Debt Crisis Will Continue

Even as EU ministers rush to cobble together a bailout package for Ireland before Asian markets start trading tomorrow morning, one has to really wonder about the effectiveness of bailing out banks as a means of solving the ongoing debt crisis in the developed nations. Such bailouts merely shift the debt onto the taxpayers of the problem countries, who are themselves hard-pressed to solve their own financial troubles. Furthermore, the EU's bailout fund basically involve financial contributions from EU nations that are all in financial dire straits. Again, this does not make sense to me.

There are only 2 ways to solve problem of too much debt: Either default or monetise it. A default will likely mean a breaking up of the Euro grouping, and so politicians may be tempted to follow in the footsteps of Bernanke's 'QE2'. Who knows?

I just wonder how long more such schemes can last before the current financial system crashes once again, possibly with a ferocity that greatly surpasses that of 2008.

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.

Possible Food Crisis in 2011 - UN

The UN's Food and Agriculture Organisation's latest Food Outlook has reported that there could be a global food crisis next year, and asked that the world be prepared for greater price volatility.

According to the report:

• World cereal production will contract by 2% instead of the 1.2% expansion in an earlier forecast.
• Inventory in world cereal is expected to drop by 7%. Barley will decline by 35%, corn by 12% and wheat by 10%
• Only rice stockpiles are expected to increase, by about 6%.
• Prices of some food types may rise up to 2008 levels.

If the FAO report is accurate, it will mean food riots next year as had happened in 2008. I think for the problem to be fixed at least partially, we have to stop the idiocy of biofuels, especially palm and corn-based fuels. It's ridiculous to devote so much land and resources to produce motor fuel when people run the risk of starvation.

For us here in Singapore, it is perhaps time again to look into preparing for this possible crisis by means of food storage and some limited forms of urban agriculture. Preparing early could mean saving some money if food inflation should become a serious issue. In China, it already is. So we need to be watchful.

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.

COE prices: Irrational exuberance?

COE prices have reportedly reached 10-year highs in all categories, at a time when economic growth is expected to slow down globally and in Singapore as well. The proximate cause of the price increases is the expected reduction next year in vehicle quotas by the LTA.

One the demand side of the equation, I wonder whether some Singaporeans continue to be overly optimistic about the country's economic prospects next year and beyond. It also looks as if no one is paying attention to peak oil and the risk of another economic crisis.

Foreign funding of local politics

A member of a local group that had recently been classified as a political organisation under the Political Donations Act (PDA). wrote a piece in an anti-government website criticising the policy of restricting funding of political bodies in Singapore to local fund sources as a self-serving rule of the PAP government. He cited our openness to foreign influences in many other aspects as a kind of counter-argument.

I would say that his piece is also highly self-serving, given that his organisation's foreign funding sources have been cut off by the ruling under the PDA. No country in its right mind would want to allow foreign funding of political organisations. Even a superpower like the US, where vast amounts of money change hands in political donations, bar foreigners from donating to American political bodies. Given the size of the US, it is obvious that foreigners trying to influence US politics would have a lot less leverage. For example, donating US$20 million to a political party there would be a drop in the bucket. In contrast, that amount of money would have a huge impact on any political organisation here, even for the PAP.

To my mind, we have enough foreign influences as things now stand. Maintaining the restrictions on foreign funding of local political bodies is one of the last bastions of 'local sovereignty', even if it is merely symbolic. I don't want to see my pink IC's meaning being eroded further.