Demographics and Economic Crisis

The anti-population mainstream media has been doing some hand-wringing over the arrival of the 7th billion person on this planet, and warnings about environmental and food crisis have been flowing non-stop.  Not unexpectedly, intelligence service Stratfor has provided a piece on this matter via its Geopolitical Diary service. What was different was that Stratfor argues that we are on the verge of a population decline with the advanced countries leading the way via their aging populations.

One part of the article that resonated with me was the following:

Demography drove economies to this condition in the 1990s, when credit (and thus growth) increased. In the 2000s, mature workers produced a good deal of excess capital. The 2010s find the global economy correcting itself after 20 years of excess-capital-driven growth — at the same time as mature workers are retiring and leaving their capital-supplying role.

A darker period is likely to dawn by the 2020s. Most of those high-wage earners will have retired — they will no longer supply capital and instead will depend on the state to issue their pensions. The cost of capital will invert strongly. The generation born between 1964 and 1979 — characterized by its low numbers — will be responsible for supplying capital. They will not only have to fund the younger generations but will also have to support the pensions and geriatric-support programs created by their predecessors. Since the developing world’s aging process lags about 30 years behind that of the developed world, this same generation will act as the primary capital suppliers to the entire world. 

The developing world started to age too late. Its countries will lack enough mature workers to generate the capital needed to replace that which can no longer be imported from the developed world. The developing world will experience the financial challenges of the developed world, without having built up the infrastructure and industrial base the developed world has had for three generations. Such capital scarcity threatens to halt growth across the poorer parts of the planet. It will also make for strange bedfellows: the only hope the developed world’s ’64-’79 generation will have to meet their bills is to import more taxpayers. Perhaps the most unexpected outcome of population patterns is that the developed world will have a massive interest in attracting immigrants

The significance of the aforementioned for me is that while I disagree with the government's immigration policies as they now stand, one can see that if Stratfor's analysis is correct, Singapore is already quite ahead of the curve in terms of preparing for the darker future postulated.

As some commentators have noted, we could well be in the midst of a Kondratieff winter.  If that were the case, this dynamic of aging population in the developed world will have very serious repercussions for the global economy.  I suspect that those Singaporeans currently paying $100K COV for bigger HDB flats and $75K for a COE will not have too happy a future.

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.

Geopolitics and GLCs

The literature on the Singapore economy has discussed the issue of GLCs and their role in the economy rather extensively.  Most of the works are somewhat polite in their criticisms of the the system.  Outside of academia, the critics have been more vocal, with certain opposition parties calling for the dismantling of the Temasek Holdings system.

Being something of an Austrian School adherent in my economic philosophy, I can see the merits of the arguments.  However, I have also felt that there was some merit in the government's arguments for the need to get involved directly in the economy, and I have also recently argued that dismantling Temasek Holdings will eventually lead Singapore down the path to de facto rule by an unelected oligarchy of business and corporate interests.  As such, I've had a somewhat uncomfortable ambivalence on the issue for a long time.

A different angle presented itself to me recently when I was reading a Stratfor article on American geopolitics.  The author postulated a positive correlation between geopolitical risks and the state involvement in the economic model.  When I read that, the proverbial light bulb in my head was turned on.

Here, I will quote the relevant passages from the article:

As discussed previously, the United States is the most capital-rich location in the world, courtesy of its large concentration of useful waterways. However, it also boasts one of the lowest demands for capital. Its waterways lessen the need for artificial infrastructure, and North America’s benign security environment frees it of the need to maintain large standing militaries on its frontiers. A high supply of capital plus a low demand for capital has allowed the government to take a relatively hands-off approach to economic planning, or, in the parlance of economists, the United States has a laissez-faire economic system. The United States is the only one of the world’s major economies to have such a “natural” system regarding the use of capital — all others must take a far more hands-on approach.

