Immigration and the Coming Retirement Crisis

I was prompted to write this blog post because of 2 things:

1. Reading Prof. Vaclav Smil's book entitled Global Catastrophes and Trends: The Next Fifty Years; and
2. Reading commentary on an anti-government website attacking MM Lee's misguided population and eugenics policies for causing the precipitous decline in fertility rates.

Prof. Smil, citing other population studies, noted that there have been no instances of a country whose fertility rate, having fallen below 1.5, had recovered back to replacement levels, irrespective of pro-natal policies. Given that Singapore's fertility rate has fallen to 1.06, it would appear to me that the country has gone way past the 'event horizon'.

If the examples of other countries do indeed show that the fertility decline is irreversible, then it would seem that an aggressive immigration policy aimed at sustaining economic expansion would make a lot of sense. This brings me to my next point.

Policy Failures

That the previous population policy was wrong and had resulted in the current fertility problems is well-known and widely-accepted. Even former top civil servant Ngiam Tong Dow acknowledged as much in his post-retirement speeches and writings. In addition, our failure to raise economic productivity rates is also well-documented and known to anyone who has studied the history of economic policy in Singapore. The flip-side of this failure is an inability to wean employers here off from reliance on cheap foreign labour to sustain economic expansion. This was mentioned in Ngiam's latest book entitled Dynamics of the Singapore Success Story.

Given these facts, the opposition parties and their supporters are not wrong in pointing out that the PAP government's policies were the cause of the current problems. However, my quibble is that pointing out who was at fault does absolutely nothing in terms of finding a solution to the problems.

No Painless Solutions

As far as I can tell, there are 3 possible solutions to the population problem. The easiest is to aggressively import people into the country, which most Singaporeans consider undesirable for various reasons. The second way is to try to encourage more people to have more children, which has been tried with arguably no success.

The third way is to raise productivity, which has also been tried with limited success. If we were to pursue this policy aggressively again, this means cutting off the supply of cheap labour to local employers in order to force a restructuring of their operations and business models to take place. In theory, this will bring severe short-run pains in exchange for longer-term growth in productivity by changing relative input costs and encouraging longer-term capital investments aimed at raising efficiency. This is a course of action that I personally favour. However, given how indebted many Singaporeans are, my question to my fellow citizens is this: Can you take the pain without severely negative financial repercussions?

Retirement Crisis

As I have argued elsewhere on this blog, given how most Singaporeans have over-spent on real estate using our CPF money, we need to sustain Singapore's resident population at current levels in order to prevent a cataclysmic decline in real estate prices. Raising economic productivity allows for growth with a lower population, but this method does not prevent a collapse of the real estate market arising from a lower demand for housing and commercial real estate. Furthermore, even if there is good productivity growth, there is no guarantee that the fruits of such growth will be shared equitably between employers and workers. This could then be yet another impediment towards workers saving adequately for retirement while paying off their mortgages.

Face the Contradiction

Given the bind that we are in, Singaporeans need to recognise the contradiction in our wanting to restrict immigration, and our desire for high real estate prices to fund our retirement. If we are serious about finding a more sustainable solution to the immigration issue, we need to also make attendant adjustments to the way we spend on real estate, our current consumption habits and become more aggressive in saving for retirement. Merely demanding that the government do something about the problem will not change the fact that a lot of us have planned for retirement using assumptions about real estate prices that are contingent upon high levels of immigration.

A Short Comment on the Oil Market

This is a chart comparing the prices of the March 2011 Brent Crude futures contract with the Nymex Light Sweet Crude contract. The darker line on the price chart is the Brent Crude price series.

Notice the divergence between the 2 in recent days, as US Light Sweet Crude moved lower while Brent, being the international benchmark, has stayed high.

I'm bringing this up because there is a tendency for the financial news media to report on oil prices based on the US contract rather than Brent. Here in Singapore, our oil is NOT priced against the US contract. As such, make a mental note if you hear on the news that oil prices are coming down. They are not.

