UK University Subsidy Cuts

I had a foretaste of the recent protests this week when I was a graduate student in the UK more than 10 years ago, when the British government wanted to enact a small increase in the fees to be paid by local students. The usual 'this will hurt the poor' chorus was sung out very loudly. At my school, the irony of course was that most of the local students were from well-to-do families, and were expected to join the country's elite given the pedigree of the qualifications that they were in the process of acquiring.

I'd say that I was in full support of the fee increases back then, and even more so now, given the dire state of the UK's fiscal health. Like it or not, British higher education is a waste of taxpayers' money. I would say that more than half of the universities are not more than what in Singapore we would consider as polytechnics, producing graduates that lack the level of skills and knowledge that would accrue from a proper university education.

As an illustrative example, I met one of my house-mate's university buddy. He got a 2nd lower honours degree from a university that was near the lower half of the 2nd tier of universities in the UK. He only managed to get a local council job that paid GBP 9000 per year at the time (That's like, after tax, making S$1 k a month as a graduate). My house-mate, a British PhD candidate in biochemistry, told me that in most cases, if one fails to get a 2nd upper honours degree, it was as good as not having a degree when it comes to assessing one's prospects in the job market. That to me was the key to the issue of quality - if employers are not willing to hire people below 2nd upper honours, it means that the pieces of paper held by most graduates didn't count for much.

UK under the Labour government has pursued extremely socialistic policies, and now the taxpayers are asked to pay for that overwhelming burden. Cutting university spending is a move in the right direction. The higher-education bubble should be popped sooner than later.

Minimum Wage and Competitiveness

In the recent debates about the possibility of a minimum wage in Singapore, both the government and the Singapore National Employers Federation came out against the idea with the textbook objection that higher wages will lead to jobs being moved overseas to cheaper locations. The argument implies that in an era of free-trade and globalisation, a minimum wage policy will lead to high wages and thus job losses.

In this context, I would like to share quotations from a blog post by Charles Hugh Smith entitled Why America Is Slouching Toward Third World Status:

Free trade fanatics would do well to study Germany and South Korea, two blatantly mercantilist export giants. German wages are among the highest in the world, yet their industry has not been boxed up and shipped to China; why?

Germany made a series of political and cultural trade-offs. Please examine their apprenticeship programs, the manner in which their unions accepted cuts in pay, benefits and working hours in order to sustain their own jobs, and that nation's political balancing of issues around jobs, trade, currency and security. Please educate yourself about the trade-offs made by South Korea.

To believe that an open market would solve everything is akin to believing in a Marxist paradise: all trade is deeply, fundamentally political. Free trade, like Marxism, promises an emotionally appealing perfection but in the real world, it is a tangled series of trade-offs that are guided by those Elites with the most to gain from one "trade" or another.

While Germany does not have a national minimum wage, it does set by law the minimum pay for several types of jobs. For the rest of the economy, wages are set by collective bargaining and are enforceable by law. As Smith rightly pointed out, the high wages in Germany has not resulted in the wholesale loss of manufacturing jobs to China, unlike in the US.

Some food for thought for us here in Singapore, especially when examining textbook arguments in economics.

Temasek To Increase Stake in China Construction Bank

Looking at the streaming news feed on my brokerage screen a few minutes ago, I saw a story by Dow Jones Newswires that Temasek Holdings has decided to take Bank of America's entitlement in the latest China Construction Bank (CCB) rights issue exercise:

(Dow Jones)--China Construction Bank Corp. (0939.HK) said Thursday that Singapore state investment firm Temasek Holdings Pte. Ltd. will take up Bank of America Corp.'s (BAC) entire entitlement in CCB's rights issue, confirming an earlier comment made by a Temasek spokesperson to Dow Jones Newswires.

According to the article, CCB had announced in April of its intention to raise up to USD 11 billion to shore up its capital base, which had deteriorated due to a government-directed lending boom. From what I can remember, this lending boom was part of the multi-bullion Yuan monetary stimulus that the central government had implemented to artificially shore up economic growth in the mainland during the recent financial crisis. For its efforts, China was widely regarded as the 'saviour' of the world economy after all the developed economies tanked.

