Monday, June 15, 2009

History Channel : "Crash : The Next Depression"

I'm not sure how many of you caught this excellent documentary[Link] which was shown on the History Channel yesterday night (14 June 2009) at 8pm. The documentary will be repeated on 15 June (1pm) and 20 June (6am).

The documentary compares and contrast the current crisis with the 1930s. The similarities between the 1920s and the period leading to the current meltdown are striking:

1. Market deregulation. Faith in the free market became blind faith and govts deregulated markets to the point they couldn't understand what was going on. In the 1920s there was frequent illegal stock market manipulation and the US govt had no means to stop it because the SEC didn't exist. Today we have the shadow banking system which has grown into a dangerous monster.

2. Rising income inequality. The only period that had comparable income inequality compared with today was the period before the Great Depression.
The US govt of 1920s like George Bush kept reducing the marginal tax rate even as the income gap ballooned (In Singapore, the govt said they increased the GST to help the poor...but they used the GST hike to lower corporate tax rate and to lower the marginal income tax of high income earners).

3. Overvalued asset bubble funded by easy credit. In 1929, they had rampant stock market speculation fuel by easy credit such as margin loans and in 2006 there was a housing bubble fueled by mortgage securitization which led to subprime loans.

The differences between now and the 1930s hopefully will lead to a better outcome. In the 1930s, the govt response to the crisis was to tighten credit and implement protectionist policies. Today we see Bernanke, the world's foremost expert in The Great Depression, and Geithner doing almost everything to ease the flow of credit. Their actions appeared to have limited the downside of the crisis but leaves the US with an unprecedented level of debt relative to its GDP. In the 30s, there was no FDIC to prevent bank runs, no SEC and no safety nets for the people. It was Roosvelt who put in place the social safety nets as part of the New Deal and the documentary explain why this was important - the crisis had affected families straining marriages, children were not properly nourished, crime rate rose and the people became increasingly desperate. The safety net help to prevent long term damage to the society and helped the people cope with the hard times. Even with The New Deal and massive govt spending in the 30s, the economy remained sluggish and sub par. What brought the US economy back on path of vigorous growth was World War 2 - it was only because of the war, the US govt could spend $3.7 trillion, a figure so large that it would be seen imprudent during peace time.

You will also notice from the graph I put up that the periods of sustainable high growth is correlated with the periods when the income gap is low. History tells us that economic growth won't last without bring down the income inequality. We cannot just focus on economic growth and allow the income gap to balloon - solving the problem of high income disparity is equally important.

It is hard to say what is going to happen in the coming years. While many people are saying green shoots are here, the recession will be over soon and the stock market and housing market are on the path to recovery, it is hard to see the economy going back to where it was before the crisis. The main source of demand for goods - credit driven American consumers - is gone and the financial sector which fuelled growth in developed countries has been devastated and will be re-regulated. We may have recovery, there is also a chance we may slip into stagflation ...there is also a chance the economy remains weak and we slip in and out of recession in the coming years. We cannot just position ourselves for good times and pretend that good times will always come back. This is our 3rd recession in 10 years and yet govt have no game plan for the people except retraining and more retraining. It is not enough for the govt to prepare for only the best case scenario - they have to take care of the plausible worst case. We do not know how long these bad times will last but we know that no reason for Singaporean families to suffer unnecessarily when they lose their jobs through no fault of their own. The S. Koreans, Hong Kong and Taiwan have learnt from the Asian crisis and put in place safety nets, healthcare programmes and financial support for the old.


Anonymous said...

In Singapore doesn't matter what the gahmen do: help, help little or no help, recession or not, you people suffer or not, criticise or not.

The people are very peaceful. The streets will also be very peaceful. Very few will also want to be in opposition.

Hence the PAP will still be gahmen. And continue to do what they feel like doing. And for a long, long time.

Chee Wai Lee said...

Interesting article, Lucky.

It would be interesting to construct the same chart (if data is available) for Singapore.

0.01% of Singapore's population now would be 450 people. To make a ballpark guess, I'll assume everyone of these individuals include the top CEOs and the government ministers. I don't know the top CEO salaries, but I do know how much ministers are paid (something like 66% peg of CEO salaries, I believe?). These range from S$1.5 million to S$3.9 million a year. So, my very very ballpark "guesstimate" would be an average of S$2.0 million a year for these 450 individuals.