Causes of Slow Future Global Growth

I am currently reading the latest book by prominent deflationist A. Gary Shilling entitled The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation. Table 6.4 of the book shows 9 causes which Dr. Shilling believes will be responsible for slower economic growth for the global economy in the years ahead. I reproduce the causes below:

1. US consumers will shift from a 25-year borrowing-and-spending binge to a saving spree. This will spread abroad as American consumers curtail imports of the goods and services that many foreign nations depend on for economic growth.
2. Financial deleveraging will reverse the trend that financed much global growth in recent years.
3. Increase government regulations and involvement in major economies will stifle innovation and reduce efficiency.
4. Low commodity prices will limit spending by commodity-producing lands.
5. Developed countries are moving toward fiscal restraint.
6. Rising protectionism will slow, even eliminate global growth.
7. The housing market will be weak due to excess inventories and loss of investment appeal.
8. Deflation will curtail spending as buyers anticipate lower prices.
9. State and local governments will contract.

With regard to point 3, this issue has also been raised by others like Russell Napier, Harold James and Ian Bremmer.

I disagree with point 4 as I believe that peak oil and resource scarcity will drive up prices relative to industrial goods and other services.

As someone who thinks our future will be one of inflation rather than deflation, I would disagree with some of the positions taken by Dr. Shilling. That said, I still take his views seriously as they are well argued and reasonable, and I want to be aware of the risks if his deflation thesis were to be correct. One risk that comes to mind is Singaporeans' ability to service their mortgages in a deflationary world. That's a big red flag for the Singapore economy, in my view.

Benefits of Economic Growth Not Shared Widely

As I have written earlier, the anecdotal evidence that I come across suggest that there is a bifurcated economy here in Singapore, which the largest share of the benefits of growth not going to the average citizens who form the bulwark of the economy.

Today, I came across a news story on this issue written from a Japanese perspective, published by the Yomiuri Shimbun:

Like many other developed countries, Singapore is dealing with demographic changes, hitting a record-low birthrate of 1.22 in 2009--even worse than Japan's. But the multiethnic city-state is more accepting of foreigners than Japan. Indeed, it relies on migrant workers to keep its economy rolling. Currently, foreign workers make up about one-third of Singapore's total workforce.

But growth has not come without a price.

The surge of foreigners has created a backlash to the government's open-door policy. Local residents have increasingly voiced anxiety that migrant workers compete with them for jobs, housing and public transportation.

Given that the Japanese themselves face a demographic collapse, it's not surprising that our problems have found some resonance with the author of the article. The article highlighted the policy dilemma between needing foreigners to support growth and the demands of Singaporeans to have a larger share of that growth through a more reasonable pace of importing foreigners.

Apart from the foreign labour dependence issue, the article also covered the issue of Singaporean brain drain. Interestingly, the impression that I got from the article was that the children of Singapore's elite citizens, who arguably have benefited most from the country's growth, have increasingly chosen to move abroad. To me, this speaks volumes about how the elite think about the country's long-term prospects, and if we tie it back to the issue of 'hope and faith' in the country, it is not hard to see why the birth rate is so low, as I have previously argued.

The full article from Yomiuri can be found here.

Food inflation and Price Caps

Someone, in a letter to the Today newspaper published on Monday, suggested that the government implement measures to cap price increases in essential food items to fight what he perceives to be profiteering. The example of Malaysia was used by the author to justify the feasibility of price controls.

That the idea is unsound is very obvious when one considers the following points:

• Malaysia has significant domestic food production capabilities, and doesn't have to be a price-taker on the international food market.
• It has an elaborate government bureaucracy designed to subsidise various parts of the food production value-chain so as to keep prices low.
• Capping food prices in Singapore's context will mean a fall in supply if the caps make selling some items unprofitable for importers.
• Price caps benefit both the rich and poor, so that if subsidies were involved, it would be an inefficient use of taxpayers' money.

I think the government's approach of targeted help for the lower income group is a better method as it does not create as much distortions in the food market and help is only given to people who need it. For the rest of us in the middle class, we can adjust to higher food prices by cutting back on other discretionary spending.

That said, the government can help to some extent by using its influence on NTUC Fairprice to have the latter introduce more price competition in the food market, so as to minimise the risk of profiteering. Using competition to fight profiteering is far better than using legal sanctions, as anyone who understands elementary economics will know.

North-South Expressway - A Mistake Perhaps?