• Germany sits on the middle of the North European Plain and has no meaningful barriers separating it from the major powers to its east and west. It also has a split coastline that exposes it to different naval powers. So Germany developed a corporatist economic model that directly injects government planning into the boardroom, particularly where infrastructure is concerned.
• France has three coasts to defend in addition to its exposure to Germany. So France has a mixed economic system in which the state has primacy over private enterprise, ensuring that the central government has sufficient resources to deal with the multitude of threats. An additional outcome of what has traditionally been a threat-heavy environment is that France has been forced to develop a diversely talented intelligence apparatus. As such, France’s intelligence network regularly steals technology — even from allies — to bolster its state-affiliated companies.
• China’s heartland on the Yellow River is exposed to both the Eurasian steppe and the rugged subtropical zones of southern China, making the economic unification of the region dubious and exposing it to any power that can exercise naval domination of its shores. China captures all of its citizens’ savings to grant all its firms access to subsidized capital, in essence bribing its southern regions to be part of China.

Based on this, I feel that a reasonable argument can be made that given our vulnerable geopolitical situation, the need for state intervention is high, and possibly even evident.

And given the rising risks in our external environment, I would argue that there will be more reasons for state intervention in the coming decade.

But that's for another day.

Market Outlook 20110717

Since my last Market Outlook more than a month ago, things have deteriorated in the Eurozone, with a debt downgrade for Portugal while Italy's problems have come to the fore.  Despite attempts by politicians to postpone the day of reckoning in Greece, things have not worked out as planned either. When these are taken together with the ongoing budget theatrics in the US, it is easy to see why many in the Western world are fleeing risk markets and moving into the ultimate safe haven asset - gold.

According to trader Dan Norcini, the gold chart patterns are suggesting to him that there is real fear amongst speculators that big troubles in the global financial system are heading our way.

When I look at things from a political perspective, a debt crisis in the developed world is a certainty - the only thing uncertain is the timing.  The reason for this is that the people in the developed world have, for the most part, not woken up to the terrible state of their countries' public finances.  Having lived for so long in a welfare-state system, they seem unable to mentally process the simple concept of 'We are broke'. In Greece for example, they have rioted, blamed the Germans by appealing to their 'past sins', and now even tries to demonise the Greek Orthodox Church for failing to pay its 'fair share' of taxes.  They simply have failed to realise that even if they tax the rich and Greek Church at 100%, there would still not be enough money to pay for welfare in a country of 11.5 million people that has fewer people working productively than Singapore.  Furthermore, as pointed out by the legendary James Dines:

Clear-eyed perusal of Greece seems that an inventory is required of what that nation has to sell to the world in exchange for its imports, for example: energy, medicines and oil. Greece has no prominent industrial manufacturing base, so it is reduced to selling its climatic beauty and relics; with copyrights on The Iliad and Odyssey having expired long ago, and fabled Greek drama supplanted by robocop-like movies, Greece is at a crossroads of something dramatic, possibly penury.

Thus, I think John Hathaway, a top portfolio manager in the gold mining sector, was right when he stated that 'welfare state democracy is incompatible with sound money', which to me means that politicians will continue to implement unsound Keynesian policies to try to hide reality from their electorates, and to try to deflect blame from their own corruption and collusion with greedy bankers.

Given the high degree of uncertainty in the current environment, I continue to think that only nimble speculators should involve themselves in the markets.  Long-term investors who want to implement a 'buy-and-hold' strategy will find the stock market challenging, and the only place that I can see such a strategy work is the gold market.

As an aside, I picked the quote from James Dines above to show that far more intelligent and successful investors than myself are of the view that a service-based economy is not capable of sustainable wealth creation and will lead to long-run fiscal problems.  As I have stated previously, I think Tan Jee Say has got it wrong in this regard.

Stocks - Time for Caution

In the week after the Sendai earthquake in Japan, there was a report in ST on 19 March wherein some market analysts were saying that the correction in the stock market presented a good 'buy on weakness' type of opportunity.  While some of the arguments were interesting, they appear to me to have seriously underestimated the risks from the unfolding events in the Middle East/North Africa as well as the ongoing sovereign debt crisis in Europe.

