Friday, October 21, 2011

On the road to the trillionaire club

Subject: RE: [MCOBA:88150] Group warns of RM1 trillion debt by 2020
Date: Thu, 20 Oct 2011 15:41:53 +0000

        Current debt is RM437 billion as at 30 June 2011 of which RM16 billion is foreign debt. This represents 51% of GDP. As a perspective of the potential problem Greece national debt is 110% of GDP whilst the PIG countries Portugal, Ireland and Spain approaches 70% of GDP. We are therefore not far of in terms of future trouble. If not checked this legacy of debt will be passed to our children and grandchildren to bear. Our foreign debt is still relatively small so if you hear of our leaders wax lyrical on new Sovereign Sukuk Issuance please do not encourage them further lest we go down the road of Pakistan who have to borrow foreign to pay govt servants salaries.

         As to the estimated RM1 trillion by 2020 this is based on the debt growth of RM50 billion p.a where RM1000 billion equals RM 1 trillion. As to whether we have RM1 trillion in money is a non issue when debt is created by the government merely issuing bills and bonds to the market. For example a budget with RM50 billion deficit is simply funded by the govt issuing Treasury bills and bonds worth RM50 billion. So a national debt of RM1 trillion can be created. 

         The unspoken presumption is that a country have a stock of gold and no amount of money beyond this can  be created. This fallacy have been abandoned by countries many many years ago. Today the volume of money bears no relation whatsoever to the nation's stock of gold or whatever. Apart from paper money and coins, a nation's money stock is created either through govt debt what economists like to refer as monetisation of the budget deficit, or fractional reserve banking. Fractional reserve banking is thin air money which banks created based on an initial stock of money deposited in a bank. Assume I deposited RM1000 in Bank Muamalat. Bank Muamalat retains a statutory reserve of 10% and extends financing RM900 to Sulaiman. Sulaiman then places RM900 with Bank Islam. Bank Islam retains 10% and extends financing of RM810 to Mohd Shah. Mohd Shah deposits RM810 with Maybank. Maybank retains 10% and lends RM729 to Idris. Now lets recap how much money everyone have which they have cheque books to prove they can spend. Me = RM1,000 + Sulaiman RM 900 + Mohd Shah RM810 + Idris RM729.  The banks have just created RM3,439 of spending power from the initial RM1000 I deposited with Bank Muamalat. This is fractional reserve banking; the creation of money out of thin air. This is the reason now why a new car costing RM14,000 in 1980s now cost RM40,000 and a new house costing RM60,000 then now cost RM300,000.

Now our children and grandchildren who not only have to bear the legacy of the RM 1 trillion national debt will also face major inflation when they start work in 2020. Fresh graduate's salary have hardly moved from RM 1500 in 1980's to RM2500 today. In the same period price of cars have moved from RM14,000 to RM40,000 and price of houses from RM60,000 to RM300,000. I am willing to predict in 2020 the new graduates salary is RM5,000 but a new a car will cost RM100,000 and a new house RM1 million.

Is this our problem or a problem of our future generation to solve? As responsible fathers and grandfathers we should address to solve this problem now, and not bequeath this burden to our future generations.



  1. saya sangat tertarik dengan penjelasan ini...mohon copy past ke blog persatuan pelajar malaysia di riyadh..syukran