Now it remains to be seen how much the bottom 90% earn. Hopefully, we'll not end up "beating" the US (1,000 times would mean the bottom 90% takes home only S$2,000 a year). Hard to say ... especially since a big chunk of our population of 4.5 million people include cheap foreign labor. It is also unclear if the US data includes the unemployed.

Anonymous said...

Even if the income gap becomes wider, the rich becoming richer, the poor becoming poorer, doesn't matter.

In Singapore, they will still be very peaceful, unlike other countries where there are riots and protests or when the gahmen wins 63% of the votes, like in Iran.

For Singapore being peaceful is an unique charateristic, very good for stability no matter what.

I am proud to live in a peaceful country.

Anonymous said...

Perhaps, we can imagine, what kind of alternative Singapore can be, that could have better fared in today's circumstances, ie instead of where we have come from economically since 1965, suppose we have taken a different route. The question then is could we be better placed today? This alternative history exercise could help us spot whether there were missed opportunities, and if so are they still available.

Anonymous said...

Singaporeans should visit Tanjung Balai, Tanjung Pinang and some other Riau Islands to see for themselves how the people there enjoy their livings.

Singaporeans would have been just as relax if this tiny dot was not given the independence.

Anonymous said...

Lucky, you're totally right. But I'm afraid the PAP Knows and Doesn't Care.

People who have studied economics know that consumption is a vital part of any healthy economy. If consumption is too low, the economy becomes reliant on exports to keep going. This is unsustainable, of course.

Singapore's solution to anything is to keep relying on foreign sources of growth. Even now, the government has no concept of improving the lives of Singaporeans. It is totally focused on increasing overall GNP growth, with the rewards entirely grabbed by PAP and cronies.

This is a GNP growth pattern reminiscent of Suharto's Indonesia. It is totally unsustainable, unless PAP succeeds in making a transition to another economic model.

Despite all these economic problems PAP simply won't change its ways because it doesn't want to. Having figured out that Singapore can no longer be a low-cost manufacturing hub, now PAP is busy remaking Singapore as an education hub, a research hub, a gambling and racing hub, a wealth management cum tax haven hub, a medical treatment hub, a financial services cum speculations hub, a global transportation hub... (you probably know more than me what else to fill in)

What is the common denominator underlying these abovementioned hub plans?

All are dependent on foreign demand. We have to keep drawing in foreign 'talents' to provide services and in turn demand for these services.

We are on the verge of turning into an absolute monarchy with a feudal system of income distribution where locals are marginalized and essentially enslaved with no rights. Bigger countries nearby will tolerate our lack of democracy indefinitely, because we offer banking services for their rich elite to enjoy.

Am I exaggerating? Go look at Monaco, Luxembourg or Leichtenstein.

In the past few years PAP has been fanatically hiring foreign wealth managers, foreign entertainers for the casinos, foreign researchers, foreign doctors, foreign lawyers... it has no concept of doing anythng to benefit the locals. As a matter of fact, ordinary locals exist only as an irritation (or source of labor) to the PAP elites.

PAP is turning Singapore into a hollow shell, a playground for wealthy regional elites with no culture or identity of its own, no different from Monaco.

None of the PAP's plans are any good for the average Singaporean. But they can be sustained indefinitely.

A future Singapore will probably feature a de facto Lee imperial family, hereditary ducal and baronial (MP and Perm Sec) offices, a caste system where the running dogs and security personnel are self-perpetuating, and a vast underclass of extremely poor people desperately trying to survive in third-world high rise slums alongside foreign cheap workers.

The whole system will be entirely geared towards pleasing other Asian elites. E.g. rich people from India or China who come here to bank, gamble, manage shipping lines, speculate on local property, enjoy escort services, stay at Sentosa Cove, etc. Judging from Monaco's longevity, that is the future for Singapore in the next few hundred years.

I'll be glad to hear your response to my comment!

Anonymous said...

unlike the Koreans, Hongkies and Taiwanese, our safety nets for the elderly is thru enforced actions on their own children to ensure their financial support.

our govt can then put the money saved to better use; such as ensure pay increases for the ministers, their deputies, seniors, entourage of advisors .etc., and defray the occassional contra (long term bets contra short term bets) losses.

Anonymous said...

