Singapore's Debt Problem

I came across the following passage from an article written by Doug Casey in the May 2012 edition of the Casey Report:

There’s nothing wrong with debt in itself; lending is one way for the owner of capital to deploy it. But if a society is going to advance, debt should be largely for productive purposes, so that it’s self-liquidating; and most of it would necessarily be short term.

But most of the scores of trillions of debt in the world today are for consumption, not production. And the debt is not only not self-liquidating, it’s compounding. And most of it is long term, with no relation to any specific asset. A lender can reasonably predict the value of a short-term loan, but debt payable in 30 years is impossible to value realistically. All government debt, mortgage debt and consumer debt and almost all student loan debt does nothing but allow borrowers to live off the capital others have accumulated. It turns the debtors into indentured servants for the indefinite future. The entire world has basically overlooked this, along with most other tenets of sound economics.

This was written in the context of asserting that the Western world had sustained an artificially high standard of living since World War II through the device of accumulating excessive debt.

When I read this, Singapore's situation come to mind.

Looking around us, one could easily see that Singaporeans have also accumulated a lot of consumption-based debt.  In our case, we don't even realise this, because we think that taking on a lot of debt to fund our HDB flats is an investment, when it is actually a durable goods consumption.

An HDB flat has a 99-year lease, which means that it will eventually run out.  The reason why we think it is an investment is because we believe that we can sell the lease to someone at a higher price, which is akin to a Ponzi scheme, or assumes that the government will continually pursue a policy of asset inflation, both of which are harmful to society.  Unfortunately for our future financial security, we bought into the mistaken notion that our HDB lease is an asset, when most of us don't generate rental income from our flat.  I blame this on the Goh Chok Tong government, who propagated this myth under the so-called 'asset enhancement' strategy.

This over-consumption of housing is further encouraged by the distorted investment policies attached to CPF funds, as the poor alternative choices drive many Singaporeans to rationally conclude that putting CPF funds into real estate is the best use of those funds.

Mis-allocated Capital

For decades now, there has been a general lament about a lack of capital in Singapore to fund entrepreneurs, which is obviously true.  Imagine what could have happened if the government had stuck to the original goals of the HDB, to provide low-cost housing.to Singapore, for that would have freed up a lot of capital for other more productive uses.

Given the fact that real estate has become increasing unaffordable, it is time to look at the basic paradigm underlying the CPF system, and reform it to support better capital formation and usage.  After all, the government has been lamenting the fact that we face increasing challenges to economic growth.  Surely having more productive usage of capital would help, and then we can obviate the need to adopt morally questionable policies like encouraging gambling via casinos.

Greek Elections

Markets were quite on Friday as many traders were wary of committing to positions before the Greek elections today, given the risks involve either way.

From a longer term perspective, the results of the election are irrelevant, since it will change nothing as far as the economic fundamentals are concerned.  Greece will continue to have too much debt that they can never pay back, and the only difference will be whether the newly-elected politicians can negotiate with the rest of the Eurozone to agree to measures that will merely postpone the underlying problems for a while more.

This looks to me to be an interesting period in European history, as friction between nations increase and there is a threat to the global financial system.

Ignorance and Irrationality

I saw some comments online on a local newspaper's website regarding the Sticker Lady saga that I thought typified the attitude and thinking of younger Singapore, by which I mean those below 35.

The first comment was that prosecuting the alleged offender under existing vandalism law reminded the person of the Cultural Revolution in China. My view is that this person either is prone to hyperbole or is woefully ignorant of history, or perhaps both. I believe many Singaporeans don't appreciate the gravity and tragedy of that episode in modern Chinese history, and I feel that comparing this rather straightforward case of applying a lawful criminal provision to the Cultural Revolutuon is rather facetious. If we had an environment that were anywhere near that of the Cultural Revolutuon, I would have been able to report to the authorities about his comments and he would have been put away without charge.

The second comment was that he felt that the acts of the Sticker Lady were acts of creative expression and therefore cannot amount to vandalism. This is surely arrogant and irrational, since it ignored the reality that public property was damaged and that he was not in a position to pass legal judgment on the matter. Sadly,this attitude typifies that of many younger Singaporeans given the kind of subjectivist cultural pollution that we have allowed them to be exposed to.

Now what has this got to do with preparedness? Well, in times of crisis, the ability to get a grip on reality is the first step toward finding effective solutions. If we have people who cannot accept reality,and worse, feel that their limited education and experience entitles them to have a voice in all matters, we will be stuck and worse, design wrong solutions.

