$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.

Singapore's Energy Strategy

While it has been reported recently that foreign experts have opined that Singapore's national energy strategy is on the right track, I feel that much remains to be done to move to a more sustainable energy infrastructure. Thus, although LNG is a good way to diversify our natural gas needs, we still can't escape the reality of well depletion, especially the rapid rates of offshore wells (since our LNG supply will come from the fields off the west coast of Australia).

And as much as it is good news to have a solar plant operate here, I still feel that we are not aggressive enough in putting in solar infrastructure. Yes, at current oil prices, it makes no economic sense, but if we look at the investment as one of providing a partial backup solution, it will make a lot of sense when (not if) there are disruptions to our natural gas or crude oil supplies.

And as for nuclear power, unless new technology making use of thorium becomes viable, if we have to wait 10-20 years as some experts have suggested, uranium-powered nuclear reactors may not be relevant as we might have reached 'peak uranium' by that time and all the known supplies would have been locked up by big countries like China and India.

NEA Website Overloading - A Simple Solution

During the recent haze problem some forest fires in Indonesia, many Singaporeans were using the NEA website to check the PSI readings. As a result, the website became overloaded and this caused a lot of unhappiness amongst users.

In response to a complain letter, the NEA posted this reply to the Today newspaper:

We refer to Mr Lam Wei Guang's letter "Frustrated by NEA's weather info hotline, site" (Oct 16-17).

We wish to apologise to Mr Lam for the inconvenience that he experienced. The lightning information on NEA's weather hotline (6542 7788) is being replaced with a newer and better system and is expected to be ready in October next year. We will inform the public when the new system is operational.

Mr Lam was unable to access to NEA website at 4.25am on Oct 10 as the website was undergoing routine maintenance on that day between midnight and 8am. We will ensure that users are kept informed of the period of scheduled maintenance.

We thank Mr Lam for his feedback.

Instead of spending time and money calling for a tender to build a new system, which will only produce results next year, a much simpler solution could have been implemented during the time of the overloading and had the problem fixed within hours.

The NEA web page showing the PSI reading was a very 'heavy' page filled with graphics and other extraneous information. What the NEA could have done is to put up a stripped down page with only the bare PSI reading information, which will not only cut down server load significantly, but could also be marketed as being 'mobile phone friendly'. This is a very common practice among popular websites, as they seek to attract mobile phone surfers such as those using the iPhone.

This simple solution could be implemented in PHP or even the current ASP framework within a few hours (including UAT) for less than S$1,000.

Now, what we get is a new system, possibly over-sized to take care of peak traffic while idle most of the other times when the air is clear. Or we get a refactoring of the website code to move to a cloud-computing solution. Both of these are complicated ways to solve a simple problem. Complexity of course means more energy, money and time expended, with doubtful benefits.

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.

More Bad News on Inflation

With bakeries in Singapore reportedly raising prices for their products due to the sharp rise in the price of sugar, there is now more bad news as Bloomberg reports that cooking oils are poised to see price increases as record demand has brought inventories down to 17-year lows.

"Inventories of soybean oil and palm oil, used by Nestle SA and Unilever and in everything from Hellmann’s mayonnaise to Snickers candy bars, will drop 12 percent in the coming year as China and India increase consumption 11 percent, U.S. Department of Agriculture data show. Food prices climbed in September to the highest level since the crisis in 2008 that sparked riots from Haiti to Egypt, the United Nations says."

Indeed, China and India will be the prime drivers of demand for agricultural commodities for years to come.