When a financial crisis strikes, the general advice given by some knowledgeable people / institutions include letting the inefficient companies close down so that the market will soon become healthier as only the healthy companies could remain. Never mind those working people for that inefficient company. They should find jobs in some other healthier company or industry. This will make everyone more competitive!
By the way, ASEAN nations facing the the 1997 financial crisis were asked to do something similar. Some followed and lost many ‘inefficient’ companies which was purchased by foreign companies with deeper pockets. These ‘inefficient’ companies could become efficient after they were owned by the foreign entities, somehow. Malaysia refused and instead instituted the now world famous capital control. RM was pegged to the US$ at US$1 to RM3.80 The reason for RM3.80 was later revealed to be just a number.
Nevertheless, this provided the stability we needed and we recovered economically despite not taking any financial assistance from the International Monetary Fund (IMF). Now, the Covid-19 is wrecking havoc in economies worldwide and this includes even the world’s largest economy, the U.S. What would be the steps suggested in order to save the economy, the many industries and specifically some troubled companies?
Article in marketwatch.com Scott Minerd, global chief investment officer at Guggenheim Investments estimated that the Chinese economy is contracting at 15% annual rate, European economy is already in a fairly severe recession and says that even if the United States is not yet in a recession, it will enter one very soon. Then he gave an idea of what is potentially happening soon with an economy which is in a recession, specifically the U.S.
He said, “While shutting down restaurants, schools and major events, a lot of people are going to be without a paycheck—people who probably don’t have $500 of savings in the bank—and they won’t be able to cover next month’s rent, their car payment, and their living expenses. Given this dynamic I see this getting much worse.” In order to ‘save’ industries and companies from this, the U.S. economy will need upward of US$2 trillion. Do read the full article with a lot more insights here: Article in marketwatch.com
Well, the US$2 trillion will have to come from somewhere yeah. If it’s about printing ever more money, then the currency should weaken… right? Well, not really. In recent days, the US dollar has climbed against major currencies like the Australian Dollar, the Euro and even the British Pound. Yes, of course it has also climbed against the Ringgit too. One major reason is always this, the US Dollar is a safe haven currency due to all the uncertainties in the world today courtesy of the Covid-19. All the rest… are well… just currencies.
If you like to understand a little more deeper on the WHY, do read this article in theedgemarkets.com So yeah, we can see that the strength of currency which should be due to the trading of goods and services is not really that apparent. The more goods and services which a country exports, the higher the demand for their currency (to pay for the goods and services) and thus it should strengthen. Malaysia has been having trade surpluses for as long as some countries have their trade deficits. Also, that financial logic that the more money the country prints the weaker the currency should be… no? Happy following.
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