waze both of which were military funded watered down version of US military application.
Apart from the fact that the military sell their weapons in the hot zones, weapon development keeps the arms race going, and the pace creates a huge market for weapons. The US not only battle-test weapons in such places they also sell superior weapons to governments; and sell outdated ones to rebels to keep the hot zones burning. In 2017, the Saudis committed themselves to buy USD500 billion worth of weaponry and payment of bills for the maintenance of a military base on their soil. That is the annual budget of the US military... but then to the Saudis this is pocket money for the mercenary services of the US.
Now, you should know that China cannot take oil out of the Scarborough Shoals that belong to Philippines. Duerte sort of agreed to the theft in the sly saying China is very strong and then they are bringing development into his country. It will tantamount to buying oil in Chinese currency ... it is a Philippine betrayal of US interests! It is an experiment in economic policies that govern the world but allowing China to “take” oil from foreign soil is a declaration of war against the US! You saw the consequences. Now there is a US naval presence at the Scarborough Shoals – not to shoot but to see if the Chinese will build an oil platform.
But Trumps strategy is not to use weapons or stress the budget for war. In Congress he has a better leverage in shifting economic policies that will stress out the economy of loud and rude nations by cutting off the flow of capital that they use to fund their misadventures in foreign soils. It is simply unfortunate that Pakistan, Iran, and North Korea developed nuclear capability and policies for the eradication of Israel at the expense of their own domestic economy. Surprisingly, even the Chinese economy is vulnerable to slight stresses in their export market. This is a superior form of warfare – war without bloodshed. You use trade sanctions to shift your own domestic public opinion against you and your policies. Maybe Trump may be a yahoo but certainly not stupid.
Step Eight: The
Star Trek Economy
8.1 The future looks weird. Whether it
is going to be more Star Trek then Star Wars, it is for you to decide. Watch
these series and imagine how the humongous marshalling of resources is possible
under the existing economic system. It is not possible without first changing
the way we do economy at a fundamental level – i.e. going back to the sticks
and stones of economy – labour, wages, demand and supply, elasticity, capital,
profit, etc.
8.2 But the future is closer than you think. So be prepared. Technology is
upsetting the classical models of economy by taking the cost of human labour
out of production through ARI – Automation, Robotics, and Artificial
Intelligence. There was a balance between people who worked and the wages they
earned which in turn was balanced between what they could afford and the
production of goods and services. This has not created but will create in the
near future what I call a Population Pressure due to technology – like a second
Iron Age. What do you do with able bodied people who have to become consumers
of goods who is not involved in its production? Population pressure is not new
to the world. In the past the “excess people” strained an economy that could
not sufficiently feed them. What is new, is that we could feed them and in a
way we need them to be consumers. But if they are not gainfully employed since
ARI entities are doing their jobs more efficiently, how do they earn their
wages? The solution can come in three directions: One is to create a Socialist
Utopia: a universal credit system could be created for the well being of
citizens, so that they can eat, be entertained and generally live a comfortable
life. Two, is create the Classical Conundrum – send people off to war to seek
glory and honour; and to engage them in super massive labour intensive
projects. Three, harness both these possibilities under a new system of
allocating resources – a new definition or philosophy.
8.3 The 21st century giants such as Microsoft, Apple,
Ebay, Amazon, SpaceX, PayPal, Uber, FaceBook, Google, YouTube, Oracle, Tesla,
Sony, Disney, Netflix, Intel, IBM, even PornHub and such companies form a
Cabal. They talk to each other, co-operate, compete, gobble each other and have
in many ways have benefitted the existing economic system by destroying the old
ways and creating new and more efficient ways. It has largely been lauded but
with the advent of an ever more efficient AI, coupled with robotics and the
internet they have heralded the Step Eight of the Economy. One of the best
known invention that utilizes Artificial Intelligence, Robots, and Internet
(ARI) is the combat drone. Out of this came the self-driving vehicle, the
home-delivery drone, and such communication tools like the web, the chat apps,
and the e-banking. It is still primitive but all good.
8.4 What philosophical premises are needed to shift into this Brave New World? How should we understand money, accumulation of wealth, and the
way we make economic decisions for our life? This is anyone’s guess but I see
preoccupation with education and research will be the biggest enterprise, and it
will be free. I also see fundamental health care will also be free. But not
transportation. Entertainment will be big business and there will be
unprecedented freedom to indulge within the limits of one’s credit.