As someone who uses the CTE occasionally, I can understand the frustrations of the users of that overcrowded expressway, being taxed to death via ERP and still having to endure traffic jams. The corresponding desire for relief through the construction of the North-South Expressway (NSE) is therefore very much a legitimate one.

That said, I can't help but think whether or not building it is the right thing to do. Given what I feel is a significant chance of global oil shortages by the middle of this decade, I would not be surprised if fuel would initially be rationed to be followed by an outright ban on the driving of private vehicles as the liquid fuels situation grow more dire. If this scenario were to play out even partially, it would mean a very significant drop in road capacity all over the country. This will entail all the resources used to build the NSE being wasted. From a peak oil perspective, allocating the resources to build the Thomson MRT line may actually be a better use of our national wealth.

In any case, I really feel sorry for the people who stand to lose their homes because of the NSE. To me, there is a risk that their sacrifices would have been in vain.

Erosion of Social Cohesion and Low Birth Rates

Three news stories caught my attention on Monday:

1. ST quoted Workers' Party chairman Sylvia Lim as saying that there has been a "palpable sense of loss of identity" amongst Singaporeans, and that she had some Singaporeans telling her that they felt better treated as PRs in other countries than as citizens in their homeland.
2. ST reported an increase in the number of magistrate's complaints being filed by Singaporeans to resolve disputes.
3. Channel NewsAsia reported that Singapore's fertility rate has hit a new low of 1.16 in 2010.

To my mind, these three phenomena are all related and are due to the stress and alienation experienced by Singaporeans arising from having to bear the brunt of the costs of the government's single-minded pursuit of economic growth and its belief in the quack theory known as 'trickle-down economics'.

The relentless focus on economic growth has brought about a host of 'supporting' social-engineering policies that have caused a feeling of rootlessness amongst the people, perhaps akin to what Durkheim described as anomie. This then manifests itself in the atomisation of social entities and frayed relationships, resulting in phenomena such as neighbours suing one another in court. The 'normlessness' has also resulted in the erosion of moral values and the rise of various social ills. The following quotation from the Analects of Confucius is perhaps an apt description of our social situation:

子曰、道之以政、齐之以刑、民免而无耻。 道之以德、齐之以礼、有耻且格。- 《论语》为政篇

The loss of identity also shows up as a loss of hope and faith in the country and its system, resulting in couples not willing to procreate and have children, since the common belief is that life will get harder in future and some have doubts about the long-run viability of the country. In this regard, we can again draw on the wisdom of the Analects:

子贡问政。子曰足食、足兵、民信之矣。子贡 曰、必不得已而去、于斯三者何先。曰、去兵。子贡曰、必不得已而去、于 斯二者何先。曰、去食、自古皆有死、民无信不立。 - 《论语》颜渊篇

As we can see from the above passage, Confucius emphasised the centrality of hope in the country and faith in the government as a key determinant in the survivability of a country. Perhaps our new generation of policy makers would do well to revisit the teachings of the Analects in trying to solve the demographic problem that Singapore is facing, since the current gamut of economic incentives is obviously not able to reverse the decline in birth rates. In some sense, the lack of babies is a kind of existential crisis for the country, but we are trying to fix the problem using economic tools. That, to my mind, is a wrong diagnosis of the problem.

Thoughts on the Property Cooling Measures

Following the announcement of the latest measures to cool the speculative bubble in the real estate market here, much of the debate continues to centre around the role played by speculators, immigration and foreigners. What I have not seen discussed in detail is the role played by the negative real interest rate environment.

From an Austrian School perspective, negative real interest rates tend to foster bubbles through mal-investments. In my view, Singapore's current monetary policy has to some extent been held hostage (due to export competitiveness considerations) by the US Federal Reserve's zero-interest rate policy as well as the People's Bank of China's USD-peg policy. This has resulted in a negative interest rate environment that is 'conducive' for the growth of speculative bubbles.

If the latest measures by the Ministry of National Development are effective in cooling real estate demand, the continued existence of negative real interest rates could well see hot money moving into the local stock market or other asset classes.

Not Only About Price

Earlier in the week, the Straits Times featured a series of articles on the issue of food inflation. Some of the economists interviewed in one of the articles commented that rising food prices hurt Singaporeans less than other people in the region as we spend a lower percentage of our income on food compared to them.

