CPI + 5.2%

[shanrui_91]

Firstly, everything is built on the premise of Impossible Trinity. It is because of this that since Singapore chooses free capital flow, it can only choose between exchange rate or interest rate policy. This is also the central argument of which if you choose not to believe in it, there’s no way we can continue debating about it.

Secondly, exchange rate policy can never control domestic demand, only fiscal and interest rate policies can do so. However, as trade is 3x the size of our GDP, it makes sense for us to choose exchange rate policy as we need to secure control of our exchange rate. No matter which direction our exchange rate goes, import and export will suffer different impacts.

Additionally, interest rate policies are inefficient in Singapore due to the various reasons I have mentioned. This is known as the multiplier effect. A 1% rise in interest rate can lead to maybe 2% drop in liquidity in other countries. As for Singapore, a 1% rise in interest rate may lead to only 0.4% drop in liquidity. Thus, to curb 5% of liquidity, Singapore has to raise interest rate to 12.5% where as other countries only need to rise by 2.5%. This is not forgetting that if interest rate goes sky high, business and investment will suffer as projects need to have higher rate of return to justify its commencement.

As for corydous, the government does not need to spend the money from bond. We already have budget surplus year after year, which means the government collects more taxes than they spend. This extra money is what that is funding our growing reserves year after year for GIC and Temasek to invest. And if you spend all your bond money now, how is the government to pay for the interest rate when the time comes?

As for your 2nd question, retailers like us will flock for the banks for the interest rate but investment dollars including the hot currencies will flock for the bond market. Hot currencies are known for their ability to transfer funds to another market for a change in interest rate. They take advantage of the government bond interest rate and not the lower bank interest rate.

Anyway, this will be my last post for this topic, I feel too tired to continue.

[freedom]

are we reading the same about "Impossible trinity"?

from what I read, it says, you can't have fix exchange rate, independent monetary policy and free capital flow, e.g. H.K.

did it mention anything about you can't have float exchange rate, independent monetary policy and free capital flow?

The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time:

A fixed exchange rate.
Free capital movement (absence of capital controls).
An independent monetary policy.

[shanrui_91]

For the empirical evidence that exchange rate is more useful you can read pdf pg 6 for the table.

http://www.mas.gov.sg/resource/eco_resea...velESS.pdf

For the trinity you can read the following

http://www.sgs.gov.sg/resource/pub_guide...ations.pdf

"In the context of Singapore's open capital account, the choice of
the exchange rate as the focus of monetary policy would necessarily imply
that domestic interest rates and money supply are endogenous. This is
the principle underlying the Theorem of the Impossible Trinity, also known
as the Open-Economy Trilemma, which states that a country cannot
simultaneously manage its exchange rate and maintain an open capital
market while pursuing a monetary policy (interest rate or money supply)
oriented toward domestic goals."

[freedom]

I am not sure about the thesis about MAS' version of Open-Economy Trilemma.

I thought there are plenty of countries which have free capital flow, float exchange rate and independent monetary policy, e.g. Japan, Australia. please correct me if I am wrong.

maybe it is Singapore version only?

[dzwm87]

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"

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.

---

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.

You are right about the repo being a temporary market activity. As Frederic Mishkin had mentioned, “a repo is actually a temporary open market purchase”. But let me search on that a little deeper. It doesn't make sense for monetary policies to be temporary in its effects else monetary ineffectiveness will set in and CB essentially plays a useless role. I am interested in finding out more about this.

As for money supply and liquidity, again the concept is incorrect. What you are mentioning is the effect of RRR - though in a warped sense.

Refer to Money Multiplier formula:
http://upload.wikimedia.org/wikipedia/en...5d3b77.png

How the mechanism work is simply this:
RRR and Money multiplier are negatively correlated and money multiplier is positively correlated to MS (MS = Money base x M). As we all know, in its simplest case, RRR determines the amount of loans allowed to be made by the banks. In other words, higher RRR meant banks have lesser to lend and vice versa. So when RRR increases, money multiplier decreases, banks have lesser to lend out and as a result, there will be lesser liquidity which meant money supply decreases. With a lower money supply level while demand for money remains the constant, the general public will have excess demand for money and banks can only increase interest rates in order to retain its deposits. Thus, it is such a mechanism that shows that RRR changes will first change money supply before it can effectively change the interest rate level.