Furthermore, looking at the Singapore market action itself, there appears to be a mood of caution amongst the speculators, while the markets in the US shows hints of distribution.  The US markets, still leaders in terms of being able to influence global investor sentiments, show more signs of nearing a top than rather than good entry points for long-term holdings.  The only thing, some would argue, that is keeping the market from dropping is the billions of dollars funneled into the market by the US Fed via its QE2 programme.

As such, I would hesitate to say that now is the time for long-term investors to accumulate stocks.  This is a trading market.

Beware of Another Oil Shock

Earthquakes, bank runs, riots and choppy markets.  What a week!

With the messy situation in the Middle East, more market participants are expecting sharply higher oil prices in the near term.  The latest people to put out a bullish forecast for oil is Nomura.  As reported by the UK Telegraph, Nomura has stated that should Algeria's production be shut down together with Libya's, then oil prices could hit US$220 per barrel.

To me, if oil were to hit that level, it would be a quick spike up that would kill the global economy.  I doubt it will be a slow climb because if the world economy could not withstand a price of US$147 per barrel back in 2008, it will definitely not be able to withstand that price today given that it is in a far weaker shape today, let alone US$220.

That said, what was more interesting in the Telegraph report was the following quote:

Jeremy Leggett, a leader of the UK industry task force on peak oil and energy security, said the Mid-East crisis "shows the extreme fragility of the global system. People don't realise how close we are to a potential precipice if this unrest reaches critical mass in enough OPEC countries. Governments need to draw up emergency plans and get cracking on proactive measures while we still have time," he said.

While some Singaporeans rightly fear the spectre of a worsening inflationary situation, there could be worse to come.  At the community, family and individual levels, we need to think of ways to deal with these challenges with minimal reliance on the government.  This is not the time to complain about the inadequacy of the budget handouts, nor boast about the popularity of your political website vis-a-vis the PAP, nor fight amongst yourselves to see who gets to be the boss.  And no, the real danger to the country is not when the PAP implodes, as some  have suggested.  There are far bigger storms out there.

On the Egyptian Situation

Based on the headlines that I have seen on my Facebook news feed, posted by politically liberal people on my friends list, the mainstream media appears to be making the demonstrations against President Mubarak as a struggle for freedom against dictatorship and tyranny.  Yet, as with all things regarding the Middle East, it's never as simple as the liberal press would like to us to believe.  Lurking behind the scenes could well be forces that are advancing a dialectical process that progressives in the press are so familiar with, a process that they have deceptively coat with a veneer of morality (good vs evil) in order to hide the truth.

For those who think that Mubarak is a hideous dictator oppressing a freedom-loving people, one may want to consider the following passage from this source:

Nine out of ten Egyptian women suffer genital mutilation. US President Barack Obama said Jan. 29, “The right to peaceful assembly and association, the right to free speech, and the ability to determine their own destiny … are human rights. And the United States will stand up for them everywhere.” Does Obama think that genital mutilation is a human rights violation? To expect Egypt to leap from the intimate violence of traditional society to the full rights of a modern democracy seems whimsical.

In fact, the vast majority of Egyptians has practiced civil disobedience against the Mubarak regime for years. The Mubarak government announced a “complete” ban on genital mutilation in 2007, the second time it has done so - without success, for the Egyptian population ignored the enlightened pronouncements of its government. Do Western liberals cheer at this quiet revolt against Mubarak’s authority? 

[...] In the most fundamental matters, President and Mrs Mubarak are incomparably more enlightened than the Egyptian public. Three-quarters of acts of genital mutilation in Egypt are executed by physicians.

What does that say about the character of the country’s middle class?

And while the mainstream media has portrayed the demonstrations as a manifestation of the people's frustrations with many issues including rising food prices, it's not hard to observe that the poor people who are really hurt by such things are not the ones demonstrating, but rather the educated middle-class people.  So again one has to ask whether there are forces behind the scenes trying to manipulate the situation to their advantage.  This perspective was considered by the private intelligence service STRATFOR.

