Mexico and Thailand found themselves in during the run up to their respective crises. If indeed the failure of credit growth to slow was the result of adjustment lags, October's MSB should at least have begun to show a tangible slowdown. Having recently edged one step closer to mounting the right 'strategy' for recovery, the Government has stopped in its trails once again. Credit lending is now being directed at productive sectors, we are told, as if to imply that it should therefore not be a problem. Perhaps credit is indeed being channelled into productive investments - but directed at productive activities or otherwise, an increase in the supply of credit over and above increases in lending resources will ultimately lead to a recession.
Money is still neutral with respect to output, no matter how it is spent.
Meanwhile, strong credit lending continues to pile debts up in the economy. In other words, for every RM1 Malaysians earn, they borrow RM1.65. Evaluated at 1996 ratios, that amount is larger than the entire output of the manufacturing sector. Any interest-rate rises would therefore not surprisingly unleash a record wave of bankruptcies. Moreover, so long as credit growth continues to pile on new debts, and therefore heighten the risk of bankruptcies, so shall the stock market continue to tumble, and likewise the ringgit.