While this view is correct under normal supply/demand conditions, I found it to be rather short-sighted in relation to the current global food situation. This is because with record low levels of inventory, food producing countries have become increasingly likely to ban food exports in order to keep prices low at home so as to appease the masses. As such, rising prices not only signal rising demand or relative scarcity, in the present context, they also serve as a risk indicator for shortages due to export bans. Our willingness to pay more for goods is meaningless if there are no willing sellers.

The thing about us Singaporeans is that we tend to assume that international trade will always happen, given that our entire history as an independent country has occurred within the context of a global environment that is conducive to trade. This has perhaps made us less conscious of the risks of trade not happening as countries protect their precious resources for their own internal use. The recent ban of wheat exports by Russia and the cutting down of rare earth exports by the PRC should serve as warnings of what can happen.

Given that we import everything that we need to sustain human life on this island, it will serve us well to keep the risk of resource shortages in mind.

Up Next: More Food Inflation

It's now official: the government expects more food inflation this year. According to a Bloomberg report, Finance Minister Tharman Shanmugaratnam told Parliament that the government expects food prices to rise further this year and that there are efforts to look at how to cushion the lower-income and elderly people from such inflation.

Apart from the traditional transfer payments, it would be of great interest to me to see what other innovative ideas the government can come up with to ameliorate the effects of food inflation. For the rest of the people who are in the so-called 'middle-class' and are unlikely to be the target of any such government measures, it's time to take defensive actions such as the adjustment of eating and purchasing habits, or even of growing vegetables where feasible.

Protecting Our Financial Reserves

According to a Reuters report, in a speech made on Jan 5, Kansas City Federal Reserve Bank President Thomas Hoenig called the gold standard 'a very legitimate monetary system'. He was the second financial big-wig following World Bank President Robert Zoellick to call for a debate on the efficacy of using gold in the monetary system.

What I find interesting about this is that it would appear that there are signs that the US Establishment is starting to look at the gold standard issue. As a Singaporean, what concerns me is the extent to which Singapore is prepared for such a possibility. And looking at official IMF data, I would argue that there is cause for concern as Singapore only has 2.5% of its foreign reserves in gold, a paltry 127.4 tonnes. This is even lower than the Philippines, which has 175.9 tonnes of gold in its reserves.

Risk of Monetary Reset

From a monetary perspective, foreign currency reserves represent claims on other countries, and are thus in effect a form of unsettled debt. Under a gold standard, the gargantuan accumulation of foreign reserves amongst oil exporters and Asian countries would not have been possible since balance of payment accounts have to be settled in gold, which cannot be created by government fiat. Thus, when (not if!) the debts of the developed countries become unsustainable, there could be a reset of the global monetary system and in such an event, gold could play a pivotal role in the settling of accounts between nations. Should gold be re-introduced into the global system, then those countries that hold the most gold will obviously be the wealthiest in the new regime, since all asset classes will be revalued against gold as the new currency. The effect would be similar even if gold were used only as a component of the new currency system together with other fiat currencies (e.g. RMB). In such a scenario, we should not be surprised if we see Singapore suddenly becoming 'poorer'. Consider also what may happen to the value of our CPF savings.

Protecting Our National Wealth

In order to hedge against such an outcome, it is important that the government consider following in the footsteps of the People's Bank of China and other central banks in terms of quietly accumulating gold reserves without disturbing the market. (As an aside, if Dr. Goh Keng Swee were still Finance Minister, I would be very confident of this quiet accumulation of gold being done.)

To further enhance Singapore's position as a global financial centre, we may also want to consider partially backing the SGD with gold, something which the Swiss had done for years and which they had rather unwisely abandoned recently. The added benefit of backing the SGD with gold is that it will enforce financial discipline on the government in terms of restraining the latter from reckless deficit spending. This discipline will be a market-based one as the financial markets will be able to judge whether the country's financial position is under threat from the outflow of gold. Such an external monitoring mechanism is also far simpler to operate and more reliable than depending on the Elected President's good judgement in the exercise of his 'second key' discretion in unlocking our financial reserves.

