CPI + 5.2%

All this discussion is very interesting & educating.
Do correct me if this is wrong concept,from my rojak understanding.

I think inflation is global thing, one cannot isolate it without linking it to the global economy unless the country is self-sufficient.

Since the financial crisis US been turning on their printing machine nonstop with their stimulus, low interest rate.
More money = USD down = RMB UP.
CHINA LPPL, bo bian have to keep RMB low because their one of the world largest exporters, with huge export = huge inflow for RMB

Thus China have to print more $$ to buy more USD to maintain the pegged RMB else their export die, companies closed down, unemployment high = government die.
[Image: dos4du.jpg]
Using the inconsistent trinity, China in adopting both Fixed Exchange Rate and Sovereign Monetary Policy(can print money), Cannot have free Capital Flow.
Thus China can Limit the effects of money supply and the exchange rates but that brings another sets of problems. They print more money, though limit outside effect with fixed exchange rate but internally they got increasing inflation, large current surpluses ..etc
anyway

back to Singapore, SG in adopting both Free capital flow and Sovereign Monetary Policy(ability to print money) cannot have fixed exchange rate.
Thus unlike China cannot limit the effects of money supply & the exchange rates.

SG cannot don't print $$ to indirectly reduce inflation, so that firms will tried to reduce costs with pegged exchange rate, to become more competitive to compete with international markets. therefore, maintain low inflation, bringing interest rates down and increase trade and investment.

All the printing of money have to go elsewhere, SG is not an exception.
practically like borrowing USD, borrowing EUR, chasing for better returns in elsewhere aka include SG. Even Japan also printing more $$ to reduce their yen exchange rate.

Thus the inflation everywhere in e world.
Maybe tat's y Jim roger said must buy commodities.

So how? buy stocks, index etf, maybe commodities cos inflation bo bian one.

Regarding COE, HDB i think is really abt supply & demand. maybe reduce demand limit to 1 car per 5 family members like e foreign worker dependency ratio? LOL?
HDB ? really can't think of anything, small country/island/city, Hongkong,Shenzhen, Chengdu all exp$$. Maybe SG also subprime, economy contract then cheap cheap.

(23-04-2012, 11:36 PM)dzwm87 Wrote: It wasn't foreign money that created the sub-prime in the US, neither was it a persistently low interest rate. The Fed did a study on that and concluded that low interest rate was not the key contributing factor to the subprime. It was instead the practice of easy to obtain mortgage loans, where no documents were required when a loan was applied for. Moreover, it was in the midst of a long enjoyable period of the Great Moderation and people became complacent and had a greater risk appetite.

http://www.youtube.com/watch?v=GLoqPm1nYRU <--- one of Bernanke's lectures which covered on the GFC

(23-04-2012, 11:12 PM)freedom Wrote: maybe Singapore can't influence FED's decision on USD interest rates, but at least MAS can control domestic SGD money supply through effective SGD interest rate control

It is the control of money supply that leads to interest rate changes, not the other way round. Interest rates change from open market operations and not simply determining/saying how much interest rates should be.

why would people become complacent and have a greater risk appetite? low interest rate. if FED kept interest rate like what happened in 1980s, 10% or higher, I am pretty sure that people will not become complacent and have a greater risk appetite.

no one is a fool and borrows on high interest for a not well profitable business or asset.

I am not sure who teaches you basic economics. but IIRC, monetary policy like bank reserve ratio or interest rate is the tool for central bank to control money supply (M1 or M2). For FED, it uses interest rate (fed fund rate, etc). for China, it uses both.

because of globalization, hardly any economy can be considered closed economy any more (maybe North Korea?) I believe it is now more like an excuse for MAS to use foreign exchange rate to control money supply.

