The View | HK should devalue the currency peg

Fixed fortifications are a monument to the stupidity of men," said General George Patton. The same belief is true for the commitment to the Hong Kong dollar's peg to the US dollar. Hong Kong's current monetary system is the root cause of many of the social and economic problems plaguing the city.

The Hong Kong Monetary Authority is caught in its own intellectual cul-de-sac: that the peg must be maintained at all costs from the viewpoint of a stable Hong Kong dollar.

That is a gross mistake. The problem is that they are failing to see the peg's problem is the US dollar, which has become a debased currency. It is dragging down more than Hong Kong's monetary policy - it threatens its society and economy. Yet it is defended by bureaucrats with a fervour and sense of mission displayed by worshippers of Stonehenge.

The US Federal Reserve's decision to not increase interest rates is unsurprising because a rise of 25 basis points does not matter very much in the scheme of greater horrors that awaits everyone.

From a longer-term view, record-setting volatility and a global market crash are the real threats. If the US economy experiences another downturn - very well possible since the reason quantitative easing has lasted so long is that the recovery has been weak and unsatisfying - what will be frightening will be the economic outcome because central banks will have a diminished ability to ease monetary policy.

And the cure is worse than the malady. Raising interest rates by even a small amount could be hazardous. A quarter percentage point rise in rates is equivalent to US$45 billion in additional interest payments for the US government. And if the idea of normal rates is about 6 per cent, the national debt payments would balloon to a dizzying US$1 trillion.

Despite persistent warnings from Fed and HKMA officials that quantitative easing is ending, it is conceivable that interest rates will never become normal again in our generation.