I believe we will eventually reap the consequences of blindly accepting postmodernist values. So this is just a small warning of what's coming up.

Resource Nationalism in Indonesia

Given what some believe to be the peaking of production of various natural resources as well the fact that agricultural and water resources are increasingly valuable, it would come as no surprise that commodity producing countries are gaining more bargaining power.

In relation to this topic, Asia Sentinel recently published an article entitled Indonesia's Growing Economic Nationalism, which is well worth a read.  I don't agree with the author's view that Indonesia will be hurt by being more protectionist.  In fact, I think that the country is moving from a position of strength, and will be able to use the bull market in commodities to its advantage.

From Singapore's perspective, the most immediate impact would be that DBS Bank would probably not be allowed to acquire Bank Danamon, which I feel is not a big loss to Singapore, given the fact that DBS has had a poor track record in overseas acquisitions.  From a longer term perspective, we need to watch out for Indonesia exerting its economic might on Singapore for both economic and political ends.  We may be moving into another era where the neighbourhood gets less friendly.

Press Freedom

I know a person who often blogs about freedom of speech issues in Singapore. A very thoughtful and kind gentleman, he recently wrote a blog piece suggesting that the lack of press freedom has resulted in Singaporeans blindly accepting the narrative spun by the government-controlled media that serves the PAP.

While I am not inclined to disagree with this claim, I think a further refinement in the argument is needed.  It is important to distinguish between freedom of the press and the ability to think independently.  While a lack of press freedom is very obviously detrimental to independent thought, the existence of such a freedom may only contribute marginally to the latter.  At least that's the view that I had derived from a Swiss wealth management professional that I often read.

Notice that despite living in the West, where there is far more press freedom than in Singapore, he had this to say:

In a world permeated by mass media and misinformation, independence in some ways has become more difficult. In order to keep up with what is going on in the world, you have to read and digest a lot of “stuff”. Most of what you will be reading will be mainstream news. Most of it will be nonsense: skewed myths, half-truths laced with contradictions, making it completely useless conceptually.

Mainstream information is “mainstream” because it is what sells; it's what the masses want to hear, not what they should hear. It seldom challenges the system or status quo and certainly never second-guesses the official data or the wisdom of those in office.

My own position is that if we take all the current journalists in Singapore, redistribute them into different privately-owned companies that are independent of the PAP government, what will emerge within a few short years will be a dominant paradigm that will still be considered oppressive by some Singaporeans, including myself.  The reason for this is that mainstream journalists, especially those who have attended journalism schools, are often of a certain ideological bent that we can call 'progressive socialist'.

When Western-style press freedom arrives in Singapore, we will see discrimination and persecution that will surprise many Singaporeans.

Am I supporting the PAP government or against press freedom? No, not at all.  I'm just warning that we will likely exchange the overt form of tyranny still practised by the PAP government for a more pervasive, subtler but more destructive kind.

Many anti-PAP Singaporeans will obviously disagree with me.  That's to be expected if we are to build a country with better freedom of speech. But I'll say this - we will let the facts in future decide who is right on this call.

Debt and Derivatives Crisis

The current financial crisis that we are in has 2 causes:

• Excessive debt, especially in the developed world; and


• Excessive speculation, especially in financial derivatives

Given the size of the problem, a worsening of the global economic and financial situation is, in my view, inevitable.  To only question is timing, and that is dependent on how much longer governments around the world can delay the collapse due by using various policy measures, including monetary easing.

Enclosed below is a short presentation on the financial crisis situation from someone who appears to me to be very well-informed.  Be warned, and be prepared!

[scribd id=95493792 key=key-2bukmjiiyjtzns9qcorz mode=list]

Higher CPF Minimum Sum

The CPF Minimum Sum has been raised again, this time to $139,000. The reasons given by the government were rising life expectancy and inflation.

I am of the view that the CPF Board needs to find additional ways of dealing with the inflation problem. Minimally, there should be changes to the CPFIS rules to allow members more freedom to pursue investment goals that are consistent with higher rates of inflation.

For example, since inflation is a problem and since we have a negative real interest rate environment, why is the maximum gold allocation only 10%? How is that going to protect the other 90% effectively?

I would contend that the current rules effectively drive people into real estate, and serves to prop up prices in that market. Such policies which encourages a misallocation of capital should be stopped. Otherwise we will see a retirement crisis in the not-too-distant future, as I had previously warned of.