The best direct play is Parkway Life Reit where about 60% is tied to Singapore CPI +1%

(24-04-2012, 07:21 AM)freedom Wrote: why would people become complacent and have a greater risk appetite? low interest rate. if FED kept interest rate like what happened in 1980s, 10% or higher, I am pretty sure that people will not become complacent and have a greater risk appetite.

no one is a fool and borrows on high interest for a not well profitable business or asset.

I am not sure who teaches you basic economics. but IIRC, monetary policy like bank reserve ratio or interest rate is the tool for central bank to control money supply (M2). For FED, it uses interest rate (fed fund rate, etc). for China, it uses both.

because of globalization, hardly any economy can be considered closed economy any more (maybe North Korea?) I believe it is now more like an excuse for MAS to use foreign exchange rate to control money supply.

The Great Moderation - occurring from 1987 - 2007 - was a good 20 years. It was a period of low volatility in business cycles. Now, why would people become complacent and have a greater risk appetite? It is the same reason why there is a bull market during that same period of time.

I am not sure why the Fed did not raise up higher interest rate but I think low interest rates should not be the main fault against the subprime crisis. Same reason that Alan Greenspan should not be blamed for the low interest rates.

http://www.hks.harvard.edu/centers/rappa...convulsion

Maybe you can read that and might have a better understanding. I will really suggest you to watch the previous video link I had recommended - from Part 2 - 4. It will give you a better picture.

I think policy making should be supported with sound empirical support. It is definitely not the basis of high inflation = let's lower interest rates. And let's not forget the effect of Rational Expectations.

As for Central Bank's role, they are mandated to provide macroeconomic stability (ensure low inflation and high employment) and financial markets stability (lender's of last resort). Yes you are right in mentioning that interest rate and bank's required reserve ratios are the CB's main tools used in order to reach their goals.

CB can increase or lower the banks' RRR simply by mandating it (as a regulation). Correct me if I am wrong but they can do it simply by announcing it. Just like how the PBOC is doing for China. This is so as it is a regulation.

However, to enforce interest rates changes, CB can't do it simply by announcing they want interest rates to be at 5%. Tell me, how do you enforce that when there are so many 'kinds' of interest rates. However, the CB can reach that goal via an open market purchase/sale. They increase/decrease money supply by selling/buying government bonds. This is shown through the liquidity preference theory and it is with the shifting of the money supply that result in the change in interest. It is definitely NOT "MAS can control domestic SGD money supply through effective SGD interest rate control".

I stand to be corrected in my details but I believe my overall concept is correct. No offence but your argument may sound logical but when the dots are joined, it doesn't make sense.

Anyway, this is a good discussion and I believe it can help to build a better understanding of economics concept for the forum members.

Btw, NUS taught me my basic and advanced economics.

you should read how FED uses fed fund rate to influence interest rate to have a better understanding about how interest rate affects LONG TERM money supply.

of course, central banks can do repo or reverse repo to control SHORT TERM money supply as repo or reverse repo only for month or a few months at most.

in short, if FED raises fed fund rate, it will increase the cost of interbank loan, which eventually will increase the borrowing cost of economy activity.

the same can be used by MAS. but I am not sure what benchmark interest rate MAS is using, or MAS never has one, lol.

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let me explain further how FED manipulates interest rate through fed fund rate.

assume, FED sets fed fund rate to 2%, although it does not mean that immediately interbank loan will be charged at 2% (banks may call FED bluff). But all funds lent to FED will earn an interest rate of 2%. would you as citi bank lend to bank of America at 1.5% or lend to FED at 2%? obviously, interbank liquidity will dry up which will push interbank loan rate so that the interbank loan interest rate will eventually around 2%. if interbank loan interest rate is 2%, eventually, commercial bank loan will reflect the cost of fund (interbank loan, in Singapore context, SIBOR) and increase the loan interest rate to general business activities.

please correct me if I am wrong.

http://en.wikipedia.org/wiki/Federal_funds_rate
Is this the 'Fed fund rate' you are referring to? They did indicate that "The Federal Reserve uses open market operations to influence the supply of money in the U.S. economy[3] to make the federal funds effective rate follow the federal funds target rate."

