There has been a huge outcry of public concern about the proposal by Deputy Youth and Sports Minister Wan Ahmad Fayhsal Wan Ahmad Kamal of Malaysia that Bank Negara Malaysia (BNM) should print and distribute money to stimulate the economy and provide support for people suffering from the effects of the Covid-19 lockdown.
This is all rather strange to mild-mannered economists like ourselves because as far as we understand his idea, it seems perfectly sensible.
To simplify the debate and cool frayed tempers, we can all quite easily agree on at least part of the proposal. No one objects to cash hand-outs to help those in need.
Indeed, we have had conditional cash transfers for a long time. Bantuan Rakyat 1Malaysia (BR1M) was introduced in 2012 by Barisan Nasional, continued as Bantuan Sara Hidup (BSH) under Pakatan Harapan in 2019 and is the centre of the Covid-19 stimulus under Perikatan Nasional this year as Bantuan Prihatin Rakyat (BPR).
So it is not the idea of cash hand-outs that is objectionable, it is just how they are paid for that is causing a flurry of concern and particularly the idea that they should be paid for by printing money.
Currently the cash hand-outs are paid for from normal government revenue, which takes the money from other priority areas. Or they are paid for by issuing new government debt which has finance costs, must be restricted within the debt limits and has to be paid back. Using government debt also crowds out the use of this money for private sector investment.
By contrast, financing cash hand-outs with newly-printed money is a useful tool in the policy mix. The money supply does not have interest rates, it can be cut back prudently in the future and most importantly, it can stimulate domestic demand and investment under the specific circumstances we have at the moment.
These include high unemployment, falling disposable income, mass closure of firms, fire-sales of stocks, a deterioration in the long-term down trend in fixed investment and the terrible social costs that accompany the economic crisis we are all suffering.
It is true that in normal times printing money does not solve poverty, it just raises prices because people spend the excess cash.
In the current scenario, people do not have excess cash and the issue is not, “too much money chasing too few goods,” it is, “too little money and not enough demand,” so people suffer and firms close down.
It is this use of money that we are interested in, as a medium of transactions to increase liquidity, unblock cash-flows and get demand moving again.
Money is printed every day. Even a casual glance at BNM data for narrow money (M1) shows it increased by 18.5 per cent or nearly RM80 billion in the 12 months to September 2020. So there should be no particular concern about printing money per se, it is crushingly normal in economics terms.
No one is suggesting that BNM print the equivalent of the Malaysian national income and dump RM1.4 trillion in newly-minted notes in the middle of Dataran Merdeka for people to take in arm-full, wheelbarrows or ruck-sacks. The policy must be applied in moderation, as part of a broad policy-mix.
We also mustn’t get too attached to the imagery. “Helicopter money” does not imply that BNM will enlist the Royal Malaysian Air Force (RMAF) to “ringgit bomb” the kampungs. It merely means that they will find channels to distribute newly-printed money to eligible recipients.
There are multiple channels, through which this can be done. For the B40 it can be channelled through the BPR scheme, for the M40 through LHDN (Lembaga Hasil Dalam Negeri or the Inland Revenue Board of Malaysia), for students through their universities who already distribute government aid grants, for sole proprietors through SSM (Suruhanjaya Syarikat Malaysia or Companies Commission of Malaysia), even the EPF i-Sinar programme has a direct mechanism to transfer the money to its members.
All that is needed is an eligible NRD/IC number and measures to make sure only those eligible receive the grant, that there is no double payment and that there are no leakages through agents.
There are of course some issues to be cautious about. The first is inflation because as a general rule increasing the money supply will cause prices to rise. Actually inflation in Malaysia does appear to be closely related to the money supply but more to wages, as a form of cost-push and demand-pull and exchange rates through the effect on the price of imported goods. So the money supply is only a partial factor.
We should also remember that headline inflation in Malaysia is negative, core inflation is only around one per cent and inflation without fuel is basically zero, according to Department of Statistics Malaysia (DOSM). The forecast is for low inflation well into next year. The risk is deflation, not inflation.
A second issue of concern is the possibility of devaluation of the ringgit. This is only likely to occur if the new money enters the foreign exchange markets.
In the current discussion, any new money printed by BNM would go first into private consumption. This would stimulate demand and investment and lead to growth which would attract foreign interest in the ringgit and support the currency, so devaluation is not inevitable.
In any event, exchange rates are largely out of your hands and determined by international markets whatever you do. You should not try to rely on exchange rate forecasts and never use them as a monetary policy rule.
A third concern that has been raised is the issue of “moral hazard.” The idea here is that printing money for cash support programmes will make people lazy as they hang around waiting for the next hand-out.
This is an interesting but rather eccentric objection because if it were true of printing money, it would also be true of all government hand-outs and we would scrap BPR for the same reason.
So we need not be too alarmed by this proposal or by the demonisation of Modern Monetary Theory (MMT). Printing money in response to an economic downturn is very widely understood, it has been used around the world in many countries and is actually a very conventional form of monetary policy in Europe, the United States and even in Asia.
It was used in the period after the “Great Depression” in the 1930s. In Asia, it has been used for decades in Japan to deal with prolonged deflation and most recently it was used in Europe and the US in response to the financial crisis after 2008.
The Governor of Bank Negara, Datuk Nor Shamsiah Yunus, said on November 13, 2020 that she saw no urgency for “unconventional monetary policy” but in this instance printing money is not unconventional and if well-managed as part of the policy-mix, it can help address some pressing issues that we are facing.
BNM is widely regarded as one of the best central banks in the world, not just in Asia and its monetary policy experts would certainly be able to manage this with the credibility and skill required to make it a success.
Dr Geoffrey Williams and Nur Muhammad Tajrid Bin Zahalan are directors of Williams Business Consultancy Sdn Bhd based in Kuala Lumpur. The views expressed here are their own.
This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.