From an Austrian School perspective, we know that a government-mandated credit boom usually lead to malinvestments as borrowers recklessly invest in projects that are unprofitable without cheap money. This is typically followed by a credit bust and loan defaults.

While the CCB is prudent in shoring up its balance sheet, it does look to me like Singapore is indirectly paying for China's monetary stimulus.

Sign of The Times?

In recent years, I have read or heard various political and financial commentators like Harold James ("The Creation and Destruction of Value") and Russell Napier ("Anatomy of a Bear Market") talk about the increasing level of intervention that governments will assert in both markets and in our lives. Looking at what's been happening since the 2008 global financial crisis, such assessments appear to me to be correct.

In a sign of things to come, the following is a story that I received from the newsletter service Casey's Daily Dispatch:

Basically, a man was arrested and taken in by anti-terrorist police in Sweden after complaining to a friend on the phone about having an “explosive headache.” How did this happen? Apparently, Sweden has had blanket surveillance of all phone and Internet traffic since 2009, and the use of the word “explosive” triggered a keyword rule that made the anti-terrorist troops come out in force. After invading the man’s privacy by listening in on his phone call, police with automatic weapons stormed his house, scared the hell out of his family, and proceeded to arrest him and three relatives, all because the guy had a headache. As if to add serious insult to injury, the guy was denied a public defender, presumably because of the “terrorist” nature of his crime. Way to go Sweden.

If you can read Swedish, the original news article can be found here.

My point is this: Those who criticise Singapore for our lack of freedom should note that increasingly, we may not be alone in having our freedoms restricted by government actions. That's the new reality, in my view.

IEA's Tacit Nod to Peak Oil

The International Energy Agency's World Energy Outlook 2010 has just been published, and in the Executive Summary of the report, we find the following noteworthy passage:

Oil demand (excluding biofuels) continues to grow steadily, reaching about 99 million barrels per day (mb/d) by 2035 — 15 mb/d higher than in 2009. All of the net growth comes from non‐OECD countries, almost half from China alone, mainly driven by rising use of transport fuels; demand in the OECD falls by over 6 mb/d. Global oil production reaches 96 mb/d, the balance of 3 mb/d coming from processing gains. Crude oil output reaches an undulating plateau of around 68‐69 mb/d by 2020, but never regains its all‐time peak of 70 mb/d reached in 2006, while production of natural gas liquids (NGLs) and unconventional oil grows strongly.

The part in bold font is consistent with what leading peak oil experts have been saying for the past few years, namely that conventional crude oil output peak at around 75 mbpd in the 2005-06 time frame, and that what has keep output growing in pace with demand has been the rising role of NGLs, coal-to-liquids, biofuels and other non-conventional liquid fuels.

Unfortunately, this important piece of news has received little or no coverage in Singapore. Given the importance of trade to our economy, and the dependence of trade on fossil fuels, this is disappointing although predictable.

World Bank Chief Talks About Gold Standard

The financial media has been set abuzz over the weekend because of comments by the World Bank chief Robert Zoellick regarding the include of gold into a future international monetary system. Calling for a more cooperative system which will include the major currencies of the world, he added the following statement, as reported by the Financial Times:

"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."

Whether or not this is another one of those 'trial balloons' that senior people like the float before a major policy change I don't know, obviously.

But it is worthwhile considering what impact the inclusion of gold into a future monetary system will have on Singapore. This is particularly so given the low percentage of our foreign reserves that is being stored in gold. Based on IMF data, as reported by Wikipedia, Singapore only has 127.4 tonnes of gold reserves, which is a miserable 2.3% of our total reserves.

In a future system that values gold more than the current one, will Singapore suddenly become poorer relative to other countries that have more gold? How will that affect our CPF savings? Does the government have more gold than what it has reported to the IMF, like China previously? I have not figured it out yet, but like I said, it's something to think about.

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.