What do you mean by short term and long term Money Supply?? MS is only determined by its aggregates - M1, M2 & M3 - which I believe isn't really used nowadays.

When repo or reverse repo is executed, Money Supply is changed permanently until there is another market operations that emphasize or reverse the earlier actions. When MS is injected into the economy, it is in there for good until it is bought back by the CB. If you are referring to ST or LT interest rates then you have to look at the relevant govt bonds being bought/sold - in which case, the last Operation Twist will be a good example.

Maybe it will be good if you can cite some references which state that CB changes interest rate to affect money supply. I am interested to see that.

please get your facts correct. repo or reverse repo has mature date so it is not permanent.

http://en.wikipedia.org/wiki/Repurchase_agreement, under section "United States Federal Reserve use of repos"

Quote:Under a repurchase agreement ("RP" or "repo"), the Federal Reserve (Fed) buys U.S. Treasury securities, U.S. agency securities, or mortgage-backed securities from a primary dealer who agrees to buy them back, typically within one to seven days; a reverse repo is the opposite. Thus the Fed describes these transactions from the counterparty's viewpoint rather than from their own viewpoint.

so get the point? Fed buys, pays cash -> Primary dealer buys back, returns cash.

money supply basically cancelled each other eventually. money supply only change in short term(within one to seven days) due to repo in U.S.

in certain countries, repo or reverse repo can be much longer. I knew PBOC often executes 3-month repo or reverse repo.

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about money supply and liquidity.

as we all know, central banks creates certain amount of money (small, MB). but it is commercial banks that creates the liquidity and the majority part of money supply through saving and loans, aka, the multiplier effect (majority of M1 or M2, assuming most of loan money will go back to banks as deposit). So essentially, money supply is most about loans rather than the original money created by central banks. If you understand how interest rate changes loan demand, it would not be difficult for you to understand that money supply is hugely influenced by interest rate.

There are a number of reasons why Singapore cannot go for monetary policy:

1)Trade is 3x the size of GDP, controlling trade is thus of greater impact than through monetary policy.

2)We do not have an active secondary bond market, SGS is not very actively traded and neither does our government depend on SGS as we always have budget surplus. Such open market operation is a very important tool as part of the interest rate policy.

3)Singapore’ heavy reliance on foreign direct investment will also make the impact of interest rate policy limited. Aside, having a high saving rate will also reduce the impact of rise in interest rate on investment.

4)Singapore’s banks are well financed in terms of balance sheet as such controlling of money supply to banks will also have a limited impact. That’s why our banks can be ranked 1st, 5th and 6th strongest by Bloomberg for the world’s strongest banks.

For expansionary policies during recession, Singapore’s government goes for CPF Rate Cut, Productivity growth through various rebates as well as subsidies in various forms to help SME.

Exchange Rate policy has its downside as well. For e.g. the government will have to keep a strong foreign currency reserve to prevent speculation attack like what happen in 1997 AFC. Secondly, to curb inflation, SGD will appreciate which will hurt our export’s competitiveness. Lastly, exchange rate policy will also fail to control internally driven inflation.

However, the most important inflation to control are still our food as well as oil prices, that’s what that most Singaporean depends on the most regardless whether you are poor or you are running a business. Property and car prices can only be dealt with through supply and demand policies. Singapore does have money market operation to banks, but that is for the main purpose of ensuring that there’s liquidity.

As for Fed raising interest rate to more than 10%, it was because inflation rate then were more than 10% as a result of a double whammy from 1973 oil crisis and 1979 energy crisis. After the recession, Reagan pursued a supply-side policy where he cut taxes aggressively. However, as they are unable to fund themselves, they have to resort to high interest rate to borrow enough money.