In one of their Intelligence Guidance notes, the following was written:

What we have to find out is who is behind this. It could be the military wanting to stage a coup to keep Gamal Mubarak out of power. They would be doing this to preserve the regime, not to overthrow it. They could be using the demonstrations to push their demands and perhaps pressure Hosni Mubarak to leave voluntarily.

The danger is that they would be playing with fire. The demonstrations open the door for the Muslim Brotherhood, which is stronger than others may believe. They might keep the demonstrations going after Hosni leaves, and radicalize the streets to force regime change. It could also be the Muslim Brotherhood organizing quietly. Whoever it is, they are lying low, trying to make themselves look weaker than they are — while letting the liberals undermine the regime, generate anti-Mubarak feeling in the West, and pave the way for whatever it is they are planning.

I don't have any particular views about the situation in Egypt.  Just like the folks at STRATFOR, I am more interested in finding out whether there are larger forces lurking behind the scenes that may have more global impact.

Future Growth Amidst Resource Scarcity

It appears to be axiomatic amongst our policy makers that the future of Singapore depends on raising the productivity and knowledge intensity of our economic activities. While this strategy is undoubtedly important insofar as it helps to reduce our dependence on foreign labour, as someone who subscribes to the global resource scarcity thesis, I sometimes wonder how far we can go as a country given the fact that we have little control over the most fundamental aspects of all human economic survival - food, energy and water. (As an aside, our ability to produce Newater has merely transformed our water problem into an energy problem, since Newater production is energy-intensive.)

Two days ago, I came across an analysis by John Taylor, Chief Investment Officer of FX Concepts, a forex research company. He argued that with the Internet and the proliferation of knowledge, it has become less scarce a commodity:

Countries that control more of the factors of production will be dominant. Today, the tables seem to be turning on the West. As education has become almost universal, knowledge, intellectual expertise, and competent labor have become less expensive and less valuable as a result.
[...]
Because the playing field has become level for the first time in history, we would argue that, at this time in history, the battle has shifted to raw materials. If we assume that today's critical resources are gas, oil, agricultural output, and rare earths, Europe is totally out in the cold and the US is supported only by its strength in food production. Although commodities have played a diminishing role in economic history and, thanks to scientific advances, should continue this long-term trend, the scramble for scarce resources should impact economic cycles and growth in the decades ahead.

Given that knowledge is intangible and it's production is not directly constrained by the physical reality of limited resources, his argument certainly has some merit, in my view. And if he is correct in his assessment, there will be very important and serious implications for Singapore's economic future. This is an issue which neither the government nor the opposition parties has addressed publicly.

Food for thought as we savour Chinese New Year delicacies.

Food Crisis 2011 - Will Politics Trump Markets?

While we in Singapore complain about the high price of barbeque pork slices, a favourite Chinese New Year food, high food prices have had far less sanguine effects on the poorer parts of the world, as we have seen from the political turmoil in Tunisia, Egypt and the rest of that region of the world. Wheat prices have hit a 30-month high and have doubled since a low in mid-2010, and this has obviously had a negative impact on Egypt, who has to import around half of its annual consumption.

With developing countries close to screaming in pain from the inflation exported by the United States through Bernanke's disastrous quantitative easing policy, I have to wonder how much more food prices have to go up before Hillary Clinton tells Bernanke and the President's Working Group on Financial Markets (the so-called 'Plunge Protection Team') to step in and cool things down.

As an aside, I tend to think that Obama is a mere teleprompter-reading puppet who has neither the intelligence nor experience to deal with such complex issues, and that Mrs. Clinton is the real brains behind such matters. Being a Marxist agitator ('community organiser') in the Saul Alinsky tradition in Chicago is not a real job.

