MySay: The economic crisis demands an urgent debate on modern monetary theory

This article first appeared in Forum, The Edge Malaysia Weekly, on August 31, 2020 - September 06, 2020.
MySay: The economic crisis demands an urgent debate on modern monetary theory
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The current Covid-19 budget and parliamentary session is probably one of the most important in our history. The government of the day shoulders an enormous responsibility to steer the country in the right direction to enable recovery and reduce the suffering caused by the economic crisis. The proponents of Rethinking Economics are seriously concerned that the correct questions to facilitate a meaningful debate are not being posed because of the misplaced belief in myths influenced by neoclassical economics.

To facilitate a meaningful discourse, the following questions are pertinent:

•What is the inflationary impact of the budget?

•How do we achieve full employment?

•Why don’t we have full monetary sovereignty? and

•What are the deficit myths and realities?

What is the inflationary impact of the budget?

The first question that needs to be asked is whether

we have inflation under control, which may be perplexing in a recession. In Rethinking Economics, however, price stability is core to the budget functions and one that is important to the financial well-being of the general population. This is in stark contrast to the orthodox economic thinking of the central bank’s use of a blunt instrument of monetary policy to manage inflation. A whole series of unintended consequences could arise from monetary policy by the central banks relating to asset inflation upon the easing of interest rates. Severe unemployment from increasing interest rates is also detrimental to the economy and general well-being of society.

Since the Great Depression, it has been generally accepted that demand will not return in the event of a deep recession, especially without government expenditure to spur aggregate demand. However, the scale of the expansionary budget should not be limited by an arbitrary budget deficit of 6% or 9%, or by a debt-to-GDP ratio of 55% or 60%. If the increased government funds from the budget go into sectors in which there is overcapacity such as leisure, hospitality, travel, private education, construction and social services, then there is likely to be no inflationary pressure. This assertion should resonate favourably well with policymakers and economic commentators.

How do we achieve full employment?

On a positive note and of great comfort is a recent debate in Parliament on the unemployment issue in the context of wage subsidies and sustaining businesses. Further, the debate rightfully pointed out that the unemployment numbers are a lagging indicator. Anecdotal evidence suggests that the unemployment issue is going to be seriously worse than what it is now.

My own experience as a former senior partner at a Big Four accounting firm is that, for the first time, we are seeing large accounting firms undergoing an employment freeze, unlike previous recessions where there was increasing employment arising from more work relating to business distress and insolvency. This employment freeze is unprecedented for a business that is generally considered recession-proof. The recruitment freeze will certainly have a profound effect on the fresh graduates and school-leavers entering the employment market, which will eventually drive up the unemployment rate.

I am confident that the current government, being caring and responsible, will seriously consider how full employment and job guarantees can be given to those Malaysians who are willing to work for a fair wage. This must be a cornerstone of the Shared Prosperity Vision and a caring social doctrine. Those who have had to endure unemployment will attest that it is soul-destroying. It also creates a sense of loss of self-worth, despair and mental agony. Surely no government that claims to be caring would permit a large portion of its population to suffer such a terrible fate.

Therefore, instead of focusing on an arbitrary deficit number, the debate should centre on how to formulate a budget that ensures everyone who is willing to work is employed (those who are not in a position to earn a decent wage to be provided with a safety net). In this connection, the budget debate should revolve around how the government spends to create the maximum number of high-quality jobs that can be fulfilled by Malaysians and how quickly these jobs can be created and identifying where they are required.

Why don’t we have full monetary sovereignty?

Major economies such as the US, the UK, Japan and Australia are considered as having monetary sovereignty, as they can control their national budgets and set interest rate policies. Some countries such as France, however, have opted to give up monetary sovereignty by joining the single-currency union in Europe. Similarly, countries in Europe that are part of the currency bloc such as Greece have suffered serious consequences from the lack of monetary sovereignty.

As Malaysia is not part of any currency bloc, prima facie we have monetary sovereignty with our own central bank that issues fiat currency. In her book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, Prof Stephanie Kelton points, however, to fixed exchange rate policies and debt ceilings as possible reasons that curtail countries to have monetary sovereignty.

The downward pressure on the ringgit is of concern, however, albeit wrongly affected by the perception of debt-to-GDP ratio, which is known as a flawed indicator of pending sovereign default. This issue is further exacerbated by international rating agencies (please see our previous article “Should we be beholden to international rating agencies?” in Forum [Issue 1286, Sept 30, 2019]).

A sudden surge in the sale of Malaysian Government Securities (MGS) by foreigners is likely to cause a sale of ringgit in exchange for US dollars, forcing a downward pressure on the ringgit, which will cause inflationary pressure. The way to address this risk is to ensure that we maintain a trade surplus. The final component of an expansionary budget debate should be a discussion on whether additional expenditure achieves an increase in exports (relevant foreign direct investments should be mobilised to support such initiatives) or import substitution.

Further, even in the worst-case scenario, if the productive capacity of the economy remains intact, then the economy will adapt to lower exchange rates and produce new export services and import substitution, as clearly demonstrated by Thailand and Malaysia, following the 1997/98 Asian financial crisis.

What are the deficit myths and realities?

The points on the deficit myths and realities as shown in the table below are just a few of a whole series of issues raised by the proponents of Rethinking Economics and comprehensively addressed in Kelton’s book, The Deficit Myth.

Even Argentina, the poster child of financial problems in 2001, after defaulting on the US dollar debt and not constrained by foreign lenders, successfully employed a domestic growth strategy to immensely improve social conditions in the country. This success can be attributed to the hugely increased employment, focus on community projects and lower dependence on foreign capital — another potent demonstration of the positive outcome from not being constrained by orthodoxy. Only when policymakers and both sides of the political debate have an open mind can similar opportunities be seized by Malaysia in 2020.


Proponents of Rethinking Economics are advocating for this year’s budget and the ongoing debate on the debt ceiling to be discussed based on a new model that clearly analyses the impact of the budget deficit on inflation, employment and trade balance. The result would be a far more meaningful discussion with better outcomes for the economy, instead of a debate on arbitrary numbers, which are increasingly being discredited by those at the forefront of Rethinking Economics.

Datuk Mohd Anwar Yahya is a partner and executive director at Sage 3, a boutique corporate finance advisory. He serves on the boards of directors of several Malaysian public and private corporations and has more than 25 years' experience in public policy, corporate finance and strategy at a Big Four accounting firm.

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