As for subprime, the story is even more exciting. Yes, they started from low interest rate policy from Alan Greenspan, but that is not the main cause. Traditionally, banks have been lending borrower’s money using their own asset. However, in the 2000s, securitization occurs and banks start to adopt a model known as “originate-to-distribute”. This is a wonderful model as it allows banks to lend unlimited supply of money. What happen was bank will originate a loan at maybe 2%, and then they will sell it to Freddie Mac and Fannie Mae at 1%. In such a way, the bank gets to earn 1% without suffering the risk of default and they will be able to free up their liability to lend to even more people. As such, it does not matter if the bank lends to subprime borrower since the bank does not suffer the risk of default. Their earning power is defined by their how many loans they can originate and not how strong their balance sheet is. This is still the tip of the iceberg.

Fannie Mae and Freddie Max were initially set up by the government not only to save the banking crisis in 1980s but also to encourage house ownership. After they buy the loans from the banks, they will securitize them which mean to package them for sale like a bond and they are called mortgage-backed securities. This is not that fun yet. From MBS, there will be multiple tranches, where the lower the risk (AAA) the lower interest rate it pays. Thus, a CDO is formed, where they will group all the AAA together, followed by the next level, until the last where it will pay the highest interest rate. Wall Street comes out with something even better.

Credit Default Swap is originally as an insurance against default of bond, it is with good intention. AIG, fueled by greed, decided to take on a large amount of CDS for the CDO and MBS as they don’t see how housing prices can collapse en-mass as it has never happen before. Given that there is CDS, so long as I buy a CDS, there is no way that I will suffer any losses should there be default. This fueled further securitization and greedy banks start to take up lower tranches securities.

So what trigger the crisis? Sub-prime borrowers borrow to buy multiple houses as the housing bubble starts. It seemed like housing prices will keep going up and they can earn money so long as they borrow to buy a house. However, when the prices start to peak, Sub-prime borrowers which are those with lousy credit history, start to default as they cannot pay. The bank will do a foreclosure where houses are sold at massive discount. This trigger further drop in prices and even more subprime borrower start to default. Then the bank will do even more aggressive foreclosure to trigger further drop in prices. This will continue all the way…

Meanwhile, as the CDO is so complexly mixed, the lowest tranche starts to get hit and they lose money. As the bubble continues to burst, those in higher tranche suffers. Lehman Brothers which holds a huge amount of the lower tranche securities get into huge troubles but as economy is going down cannot borrow much more money as there is a credit restriction. Meanwhile, AIG realizes that there’s an insane amount of CDS which it has taken and now it has to vomit out all these money to pay for the defaults. People who bets on the CDS meanwhile becomes insanely rich overnight 

The story is really exciting, for a better story-teller you can pick up a book by Michael Lewis. As for why exchange-rate and interest rate policy cannot go hand in hand you read up on the “Theorem of the Impossible Trinity”

No one is saying that SGD should be weak so that food price and other daily essentials will cause more inflation. What I am trying to say is that though appreciating SGD can control some part of the inflation, which is good, it is not enough or helping to depress COE price and property price, which increasingly becomes major factors in inflation. Of course government can increase the supply of COE or property, but I am not sure that's the right way. can the roads support more COEs? can Singaporean really consume the over supply of HDBs and private properties? I am certain that no one wants to go through another property bubble burst in Singapore. Should the government try to depress demand instead of increasing supply, which can be done by MAS through remove SGD liquidity?

what i feel is that Singapore is doom to fail right from the start. Our population has been expanding too much faster than growth in our land size. Can anyone imagine our population doubling or tripling in the next 30 years? Where we must have triple-decker buses, multiple layered of roads from underground to head, HDB as high as 80 storeys.

These are structural problems that Singapore as a little red dot faces. Taking out speculators, there will still need to be sufficient flats for us to live in. Things will have been worse if the foreign immigrant policy has not been restricted recently. I do foresee that my generation can continue to survive, but for the next 2 it's not going to be easy...