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.

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]

European Crisis - No Way Out

PM Lee, at the recent G20 summit in Cannes, urged European leaders to adopt policies conducive to growth as a long-term solution to the sovereign debt crisis there.  My guess is that he was being polite and needed to say something encouraging after Singapore had been invited as an observer.

The fact of the matter is that there is no way out of the Eurozone debt crisis.  This has been a problem 40-years or more in the making.  Furthermore, based on traditional economics, the fact of Europe's aging population argues against any possibility of economic growth as a viable option for dealing with the debt problem.  When we add to this the fact of energy dependence and racial issues there, the lack of a realistic solution becomes crystal clear.

Now the only question is when the thing will blow up global stock markets, which appear to have been successful in pretending that the problem has a solution, thus far.  It has often been said that the stock market is for kids, and that the real adults play in the bond market.  I guess that must be true given the divergence in these 2 key markets.

China Bailing Out the Eurozone

It's amazing what politicians will do to keep the status quo and their privileged positions.

The idea that China, a country of peasants who can barely afford to feed themselves, should put money into Eurozone bonds to bail out the fat cat bankers of Europe seems to defy common sense.  And yet, the financial markets rally on the news.  So much for the crap in finance textbooks known as the 'efficient market hypothesis'.

On China's part, it is merely trying to keep its mercantilist policies going, since it needs an export market for its excess industrial capacity.  Global debt deflation will immediately bring China into a Kondratieff winter that will make the Great Depression look mild.  Also, given the problems within China's financial system, one has to wonder where they are going to find the money to bail the Europeans out.  The US$ 3 trillion in reserves that the PRC supposedly has isn't actually enough to fix the internal financial black-holes there.

As for Europe, I think the 'peasants' who still can't accept the fact that their 60-year experiment with socialism has failed will eventually rise up and revolt against the political establishment in Brussels and their respective home countries.  Europeans will not likely take kindly to the prospects of their politicians selling the continent's 'crown jewels' to China.  This is something that the CCP leadership appears not to have understood so far.

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.

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.

Gold and Silver Very Strong

Gold and silver were showing significant price strength in New York trading on Friday, as can be seen from the 2 Kitco charts below:

This move appears to have negated the Head & Shoulders formation that I had thought might form in the daily gold chart:

This was a costly mistake as I had traded out of a small speculative gold position, and I wasn't quick enough to buy below the 1390 level last night during NY trading. Not too sure whether a short-term top is near though, as the momentum indicators in the chart above are not at oversold levels yet.

On the macroeconomic front, the ECB's backdoor QE programme appears to be winning approval from the stock market, even though it is sign that the EU's debt problems are too serious to be solve with austerity alone. On the US side, the bad unemployment numbers also did not appear to have discouraged the bulls.

To me, this is a very confusing market environment.

China's Bubble Economy

Below is a video about the current state of China's economy, casting doubt on the widely-accepted belief in China's 'economic miracle'. The analysis, in my view, is fairly consistent with the Austrian School's analysis of malinvestments due to excessive credit growth. For those who are familiar with Frédéric Bastiat's 'Broken Window Fallacy', it's also featured prominently in the analysis.

EU Crisis Unabated

Talk about diminishing returns. The Greek bailout managed to calm markets for a few days. Now, even before the ink is dry on the Irish bailout, the markets are again sending credit default swap rates for various EU sovereign debts sky high. While I had expected the crisis remain unresolved, I didn't expect the market to shift its focus so quickly onto the other EU debt-ridden countries.

Result: Closed a small speculative gold position out too early.

Merkel Pledges Permanent EU Bailout Fund

The BBC has reported that German Chancellor Angela Merkel has vowed to implement a permanent bailout mechanism for the EU. As I have written earlier, the debt crisis will continue, and that's why the EU politicians deem that there is a need for a permanent bailout fund.

There was speculation earlier in the day as to the course that the Germans would take given that the continued bailouts have started to affect the country's credit ratings, as reflecting in the credit default swap market.

It seems to me that while the German people are unhappy with having to pay for the mistakes of other EU nations' banks (I believe that such bailouts benefit banks and shift the burden to taxpayers), their ruling elite has decided that the half-a-century political effort to build a united Europe and to prevent another war is worth the financial sacrifice. To make matters worse, several EU countries have started to take money from pension funds to support their fiscal shortfalls.

Given the protests that have taken place all over Europe, one has to wonder how much longer the political elite of the EU can continue to ignore the views of the people and pretend to be democratic.

In response to the Irish bailout, financial markets have sold off the Euro against the USD, and stock markets in Europe have ended Monday largely down.

Looking at the USD/SGD price chart, it would appear that the USD has reversed its downward course against our local currency. We could perhaps see the 1.40 level again if a big financial event occurs in the near future.

$10.2 trillion problem in 2011

The Wall Street Journal has reported that the developed countries of the world will need to raise US$10.2 trillion in 2011 to finance their budget deficits as well as to repay maturing bonds issued previously.

Given that many investors are now aware of the fact that most of the developed countries' governments are bankrupt, and that China may be increasingly unwilling to buy such sovereign debt as a result on the ongoing currency and trade wars, this could mean another round of shocks to the global financial system next year. If investors fail to show up for those bond auctions, there will either have to be debt default or monetisation. In the US case, the outcome is already clear - the US Federal Reserve will act as the buyer of last resort, buying up US Treasury debt in order to monetise it. As for Europe, I am not sure what will happen, as national politics between the different EU nations are involved. Austerity measures aren't getting much traction so far given the scale of protests that are happening across the EU. So, perhaps the EU may also be tempted to monetise debt? Who knows?

