I've been watching this crisis unfolding before us for months. But yesterday it became very real for some Singaporeans when AIG headed to the edge of bankruptcy. Hundreds of Singaporeans panicked and had their insurance policies with AIA cancelled. There was a long queue at AIA Tower but I think the fears of these people may not be justified - the insurance industry in Singapore is highly regulated and the contributions we make to AIA cannot be used to cover the losses of AIG.
In March 08, I wrote that the crisis was only at its mid-point and that worst is ahead. The template for disaster in outline in 12 steps by Professor Roubini who has been ahead of the curve in this crisis. Looking through the 12 steps, we are roughly at step 8. In the next few steps, the crisis will start spreading to everyone as we enter a severe recession. There is reason to believe this will be a deflationary recession rather than stagflation. Before the end of this year, economies will start slowing and inflation will be history. Central banks will start cutting rates in anticipation of the recession.
There is an easy way to recognise a recession 1) Slowdown in demand 2) Fall in production 3) Job losses. A recession is a bit of a vicious cycle because step 3 will lead back to step 1. I now believe that a recession is nearly impossible to avoid. The reason why the US economy has kept growing is due to the stimulus package they implemented earlier this year. That only postponed recession to the end of this year.
This recession is going to last for sometime as the financial architecture of the global economy has sustained some amount of damage. Banks cannot lend unless they are well capitalised and that will take months if not years to fix. Right now credit is shrinking as deleveraging takes place - you can tell by the sharp falls in everything from stock prices to commodities. With the economy slowing down, the losses at the banks will cascade as people who lost their jobs default on various loans with the bank.
I know all of you are worried but we have great leaders to guide us through this crisis. Starting with MM Lee who said that we are in a "Golden Period" in 2007. PM Lee really believed we were heading for a "Golden Period" and should no problems paying more GST (to help the poor). Our elites in Temasek and GIC bought huge chunks of Merrill, Citibank and UBS. You can tell they have foresight because they can see beyond the problems that most of us fear. To train the people to be more resilient when the hard times come, they hiked everything from electricity to HDB flat prices in the past few months. Thanks to this training, when the hard times come, we will be ready to eat less and use less electricity. With great leadership, we should be able to navigate through troubled times. Don't expect our leaders to take any soft options such as subsidies and welfare for the people. No matter how bad things get, they will be there to explain all the sacrifices you have to make to get the economy back on its feet - CPF cuts, retraining, working longer hours, less benefits etc. Once the US economy recovers and things get better, they will explain how their great leadership has taken the country out of difficult times once again. Your sacrifices like CPF cuts and loss of benefits will be made permanent so that you can make a permanent contribution to Singapore Inc's bottomline.