Inflation


Ringgit MalaysiaThis article is an adaptation from a section of Sharif Rahman’s latest book which concluded his detailed explanation on gold’s multitude of failures.  His latest book is titled, “Kegagalan Emas Sebagai Matawang” and is sure an exciting read because he also took the time to explain the justice of “interest”.

Ever wonder why the money in your hand is considered valuable, even if the paper it’s printed on is just that, mere pieces of beautiful paper? Many gold bugs made the silly accusation that these pieces of paper have no value and are no match when compared to their shiny gold bars and coins.  They claimed that the Ringgit’s value is simply being dictated by the government and the government is forcing the people to accept it.  Thus the typical word they used to badmouth the currency is “fiat”.  Fiat means decree, and a long time ago, that was the case.  However today, our paper money is no longer a mere fiat currency, it is a currency that is soundly backed, and the backing is far superior to using gold as the support.

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For the past decade, the gold price increases tremendously from merely USD270 (RM1,026) per ounce (oz) in early 2002 to all-time high of USD1,913 (RM5,685) per ounce (oz) 23rd August 2011. That was 608% increase in US Dollar or 454% in Malaysian Ringgit.

However, since reaching all time high, the price gradually went down to less than $1,200 per ounce at the end of 2014. 2013 is the worst performing year, where the price drop a massive 27%. 2014 also register a price drop in US Dollar albeit small drop but the price increase in Malaysian Ringgit which was due to sudden drop of Ringgit versus US Dollar.

Gold once perceived as a safe haven during uncertainties or economic crises and a hedge against inflation but why it dropped so much? Read the article “Breaking the Myth of Gold as the Ultimate Store of Wealth” and “Why Gold is Damaging to the World’s Economy” which were written by the author of 259 Trillion Vs 5 Trillion book series. Maybe the article could explain why.

I made a compilation table to show the annual gold price changes for the past decades in both US Dollar and Malaysian Ringgit as below.

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GoldCentral banks in countries namely United States (US), Germany, France and Italy hold 70% of their reserve in gold. What spurs them to use gold as reserve is their loss of confidence towards the two world leading currencies, the US dollar and Euro. Gold is viewed as a federal reserve and is a counter against the swing of the US dollar.

United States, who is the leader in the world of economy, has been facing one of the roughest times with its shrinking economy and increasing unemployment rate. Since the concluded of the Great Recession 3 years ago, the country’s employment rate has topped 8% for each month with job growth slowed drastically in August. Employers only added 96,000 jobs which indicate a fall from 141,000 in July, far below the 12 million over citizens who are still unemployed.

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subsidies

Malaysia is one of the most subsidised nations in the world. Its total subsidy of RM74 billion in 2009 is equivalent to RM12,900 per household or 4.6 per cent of GDP even higher than Indonesia (2.7 per cent) & Philippines (0.2 per cent).

Due to high subsidies, Malaysia’s fiscal deficit stood at 7% of GDP or RM42 billion in 2009. Malaysia will be bankrupt by 2019 as total debt would soar to a RM1.16 trillion if we do not cut subsidies now.

Below are the breakdown of 2009 subsidies,

  • RM 30.8 billion – Primary, secondary, higher education and scholarships.
  • RM 22.9 billion – Medical services, petrol, toll, foodstuff (paddy, sugar, cooking oil)
  • RM 18.0 billion – Gas subsidy for power and non-power sector, prefential interest rate.
  • RM 2.3 billion – Welfare aid for poor, farmers, fisherman and disable.

Prime Minister’s Department’s Performance Management and Delivery Unit (Pemandu) was giving the task to come out with the plan to rationalise the country’s subsidy scheme.

A nationwide SMS survey conducted by Pemandu found 61% of respondents agreeing to the subsidy rationalisation initiative, with the majority preferring for it to be phased out over three to five years.

Below are some of the recommendations on subsidies that are to be removed.

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inflation

Previously, we look at how does one trillion dollars look like. Yes, one trillion dollars in cash is really massive amount to keep. Now, I am going to show you 100 times more, a 100 trillion dollars. Can you imagine how its going to look?

Read more to find out.

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