Whatever the case may be, it will definitely mean more 'interesting' times for investors as governments get more and more interventionist.

US Federal Reserve QE2 looks set to fail

Since the US Federal Reserve announced its US$900 billion 'QE2' programme of buying US Treasury debt and other mortgage-backed securities, stocks, bonds and commodities have moved violently in response. Looking at the intra-day actions on Wednesday and Thursday (US time), the market seems to be signalling failure of the new policy. Here's why.

Whatever the ostensible reasons for 'QE2', one important reason for the Fed's actions is to prop up the US stock market, using the 'reflation trade' to try to create enough wealth effect to stimulate household consumption, and thus get the US economy moving again. This is typical Keynesian thinking.

However, when we look at the market movements in the latter part of the week, we find that while US stocks have moved up, commodity prices have increased to an even greater degree. Since commodity prices influence cost-of-living, it means that the weak wealth effect has been more than negated by pipeline inflation. Thus, the market appears to me to be saying that the Fed's leveraging up of its balance sheet ultimately is a lot of 'noise' but no real impact is achieved. This is exactly what economists of the Austrian School have predicted together with some of the more savvy market participants.

For us here in Singapore, what this means is that we have to discount most of the 'good news' that the mainstream media is feeding us about the effectiveness of the Fed's latest policy move in helping the US economy to recover. The risk of a 'double dip' is still out there, probably in 2011.

Biggest Debt Bubble in Human History

This is an article from the Economic Collapse blog arguing that the US is still in the midst of the largest debt bubble in human history.

Living Beyond Our Means: 3 Charts That Prove We Are In The Biggest Debt Bubble In The History Of The World

Apart from the US, there are also debt bubbles in the various European nations. As such, I think it is a matter of time before another financial crisis hits the world, as the size of the debt bubble is at or near a point where it is mathematically impossible to be sustained. And when that happens, Singapore will also be seriously affected.

Singaporeans Buying Properties Overseas

Last evening, I overheard a report on the 6:30 pm Chinese news programme on Channel 8 that more Singaporeans were looking to buy properties overseas. This was also reported by Channel NewsAsia here.

What caught my attention was the following statement made by one of the developers:

"Still, buying properties in Spain now is about 50 percent cheaper than several years ago as property prices there have reached rock bottom, said property developers."

While it is true that real estate prices in Spain has declined by 50%, whether or not it has reached rock bottom remains to be seen. As the old trader's adage goes, 'cheap can get cheaper'.

The premise of the aforementioned statement by the developer appears to be that the worst of the financial crisis is over, and that we are slowly climbing back to economic growth. This is something which I disagree with.

A quick scan at the EU landscape shows increasing levels of social unrest as people express their unhappiness about the forthcoming fiscal austerity programmes imposed by their governments. Europeans accustomed to generous welfare benefits have so far been unwilling to accept the reality that high standards of living require the exertion of more than minimum efforts. This does not look to me to be a sound basis for an economic recovery.

Furthermore, despite the fact that European banks in general are more poorly capitalised than US ones, none have been closed down so far compared to hundreds in the US. Something is wrong with this picture, isn't it? Short of the ECB doing more 'quantitative easing', bank failures will hit the EU next year.

For Spain itself, more bad news as FT reports that municipal debt default has started with the town of Villajoyosa. Again, it does not look like recovery is on its way.

I don't know about you, but I never trust property developers when it comes to macroeconomic analysis.

Debt and Preparedness

The Sunday Times ran a story about the debt problems of young people in Singapore, noting that the debt default rates amongst those below 30 were the highest amongst the various age cohorts while those between 30-39 had the second highest rate of default. An example given in the story was of a woman who ran into trouble servicing her debt when she had to change jobs and take a 40 percent pay cut. The article then provided specific action steps endorsed by financial advisors that aim to help those who are in debt trouble.

Because of the approach taken by the article to the debt issue, one thing that was not highlighted was the fact that taking on debt these days is riskier than say 10 years ago. The reason for this is quite simple: job security is lower now and will continue to decrease in the foreseeable future. With globalisation, outsourcing and the government's current policy of liberally allowing foreign labour into Singapore in order to contain wage pressures, the average Singaporean's risk of losing his job is now significantly higher than even 5 years ago. Unfortunately for the younger adults, many of whom were brought up to have self-esteem that exceed their actual capabilities, the realisation that they can be replaced by cheaper workers of nearly equivalent skills have not made them adjust to the reality that they are likely to have poorer prospects of advancement than their parents.

While unchecked spending on consumer items is one of the causes of the increase in indebtedness, the rising cost-of-living in Singapore has also contributed to this unfortunate situation. For example, a price of a modest new (i.e. 'subsidised') 4-room HDB flat in the outskirts of Singapore has doubled in the last 7 years, while the salaries of those under 30 have definitely not increased proportionately. This significantly increases the cost of new household formation and therefore makes it more likely that the younger adults carry a heavier debt burden.

From a preparedness perspective, this situation requires us to help remind our friends and family members of the risk of diminishing job security when managing their finances, and thus be extra prudent when it comes to taking on debt. In terms of mindset adjustments, this may mean accepting the possibility that we can afford fewer material things, that we have to be more disciplined in terms of distinguishing between our material wants and our needs.

For those of us that are in a debt situation, it is important to work with a qualified financial advisor to resolve it as quickly as possible. Being prepared means moving away from being 1 pay cheque away from financial distress.