=====
Fallacy of appreciating currency attracting more capital inflow:
This may sound logical but again, it is warped. Like what Shanrui said, it is only the expected belief of further appreciation that will spur more demand. If the mere effect of SGD appreciation will attract more funds, then you are implicitly making this stand - that as long as SGD appreciates 0.0001%, it will stand to appreciate to the infinity.

Again, there are many factors which will affect the demand for SGD - interest rates is the first and most common factor, thereafter, relative economic performance (Asia compared to Euro) is another and macro event (QE, Euro) is another.. and etc.

=====
Regarding the impossible trinity:
As proposed by Robert Mundell, the impossible trinity states that it is impossible to have these 3 outcomes:
1. control over currency
2. control over interest rates
3. free capital flows

Singapore is a special case as FX is trading at a band and seemed to be quasi-fixed. Here is an interesting article regarding it:
https://www.dbsvresearch.com/research/DB...1001ABC1A/$FILE/Singapore%20attempts%20the%20impossible%20101206.pdf

=====

Anyway, I too called my end to this discussion as it seemed that we are each insisting on our own stand.

Don't mean to be a sarcastic remarks, but probably you may want to write in to ST forum, MAS or even the econs department in the various universities. I believe they or the public can provide a more convincing answer.

[shanrui_91]

I am not sure about the thesis about MAS' version of Open-Economy Trilemma.

I thought there are plenty of countries which have free capital flow, float exchange rate and independent monetary policy, e.g. Japan, Australia. please correct me if I am wrong.

maybe it is Singapore version only?

Japan and Australia follow the impossible trinity as they choose free capital flow and independent monetary policies, giving up fixed exchange rate.

There's 3 type of currency regimes
1) Fixed - pegged to maybe USD at a fixed rate where Government is free to change it. This is something of the past like Thai before AFC, China before 2005 and US peg to gold before 1970s

2) Floating - free floating, being determined solely by market demand and supply. but when currency goes one direction way too much, central bank still have to do something

3) Managed Float - currency allows to float but the central bank controls how much it float
http://en.wikipedia.org/wiki/Managed_float_regime

Singapore uses this managed float system as SGD is only allowed to be traded within a certain band strictly. For e.g. if MAS only allows SGD to be between 1.2-1.3 to 1 USD, there's no way anyone can buy SGD until it falls to 1.19 SGD to 1 USD unless you have more money than our Singapore foreign currency reserve. In a way, you can call it a flexible fixed exchange rate policy, just like how you can call a preference share a share-like bond.

There's nothing wrong with our arguments other than that we are arguing about different perspective. I am saying that apple is tasty while you are saying that apple is red. We are both correct.

[freedom]

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"

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.

---

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.

You are right about the repo being a temporary market activity. As Frederic Mishkin had mentioned, “a repo is actually a temporary open market purchase”. But let me search on that a little deeper. It doesn't make sense for monetary policies to be temporary in its effects else monetary ineffectiveness will set in and CB essentially plays a useless role. I am interested in finding out more about this.

As for money supply and liquidity, again the concept is incorrect. What you are mentioning is the effect of RRR - though in a warped sense.

Refer to Money Multiplier formula:
http://upload.wikimedia.org/wikipedia/en...5d3b77.png

How the mechanism work is simply this:
RRR and Money multiplier are negatively correlated and money multiplier is positively correlated to MS (MS = Money base x M). As we all know, in its simplest case, RRR determines the amount of loans allowed to be made by the banks. In other words, higher RRR meant banks have lesser to lend and vice versa. So when RRR increases, money multiplier decreases, banks have lesser to lend out and as a result, there will be lesser liquidity which meant money supply decreases. With a lower money supply level while demand for money remains the constant, the general public will have excess demand for money and banks can only increase interest rates in order to retain its deposits. Thus, it is such a mechanism that shows that RRR changes will first change money supply before it can effectively change the interest rate level.