Such an intervention in the commodities market is not without precedent. It had happened before in 2008 during what Donald Coxe, chairman of Coxe Advisors LLC, called the 'Saturday Night Massacre', where it was thought that the US government, working through its Wall Street connections, hammered down commodity prices through the futures market. The only difference between now and 2008 was that the US political class had a vested interest in having commodity prices down due to the then-impending Presidential Elections. As for the present situation, I would argue that being the sole (albeit declining) superpower in the world, the US has a vested interest in trying to keep things under control, especially when it comes to the Middle East, where it is engaged in protracted wars in Iraq and Afghanistan that it has no hope of winning. Allowing things to further deteriorate will definitely have a negative impact on the global economy, on the stability of the Middle East and possibly on the supply and price of oil.

Be that as it may, looking at the various charts of agricultural commodities, rice has just broke its sideways pattern to move up to a 27-month high while wheat and corn may still have further upside. That said, I am wary of getting into long positions, as my sense of the consensus view is that too many people think prices will keep going up due to supply challenges underpinning the fundamental picture of food commodities. The fundamentals are correct, but with the CCI breaking record after record on the upside, I am just worried that the opinions are too one-sided and that there is a speculative frenzy feedback loop fed by the ongoing social unrest. Since I am somewhat a kiasu person, I am most likely going to sit out this episode of price movements.

And given that rice prices have start to move, we need to be on a lookout for protests and social unrest in those parts of the world where rice is the major staple food. So far, our region has been spared unrest, but don't count on that to continue if rice prices start to move aggressively up like wheat and corn.

In the meantime, I'll be thankful for the abundant food available here in Singapore and enjoy my Chinese New Year.

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.

Cutting Our Defence Budget?

The papers today carried a letter from Ms Hazel Pua of the Reform Party written in reply to MND Minister Mah Bow Tan's op-ed piece some days back defending the affordability of HDB flat. Various very good points were made in the letter to argue that HDB flats are now less affordable, with Minister Mah's assumptions taken part rather cleverly.

That said, I would disagree with part of the following:

The Reform Party is happy to offer some other options for consideration: Cutting the defence budget; reducing the payments made by HDB to the Singapore Land Authority for the purchase of land to build HDB flats; and cutting ministerial salaries.

To my mind, the above statement appears to suggest that our current level of defence spending is unnecessary. But in the absence of a war to test out the adequacy of our military, such a claim is untestable. To draw an analogy from IT, it is like trying to argue whether one's off-site backup system is cost-effective when there had been no data disasters before to quantify the range of possible losses.

I think cutting the defence budget is a terrible idea. As I have maintained throughout my writings on this blog, the world is moving into a period of greater geopolitical risks, driven largely by resource scarcity. Given our dependence on foreign resources for our most basic needs, it is paramount that we have a strong military as a kind of leverage against any hostile foreign intentions. Furthermore, such military force will likely be required to keep our sea lanes open in the face of terrorist threats. Ms Pua and the Reform Party have made the rather common error of thinking that if Singapore is friendly towards other countries, they will reciprocate. I would suggest that they read some of the local language newspapers of our neighbours if they have not seen the vitriol poured out against Singapore on a fairly regular basis.

The Reform Party's letter again shows, in my view, that the coming elections will only be about domestic issues. The bigger storm clouds coming over the horizon are being ignored by all political parties.

North Korea Attacks South Korea and Irish Troubles

South Korea's Yeonpyeong Island, near the disputed maritime border with the North, was shelled by the latter today, killing 2 South Korean marines and injuring several others. The attack has been criticised by the United States, Europe and Russia, while Japan is demanding action from both the US and the United Nations. I think China's reactions should be interesting.

Apart from this, the Irish bailout by the EU and IMF appears to be in trouble. This just in from Dow Jones Newswires:

German Chancellor Angela Merkel Tuesday underlined the grave situation facing the single currency in the wake of the financial woes facing Ireland.

"We're in an extraordinarily serious situation, as far as the situation of the euro is concerned," Merkel said during a speech at the German employers association annual conference.

She labelled the Irish crisis "very worrying" but different from that faced by Greece in spring this year.

Thus, financial markets around the world have been rattled by these 2 events today. Interesting times in the markets.