When they lower the marginal tax rates, this benefit the high income; and that includes themselves. The estate duty, or death taz, was also abolished and again the benefit goes to the rich and themselves when they pass on.

Anonymous said...

The abolishing of the estate duty meant also that when they die, there is NO NEED for the administrator of the estate to declare the wealth and questions as to how this could be accumulated would not be known.

Anonymous said...


After reading about Monaco...seem like Singapore is getting there...with income tax getting lower and lower...and GST getting higher...Looks like it's a heaven to the riches...

No wonder PM Lee said during the last GE..."Nobody will be left behind" Now I know what he meant...

Anonymous said...


Talking about plutocracy, Lee has an value-added one : Modern Feudalism.

How does it work?

:: By being monopolist of public housing which houses 85% of population. That's the HDB which now totally abandoned its social responsibility to the people.

:: By being the leader/first-mover of turnover-based rental system at shopping centres. That's Capitaland which CEO earns $20 millions in performance bonus is one year.

These two are enough to control the livelihood of the people, never mind for the time being GST, road tax, traffic summons.

Just these two, yes!

The similarity between feudalism of yore and the current PAP feudalism is this: The regime owns the land/properties and set the rental based on the output.

1) When average income rises, PAP will raise the prices of HDB flats to suck up the extra income. As Lucky had pointed out in an earlier article a 5 room HDB flat can now cost over $500K.

2) When a retail business does well, the landlord Capitaland will know because it requires every tenant at its shopping centres to report on a daily basis their turnover using networked pos systems which are further rented out at a profit to shop's tenants.

At the end of the month, Capitaland will demand a levy based on their turnover.

Furthermore, during the renewal of the shop's contract with Capitaland, the rental will be raised based on its turnover.

Some profitable shops had their rentals raised so much that they decided to quit from Capitaland's shopping malls.

Therefore shops with different performance will receive different rental figures on renewal of their contracts.

In the end, every shop owner will just be slogging for the landlord Capitaland and just pass the added cost to consumers. This is why goods are now so expensive at new shopping centres like Tampines One, shop tenants having gone "high-end" in their business.

It is exactly like the landlords in agricultural system of yore, who demanded so much from farmers who have no choice but to struggle on.

Capitaland was the first to start this "levy" policy and other major landlords like UOB Land etc had already followed suit.

Those landlords which have not implemented this are now catching up.

Anonymous said...


Using the aforesaid methods, PAP controls the livelihood of the general population, so that no matter how much they work, their material quality of life is already mapped out for them by PAP.

What PAP has chosen to ignore is that corporate greed over the decades has done the US in. For that matter, PAP is happily implementing the same policies like easy credit that the US banking industry had practised in the past. Do you know that now there are legal "Ah Longs" with high interest rates approved by PAP named "Miss Tan Credit", "Miss Wee Easy Loans" ... so forth, reaching out to businesses.


Feudalism of yore has failed. PAP thinks it will succeed here.

Easy credit has failed. PAP thinks it will succeed here.

Will they or will they make a mess of this nation.


May be I am just too much of a pessimist.

Hey, where are all the top minds to write a few books on this PAP system which has the danger of being adopted by other countries, spreading a political-economic disease to infect the world even while the present US administration trying hard to stem the damage arising from similar causes?

PAP is a danger not just to S'poreans but to the whole world!

But supporters of PAP will say otherwise; they will say PAP is so smart and knows how to make money. They say look at the order in Singapore, you should be grateful. Those who criticise PAP are just fools. Where else can you get such a great government that even leaders of other countries like UK & Taiwan wax lyrical about?

So PAP is very smart. How do you judge that?

When they invest in other countries time and again they got cheated by countless $billiions. That clearly shows PAP is a fool.

PAP is able to implement its modern greedy feudal system because it viciously presses down public dissent. It is not that PAP is doing right.

Mr Lee Kuan Yew said several times that he learned a lot from the Japanese during WW2. By this I reckon that he learned how to control, to engineer society through vicious measures. I mean that's what history tells us.

But the Japanese regime last only a few years while the British colonist lasted over a hundred. That he may have forgotten to note.

Please discuss.

Anonymous said...

History Channel just screened Bernard Madoff. Maybe you should do a write up. Morale of the story: Never trust any man, especially those most trustworthy.