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.