Preparing For A Less-Friendly World

At the recent G20 Summit in Korea, PM Lee Hsien Loong rightly called for the G20 group of nations to work together towards policy measures that will sustain global economic growth. Unfortunately, as the aftermath of the meeting showed, his urgings fell on deaf ears as the Americans went ahead with QE2 despite opposition from China, Brazil and others. It looked to me like 'every nation for itself' and the possible outcome would be some kind of 'Nash equilibrium' when it comes to the trade and currency war situations.

As I have written before, I believe that we are moving into an era of reverse globalisation where there will be more friction of various kinds between countries. Here in Singapore, based on public information, it would appear to me that the government's economic assumptions are still predicated upon the continuation of the old free-trade system that has started to unravel since the 2008 financial crisis, with only a change in leadership from the developed world to Asia. What I would hope to see from our government is first an acknowledgement that we could be going into a rough period in the international scene, followed by concrete policy measures to prepare for such a possibility.

Realistically, I don't expect any change in our national economic thinking any time soon. Neither the government nor the opposition parties appear to have considered the risks of the era of reverse globalisation, at least not publicly.

Vietnam protests against China mapping

More troubles between Vietnam and China, this time over the way a PRC government agency has drawn its maps marking the Spratly and Paracel Islands are PRC territories. This has been reported by the FT Chinese edition today:

中国政府上月启动的一个在线地图服务受到了越南政府的强烈批评。这是由于中国姿态日益强硬，造成地区摩擦的又一个体现。

Vietnam has protested the PRC action, and this has been reported by the Vietnamese media, an English version of which can be found here.

Definitely something to keep an eye on.

Storm Clouds Over the Horizon

While the drumbeat of Singapore politics has become louder in recent months, I am of the opinion that the focus of the discourse has so far been too parochial. There are some of the storm clouds that I see over the horizon and that could have impact on Singapore within the next 5-10 years, but which has so far not been covered in the discourse.

In this article, I shall outline some of the issues that I think will have major consequences for the long-run viability of our country. Admittedly, since I don’t have the power to predict the future, these points are somewhat speculative, although I have done some homework in all areas.

Peak Oil

Some experts such as Dr. Colin Campbell and Prof. Kenneth Deffeyes have argued that global peak oil production had actually peak in 2005, based on current available data. Production of liquid fuels has kept up with demand so far due to other sources like coal-to-liquids and gas-to-liquids technology. While new ways will be found for extracting oil and gas, the fact that the Brazilians have to drill for oil more than 7 km below the earth's surface for their Tupi field shows that the era of cheap oil is over.

Peak oil will result in very high volatility in the crude oil market, as high oil prices triggers recessions in economies. Such recessions will bring down demand and thus prices for a while until recovery takes places, at which time prices move up again and the cycle repeats.

As high prices take its toll on the global economy, trade will be reconfigured as businesses seek to move their production closer to their customers in order to cut down on the distance over which they have to ship their goods in order to cut transportation costs. A preview of this happened in 2008 when some US manufacturers found that moving production from China back to the US or Mexico made a lot of sense when oil was over US$100 per barrel. Besides this, tourism will be affected as high fuel prices forces airlines to cut routes and ground planes, as had happened in 2008.

Since the Singapore economy is very dependent on trade and tourism, peak oil could have a very large negative impact on our livelihoods.

To make things worse, high fuel prices will definitely lead to higher food prices since we import almost all of our food from abroad, sometimes over long distances.

Resource Scarcity

Due to changes in the weather cycles (not anthropogenic global warming), global food production could consistently fall short of demand. This explains the current ‘land grab’ that many countries are engaging in over in Africa and South America, as previously covered by this blog. Furthermore, the availability of potash and phosphorous could also be constrained, resulting in lower fertiliser production.

In terms of other minerals, peak oil proponents like Richard Heinberg have argued that we will soon experience declines many key industrial commodities.

And let us not forget the issue of water scarcity. As covered by the National Geographic magazine in April 2010, water conflicts are starting to surface, especially in the Tibetan plateau (China and India) and the Nile region.