=====
Fallacy of appreciating currency attracting more capital inflow:
This may sound logical but again, it is warped. Like what Shanrui said, it is only the expected belief of further appreciation that will spur more demand. If the mere effect of SGD appreciation will attract more funds, then you are implicitly making this stand - that as long as SGD appreciates 0.0001%, it will stand to appreciate to the infinity.

Again, there are many factors which will affect the demand for SGD - interest rates is the first and most common factor, thereafter, relative economic performance (Asia compared to Euro) is another and macro event (QE, Euro) is another.. and etc.

=====
Regarding the impossible trinity:
As proposed by Robert Mundell, the impossible trinity states that it is impossible to have these 3 outcomes:
1. control over currency
2. control over interest rates
3. free capital flows

Singapore is a special case as FX is trading at a band and seemed to be quasi-fixed. Here is an interesting article regarding it:
https://www.dbsvresearch.com/research/DB...1001ABC1A/$FILE/Singapore%20attempts%20the%20impossible%20101206.pdf

=====

Anyway, I too called my end to this discussion as it seemed that we are each insisting on our own stand.

Don't mean to be a sarcastic remarks, but probably you may want to write in to ST forum, MAS or even the econs department in the various universities. I believe they or the public can provide a more convincing answer.

repo as a tool is only for short term liquidity manipulation, they are created to influence short term over night borrowing rate. what is long term actually for FED would be fed fund rate, eventually to influence the real interest rate to align with what FED wants. There is nothing wrong with short term liquidity removal or injection with repo. Of course, like what FED did in GFC, repo does not help to bring down the interbank borrowing cost although fed fund rate was already very low. FED thus created other tools for longer term lending to commercial banks through various new facilities such as Term Auction Facility.

as for RRR, modern central banks hardly use RRR to create multiplier effect, rather than they just set a minimum reserve ratio. The real multiplier effect is more through loan demand by influencing interest rate.

[brattzz]

hey guys! thank you for all the pointers! it's really good info and read up!

If tired, take a break, come back later lah, do continue to share!

[camelking]

So, does the cheapo loans caused skyhigh COE?
We love to think that we cannot afford that shiny merc simply because some fellows are willing to finance the cars with 10 years loan.
In actual fact, the vehicle loan was rather stable throughout the last decade.
http://www.singstat.gov.sg/stats/themes/...e00-10.pdf

We also like to think that the skyhigh properties are caused by cheapo loans. But, in actual fact, Singaporeans are rich.
From 2000 to 2010,
Singaporeans' deposit increases from 114 billion to 247 billion
Singaporeans' CPF increases from 90 billion to 185 billion
Singaporeans' mortgage loan only increases from 102 billion to 158 billion.

Are we having a bubble??? maybe a small small one.

Fully agree.
People are getting rich.
On top of it, there are lot of rich foreigners picking up PR or citizenship.
Singapore has limited capacity for property and car ownership due to its size.
Why shouldn't the prices of both assets go up??
No, interest rate has limited impact especially for car ownership.
(I read a comment by a car dealer that lot of people pay their $100plus car in cash) In addition, lot of people i know are waiting to buy property on a dip. hahaha.

lot of working couple have combined income of $200k per annum.
What is a property of 1m to them?
Income gap is ever increasing due to skills sets and globalisation.

Change is constant; nothing is permanent.

[Musicwhiz]

lot of working couple have combined income of $200k per annum.
What is a property of 1m to them?
Income gap is ever increasing due to skills sets and globalisation.

I think things must be taken in context - I don't know of many couples around my age group (35-40) who are earning $200K per annum. Perhaps if we looked at the 40-50 age group, this may be more possible. But then again, it's naturally assumed that we have more savings (and hence money) as we work more years and save and build up our fortunes, right?

So wealth should in some way be tied to a function of age. E.g. if you were 20+ and a millionaire I'd say you were really capable! But someone who becomes a millionaire at age 60 is less impressive (though still commendable).