THE misunderstandings and misconceptions that exist with Hong Kong residents, the Government and its advisers about the territory's monetary policy has now reached dangerous proportions. The so-called peg of the Hong Kong dollar to the US dollar has been presented, either by the error of omission or commission to the public, including economists and bankers, as something entirely different from that which it is.
As always, whenever any monetary or financial matter is misunderstood, it causes people and institutions to take unnecessary risks. It is important that the myths on this most important subject be de-mythicised.
The peg does not offer a solution in the case of a possible panic over the value of the Hong Kong dollar. On the contrary, it holds out a false hope that in a panic anyone can exchange Hong Kong dollars for US dollars. The weakness, which is not usually mentioned, is that the Exchange Fund does not have even a fraction of the US dollars that would be required to give everyone US dollars in return for Hong Kong dollars. Actually, it would be the height of foolishness for the Exchange Fund to hold the amount of US dollars required.
Let us hope that the Hong Kong government reserves or the Exchange Fund are in currencies that pay higher interest rates than US dollars. Once and for all, let us admit that the peg does not offer 100 per cent backing to every Hong Kong dollar enabling redemption in US dollars. The peg is only a promise to pay, and everyone knows that an IOU promise is never equal to the real article.
It is a myth that the peg is like the gold standard. There is no resemblance between a currency redeemable in US dollars, which are a liability of the nation with the largest debt of any nation in history, and gold, which is an asset with no liabilities whatever.
The US was on the gold standard over half of this century, and it had gold equivalent to the currency held at Fort Knox, Kentucky. This is as close as possible to a real standard. In the early 1970s the US abandoned the gold backing and now the US dollar has no intrinsic value and is merely a good piece of paper spoiled by ink stains. It isn't worth a farthing. It is not issued by any government, but by the US Federal Reserve, which isn't even an agency of the US Government.