As resources get scarce, there could well be conflict between countries competing for those limited supplies to satisfy their own economic needs. Global cooperation will decline and the world will become more unstable, again not good for Singapore's economic model.

End of USD as Reserve Currency

If the US Federal Reserve continues current policy of debasing the USD, it could well only be a matter of time before confidence in the currency collapses and the world is forced to move to a new currency regime.

While I don’t claim to know what the likely impact of such a scenario will be for Singapore, the fact that our country is a large holder of US government debt makes the possibility of financial losses quite high should the USD lose its reserve currency status. What this means for us as citizens is that our CPF savings will suffer losses as well.

Besides this, since our independence, we have only had experience with a USD-based global currency system and nothing else. One could even argue that our economic policies were designed to take advantage of the global trade system made possible by the USD’s reserve currency role and the attendant global credit expansion cycle since the early 1970s. Once that changes, we will have to figure out how to adjust our economy to the new global architecture, and whether or not we will be up to the task remains to be seen.

War

That the US is in decline is by now quite obvious, except for people like Stratfor’s George Friedman. As we move toward a multi-polar world, there could actually be more instability, if the Hegemonic Stability Theory is correct. This is especially so as the world faces the reality of resource scarcity and there is heightened competition.

Besides this, based on historical analysis, some cycle theorists and market experts believe that we are now in a Kondratiev Winter, and some believe that major wars have to occur before the next upswing in the global economy. From a generational cycle perspective, John Xenankis of Generational Dynamics predict a war between China and the US.

If the world were to move into a period of conflict, it would again mean that Singapore’s economy will be affected, since we depend on peace for our economic model to work.

Conclusion

Since this article is about threats to Singapore, I have not covered the more optimistic factors that will affect our future (e.g. Asia’s rising economic power etc). What I hope is that more Singaporeans will take a look at these possible threats and make preparations to deal with them in whatever way they can, and of course, pray that they don’t come to pass.

China Does The Trade War Thing

Overnight, news came that China was halting exports of rare-earth minerals to Western countries, sending stocks like Molycorp up sharping on a day when the broader market got killed. This appears to be yet another salvo in the ongoing power struggles between China and the West.

The excuse that China typically uses for such moves is that it needs the minerals for its own fast growing industrial usage, which sounds plausible prima facie. The irony here is that China's own aggressive acquisition of overseas resources makes it vulnerable to such stunts being pulled by other countries as well, especially given the current trend towards resource nationalism. The Chinese would probably not be amused if say the US decides that it needed more wheat and soy meal for 'its own use', given the lack of supplies in the market currently. There's a difference between people not having enough to eat and them not being able to buy an iPad due to component shortages.

Perhaps that's why China is busy building up its blue-ocean capabilities, so as to be able to project power far away from its shores in order to get the resources it needs to sustain its increasingly expectant people. The risk of them 'running into' the US Navy is definitely on the rise.

己所不欲，勿施于人 - 《论语·颜渊篇》

Video: Meltup

This is a highly-educational video on current US economic conditions which highlights the risks of hyperinflation in that country. While this is not directly related to Singapore, the fact that the US is the largest economy in the world and currently the most important source of global liquidity (due to the Federal Reserve's zero interest rate policy) means that any problems there will have serious repercussions on our small country.

The Germans are worried about Peak Oil

Following a series of high-level reports issued around the world by various groups, it appears that the Germany armed forces is the last to indicate some concern about Peak Oil. In an article found in Der Spiegel's English online website, it was reported that a German military think-tank has warned of the potential for very drastic consequences as the effects of Peak Oil are felt around the world.

The central points of the reports are as follows:

• Oil will determine power
• Increasing importance of oil exporters
• Politics replacing free markets
• Failure of the market mechanism for oil
• Relapse into a planned economy
• Global chain reactions
• Crises of political legitimacy in various countries

From a Singaporean perspective, this has a great due to concern us as we import 100% of the energy we need to run our modern economy. Over time, I will explore the implications of Peak Oil for Singapore and for our own individual lives.

Stay tuned!