Note that it is a Brave New World, and not a brave New World Order. What’s the difference? In the New World Order it is the elite of previous generations through their own intricate collusion keeping for themselves access to an inordinate proportion of the resources of the world. In the Brave New World, there will be a whole new elite that will rip everything apart, setting into motions a whole new economy that will render the very concept of wealth of the Old Money obsolete. The benefits of knowledge will constantly radicalize the way we access and use the resources of the world.
Economically, there will be exciting pockets of local economy that will be unmolested as if it is some sort of entertainment for the people. Such localized economies, called the Bazaar will define the local culture and their enterprise. It will contain the vestiges of the old economy, with its own entertaining heroes and cultural icons.
There will still be personal crime but hardly any property or economic crimes. Policing will remove law-breakers to comfortable isolated communities rather than let them live among the free people. There will be Lawbreaker Islands. Policed for health, these communities will be allowed to regress into their own Bazaar.
The most exciting aspect of the Brave New World is medical care that will be universal and free. For those who choose to do so, life could be terminated at one’s own will. Or if the individual choose to invest they can have access to Intermittent Hibernation techonology. This option will allow people to extend their age to hundreds of years by hibernating for years in between waking periods. A farewell party, a goodnight kiss, and you wake up fifty years later. You live for ten years or so, and then return to a hibernate-sleep and wake up another fifty years later.
Hibernation will be a by-product of another drive in science and technology - Space Exploration which requires perfecting the technology of Hibernation Science and Body Augmentation. One of the most riveting event of the Brave New World, is the discovery of a reachable habitable planet. The most depressing news will be the gnawing suspicion that there is no greater intelligence in the universe than us, and that Earth the Homeworld is indeed the centre of the Universe.
This combination will change the attitude of the tech-savvy Civilized with many life-style options made available for them – there will be the rest of the world who have no access to the privileges of civilization in the first place – the Lefty, i.e. the Left-Behinds, especially in large pockets of the Middle East, Africa and in large parts of China, India, and South America. There will be the dissidents who voluntarily choose the old ways – the Amish. Those who want to spend their life as soldiers – the Mercs. Those who choose to go space exploring – the Spacers. The large number of hibernating individuals - the Sleepers; and the privileged awake – the Hypers.
To old school people like me, it is Strange New World, to enter it one must be bold and brave but to those who live in it, it is the World itself.
Note that it is a Brave New World, and not a brave New World Order. What’s the difference? In the New World Order it is the elite of previous generations through their own intricate collusion keeping for themselves access to an inordinate proportion of the resources of the world. In the Brave New World, there will be a whole new elite that will rip everything apart, setting into motions a whole new economy that will render the very concept of wealth of the Old Money obsolete. The benefits of knowledge will constantly radicalize the way we access and use the resources of the world.
Economically, there will be exciting pockets of local economy that will be unmolested as if it is some sort of entertainment for the people. Such localized economies, called the Bazaar will define the local culture and their enterprise. It will contain the vestiges of the old economy, with its own entertaining heroes and cultural icons.
There will still be personal crime but hardly any property or economic crimes. Policing will remove law-breakers to comfortable isolated communities rather than let them live among the free people. There will be Lawbreaker Islands. Policed for health, these communities will be allowed to regress into their own Bazaar.
The most exciting aspect of the Brave New World is medical care that will be universal and free. For those who choose to do so, life could be terminated at one’s own will. Or if the individual choose to invest they can have access to Intermittent Hibernation techonology. This option will allow people to extend their age to hundreds of years by hibernating for years in between waking periods. A farewell party, a goodnight kiss, and you wake up fifty years later. You live for ten years or so, and then return to a hibernate-sleep and wake up another fifty years later.
Hibernation will be a by-product of another drive in science and technology - Space Exploration which requires perfecting the technology of Hibernation Science and Body Augmentation. One of the most riveting event of the Brave New World, is the discovery of a reachable habitable planet. The most depressing news will be the gnawing suspicion that there is no greater intelligence in the universe than us, and that Earth the Homeworld is indeed the centre of the Universe.
This combination will change the attitude of the tech-savvy Civilized with many life-style options made available for them – there will be the rest of the world who have no access to the privileges of civilization in the first place – the Lefty, i.e. the Left-Behinds, especially in large pockets of the Middle East, Africa and in large parts of China, India, and South America. There will be the dissidents who voluntarily choose the old ways – the Amish. Those who want to spend their life as soldiers – the Mercs. Those who choose to go space exploring – the Spacers. The large number of hibernating individuals - the Sleepers; and the privileged awake – the Hypers.
To old school people like me, it is Strange New World, to enter it one must be bold and brave but to those who live in it, it is the World itself.
