Discuss Gold Dinar Issue Objectively

The EDGE, 30 August 2010, p57. 

The world is reacting in many ways to the ongoing global economic crisis - quantitative easing, fiscal stimuli, currency swaps in trades, issuance of local currencies, opening gold markets etc.  The crisis is, unfortunately, still ongoing because the United States being a very significant economy is yet to recover from the crisis triggered by the collapse of its subprime mortgage market.  The unemployment rate is still persistently high and the housing market is still dwindling.  The US Labor Department reported that additional 131,000 jobs were lost in July, with the national unemployment rate remaining at 9.5%.  The possibility of a double-dip recession, or even worse, is a high possibility now.    Usually recessions are reversed within a year but now it has been about two and half years since the crisis started in mid-2007, but indications are that it is only getting worse. The crisis has indeed started a domino-effect ‘seismic wave’ throughout the world.

The US, being gifted with top economics and finance schools, with many Nobel Laureates in economics, one wonders how this could happen - first the failure to predict the coming of the crisis and second the failure to solve it.  What went wrong?  Alan Greenspan, the former Chairman of the Federal Reserve, admitted in testimony to a congressional committee that he had been going for 40 years with considerable evidence that his governing ideology was working well, but nonetheless the whole intellectual edifice, however, collapsed in summer of 2007.  The crisis’ domino-effect, having clearly hit Europe, Dubai etc., is bound to reach Asia soon.  What all these tell us is that there is a serious structural flaw in the current global monetary system.

What is that flaw?  Many now agree that the flaw lies in the monopoly creation of fiat money out of thin air by the banking sector and giving them out as loans on a compounded interest basis.  This has a profound effect on the macro-economy by creating huge quantities of money in the form of debt.  The exponential growth of debt due to compound interest relative to the real economy is what is unsustainable.  Basically, the ‘natural’ law is telling the most intelligent creature on earth that one cannot create value out of nothing.  Worse still is lending that ‘value’ to others at interest.  This, of course, would have repercussions on asset ownership in the economy.  Unlike the effects of a tsunami or hurricane, if one were to look down from a helicopter during an economic crisis, one would see as though nothing has happened.  Precisely that’s what economic crises are all about - destruction of productive processes and the transfer of ownership of assets, accumulating particularly in the hands of those who are creating values out of thin air. 

One solution that is pertinent in addressing the crisis is to give debt relieves - to individuals, businesses and the government, requiring them to payback only the principal portion of their loans - and to redistribute wealth particularly of the properties foreclosed by the banking and financial sector.  This, of course, requires strong political will, which is not apparent in the current scenario.

On the other hand, governments are frantically increasing further the fiat money supply in the hope to mitigate the crisis.  This would only provide the economy with a temporary ‘recovery’, but nonetheless with the consequence of serious hyperinflation soon. 

Robert Mundell, an economics Nobel laureate, identified exchange rate volatility as a major threat to human prosperity today.  His statement stopped there, but if we reasoned further, exchange rate volatility exists predominantly due to the fiat nature of currencies that are not backed to commodities like gold.  Once currencies are backed to gold, for example as was in gold standard or Bretton Woods, we would effectively have fixed exchange rate regimes with the volatilities eliminated.  If so, why do people accept fiat currencies then?  The answer is, its acceptance is forced on to the people through the legal tender law.  While the legal tender law may have benefitted the governments in the past, in the current era of globalization this is no longer true.  Governments and local politicians tend to lose in this system, with the power being enthroned on some ‘higher’ foreign institutions. Accordingly, authorities should take a relook at the legal tender law and ascertain if it is still beneficial or becoming detrimental to the people and the political structure.  The onus is also on the legal authorities to look into the definition of legal tender, what it really means in a fiat monetary system and convince themselves that it is indeed a fair and just law imposed on the people.  If not, perhaps they too should give a ‘yes’ signal that it is time to take a relook at it.

This is important because as a consequence, this flaw in the global monetary system is now threatening to plunge the world into a major conflict.   If we are serious in mitigating the problem and save humanity from the misery of a global conflict then governments and their monetary authorities should seriously address the monetary flaw, the flaw which Alan Greenspan discovered only after 40 years.

After debt relieves, the next most important step needed to bring sanity, stability and justice into the monetary system is to institute real-money as opposed to fiat money.  This basically involves anchoring money to the real economy as that existed in the past monetary structures like bimetallism, gold standard and Bretton Woods.

In this aspect, the state of Kelantan’s decision to issue its ‘Syariah Money’, i.e. the gold dinars and silver dirhams, seems in the right direction from economic perspective, and pertinent noting the current global situation.  Kelantan should perhaps discuss the issue amicably with the federal government so as to win its confidence and political will.  A good effect of Kelantan’s action is that it has attracted world-wide attention, making many parties to discuss and debate the issue out.  Such discussions and exchange of ideas surely would bring positive results in the future.

In such exchange of opinions, nonetheless, people should argue with facts and sound reasoning, avoiding attacks on personalities or ideologies; or resorting to image-smearing by highlighting mundane and unrelated issues.  Such actions would only undermine one’s opinion.  For example, the editor of Islamic Banker magazine, Mushtak Parker’s statements that Kelantan’s action reflects its shallow knowledge of monetary and financial matters; and that it practices religious apartheid by creating special lanes at supermarkets for women etc. are  unwarranted for and do not contribute to a healthy intellectual discussion of the matter.

Albeit his criticisms on Kelantan, Parker reminds us that there already exists an Islamic Dinar, issued by the Islamic Development Bank (IDB) since 1975.  But the Islamic Dinar of IDB is also fiat money that takes the form of accounting units.  It is basically an accounting overdraft.  Parker’s opinion that if Muslim nations preferred a common currency, then the Islamic Dinar of IDB would be the best choice, is flawed not only because the Islamic Dinar would face similar problems like the euro, it would de facto make the IDB the supreme ‘governor’ of the Muslim world.  I am not sure if Muslim nations would love to see that.

On the other hand, China, noting the vulnerability of the global financial and economic order, has opened its gold markets to its people, encouraging them to diversify into gold.  Gold is an asset of choice during uncertain times and being a proven inflation hedge would surely make a good holding in the current period with hyperinflationary expectations.  All nations should make some effort now to put some gold holdings into the hands of its citizens.  In this aspect, Kelantan’s action indeed provides this opportunity for people to diversify some savings into gold.  If the word ‘dinar’ sounds too Muslim in nature, even though it is Roman in origin, call by whatever name - dinar, ying yuan (ancient Chinese gold coin), krugerrand etc. so long it has real gold content.

On the side note, the gold and silver being the Syariah money would also complement Islamic banking and finance.  Without such anchor, operating in the fiat money environment, Islamic banking is bound to converge with its conventional interest-based financial system due to arbitrage and profiteering opportunities made possible between the two financial systems.  The Syariah money would enable Islamic banking and finance to detach and free itself from its conventional counterpart and thereby truly define itself.  Thereafter then Islamic Banking and Finance could truly become a viable alternative to the collapsing global monetary order and make Malaysia’s aspirations to become the global Islamic finance hub a reality.   Nonetheless, enjoying the creating of money out of thin air in the current system, the Islamic bankers’ acceptance of Syariah money is yet to be seen.

Accordingly, one should see the merits of Kelantan action from economic perspective - its benefit to the people and country, even if it is mixed with some political opportunism.   It may bring a lot of good to the people, government and the country as a whole.  So let’s discuss the issue more objectively.

Ahamed Kameel Mydin Meera

Professor

Department of Business Administration

International Islamic University Malaysia

Posted in: Kebangkatan Dinar