Whether BNM maintain or increase the rate, the Malaysia economic meltdown can't be avoided
(Disclaimer, Everything I write here is based on my own personal view)
This post is written in layman's terms so that everyone can understand. I don't study finance so I don't really know all the correct words to use. BNM here refer to Bank Negara Malaysia
Last year I wrote this post on how to save Malaysia economy which is deflation
based on the 2022 budget, the government intended to use the inflation strategy to try to save the economy.
Things didn't go really well for Malaysia because recently we have a huge flood that destroy a lot of business and some life is lost.
Why does the BNM maintain the rate?
It is very simple actually, the BNM is in a hard position. If they increase the rate, the following will happen. people will scramble to clear their loans early. This will further cause the amount of money in the market to reduce. Remember that debt is money and money is debt, reducing the debt means less cash in the market to roll around.
Many businesses especially the small and medium will closed down due to lack of sales since there is less money to spend.
Why does maintaining the rate still can't stop the meltdown?
It is because this current interest rate has one flaw, the money to pay the interest doesn't exist unless the one who issues the loan spending is equal to the amount of interest they are charging.
Based on the top scenario, it means if the bank doesn't spend RM1,000 on the market, somebody within the market going to need to do refinance and declare bankrupt.
This whole scenario resembles a musical chair game. I hope you enjoy the game, I personally don't play this game.
The coming liquidity crisis
In case you didn't know, Malaysia banks are making a huge profit in 2021. It is not surprised since, with so much uncertainty during the lockdown, everyone wants to clear their loan as soon as possible.
However this creates a problem, if the loans are repaid so quickly, it means a lot of liquidity is sucked out from the market.
I honestly doubt the bank will be spending all their profit which mean somebody won't have a chair once the musical chair game end. They will need to apply for refinance to avoid bankruptcy.
Some will even resort to selling their assets item like houses, cars, shares or cryptocurrency to pay off their loan. This itself will collapse all the market.
While there might be many things that contribute to high inflation, this is also another thing that will contribute to high inflation. If it is a business that needs to do refinance, it means it has to sell its goods or service at a higher price to pay the loan.
Meltdown only delay, not solved
The only difference the BNM decision make is whether this whole process speeds up or slow down.
The only way out of this is the bank or the central bank spend all their profit. If this doesn't happen, history will repeat again.
At the later stage of the crisis, it will be the bank turn to play the musical chair game. The bank will the least reserve will get into trouble and get absorbed into the bank with a larger reserve. But what will happen if there is only one bank left and it fails? I think this is about to become a reality since there are not many bank left standing