Food Crisis 2011 - Riots in Algeria

The Associated Press has reported that youth in Algeria had rioted on Thurs over rising food prices and high unemployment. This could be the first salvo in what may become a global food crisis in 2011 as developing countries cope with food inflation brought about, in my view, by the reckless money printing of various countries trying to devalue their respective currencies in order to export their way out of economic troubles. Chief amongst these is of course the US Federal Reserve and the People's Bank of China.

In India, food inflation for Dec 2010 was over 18% in a situation that is worsening, contrary to the expectations of government officials there.

In Singapore, the situation is also getting worse. Someone who runs a food stall at the canteen in my office building told me over lunch that food inflation is serious enough to have an impact on the stall's selection of food inputs and the type of dishes that can be sold profitably.

We need to get prepared. Remember to stock up on essential food items when there are cheap sales.

James Kunstler's 2011 Forecasts

Well-known peak oil author James Kunstler has written a very long article on his blog detailing what he thinks could happen to the global situation in 2011. While I don't agree with some of the stuff he has written, his piece is nonetheless a very thought-provoking one.

In the article, the issue of the break-down of globalisation and even advanced industrial activities were considered, these being a corollary of the breakdown in both the global financial system and a short-fall in the output of oil. While such a prediction may not come to pass any time soon, I believe that the scenario is worth contemplating, especially with regard to how it would impact Singapore's economic survival. Personally, I find thinking about such a scenario allows one to appreciate the fragility of our country and to pierce through what I believe is a false sense of security arising from our national wealth.

Be that as it may, I also feel that the article provides some useful inputs as to the type of issues that we have to be prepared for in terms of dealing with unfavourable future outcomes.

My Outlook for 2011

After an eventful 2010, I believe that 2011 will bring even more surprises as we move into the next phase of the global financial crisis. Here are some of my thoughts on what could be important issues for the year:

Sovereign Debt Crisis

With credit spreads of the PIIGS countries near record levels, I believe that the market will start to recognise that the debt problems of the EU countries cannot be resolved without either outright default or being inflated away through debt monetisation. I also believe that the US and China's debt problems will start to appear on the radar screens of more investors, and that there is a small chance of them being blown up to full-scale crises. All these will make investing very 'interesting' in 2011, to put things mildly.

Singapore General Elections

While I am not able to foresee whether there will be significant changes to Parliament following the next GE, I believe that none of the long-term problems facing our country will be tackled irrespective of the GE results. As I have previously mentioned, I don't believe that any of the opposition parties have any clue about the serious external threats that Singaporeans will have to deal with in the next decade. As for the PAP government, since I am not privy to what goes on inside the system, I can only say that the outward signs are that no one there appears to be willing to discuss the same long-term threats as well. As such, as far as I can tell, the next GE will not have any direct bearing on those long-term issues.

Retirement

Singaporeans will continue to ignore the looming retirement crisis by over-spending on real estate and cars, while at the same time complaining about the high cost-of-living in the country. We will raise concerns about foreigners taking away our jobs but at the same time fail to realise that this heightened job insecurity situation is at odds with our willingness to commit to 35-year housing loans in order to have the old stereotypical 'good life' of living in a private apartment. Those under 40 will continue to display an ignorance of the virtues of thrift. Many will seek to maintain their standard of living by spending their parents' wealth, thus endangering the retirement savings of the latter. The harsh reality of diminished future prospects due to greater global competition will continue to be ignored.

Inflation

Short of a wholesale deleveraging like what we saw in 2008, where investors sold every kind of risk assets, there is a good chance that oil and food prices will continue to move higher given the supply and demand fundamentals of these markets. Furthermore, if China continues to refuse to let the RMB appreciate against the USD, MAS could be forced to continue letting our money supply grow at high single-digit rates as the US Federal Reserve continue its money-printing and debt monetisation schemes (a.k.a. 'quantitative easing'). This will contribute to higher inflation rates and perhaps inflation in some local asset markets. Singaporeans will complain about the inflation but will do nothing to deal with the issue, preferring to blame the government and ignoring the power of our own behavioural choices.

Self-reliance

PM Lee's New Year's Day message contained a call to 'strengthen the spirit of self-reliance among Singaporeans'. I believe Singaporeans will continue to bitch and moan against the government whenever we are unhappy with things, and prefer to see ourselves as victims rather than do the adult thing of taking responsibility. And because of this, very few people will be interested in preparedness.

Have a joyous and peaceful 2011!