Thursday, July 16, 2009

Something unusual about this recession Part 2.

Part 1 is here.

A few days ago, I tried to explain why there was a lack of fear in this recession. I was not the only person who noticed it. BNP Paribus wrote that this lack of fear can be due the relative size of our assets compared with our liabilities [Link]. They are basically saying that Singaporeans have more buffer now - if something happens, they can sell their assets to cover their liabilities. There is a bit of a circular argument here because the lack of fear actually prevents asset values from falling so it is not clear which causes which. The other point to note is although assets grew from the period 2000-2008, the distribution was the most unequal compared with the rest our our history. So the asset growth may be concentrated in the top 5% who saw their wealth accelerate at the fast rate during that period.

The bottom 20-30% of our population are in financial distress regardless of the recession. The author could have been more convincing if he showed what was happening to families at the median income level.

One of the comments to my original article says people are not fearful because they are complacent. I think it is possible that people are not fearful because nothing has happened directly to them....... yet. We may see some slow recovery in the coming months as many analysts predict but the risks remain high. The large amounts of money pumped into the economy by various govts in the form of stimulus packages around the world has only resulted in stabilisation and the possibility of slow growth. They cannot keep having one stimulus package after another.... Several central banks have used 'quatitative easing' an euphemistic term for printing money. Never before has the world seen such a massive expansion of money supply....and such expansions in the past have always led to inflation. Bernanke is suppose to explain his exit strategy next week[Link]. If he gets it wrong, the inflation that is going to hit us will be more painful than the recession.

25 comments:

Anonymous said...

Dear mr Tan,

I really admire your understanding of the situation and especially you are able to break down a complex issues into simple and straight forward points.

Like many of your readers, I benefitted a lot from reading your works.

Please continue ... If possible, you should come out with a Chinese/Malay version to benefit with those who do not read English.

Yours respectfully,

Anonymous said...

But no matter what, Singapore is very stable and peaceful and even lots of "economic boom" signs at ground level.

So unusual or not, recession or not, SIngapore will continue the way it is for many, many more years. And good life for some (maybe majority) for many, many more years.

Maybe it's good to be a little red dot, if you know how to handle it well like PAP did.

Confused said...

Lucky, do you mean to say the threat of recession is gone. What we need to worry next is inflation? Should we then rush out and buy a car before COE goes through the roof? Or should we put deposit down on a private property and wait for capital gain 12 months down the road?

Yes, if the next disaster to hit Singapore is runaway inflation, the low income segment will be badly hit in the already high cost Singapore. These are the ones who have problems putting food on the table, paying medical bills, sending their children to school, etc. Then again, Singapore government historically has been rather good at controlling inflation. Could this be the time when history does not repeat itself?

Anonymous said...

That cited AsiaOne (SPH) article states:

"Singaporeans are sitting on $301billion of cash deposits in the bank, in addition to $67billion in Central Provident Fund accounts that can be used to buy either property or stocks, according to the latest figures for May."

How could the total CPF fund be just $67 billion, which is in Singapore dollars. One decade ago it already reached or surpassed that level from what I read then in official document.

Also if Singaporeans (3.5 million citizens & PRs) have $301 billion in cash, then it each has $86,000 or roughly $387,000 in cash savings per family.

Really?

Want to bluff also go to that extent lah, PAP.

Anonymous said...

i am one of those with more than 86K in banks and there are friends who have even more. The pain now is not about the recession but about what we should do with these spare cash. Should we invest now or wait for the next pick-up sign? I am having sleepless nights because of this. Anyone can advise?

Anonymous said...

Not commentary, just an appreciation note. After following your Blog long enough, I should at least say thanks here in return from all the insight shared.

I agree with you most of the time, and admire your courage in carrying on writing despite we all know how far this government will go to get everyone in line.

Your Blog is a must-read for me everyday, keep up the spirit.

Koh

Anonymous said...

Anon 2.02 pm

Do not underestimate the people'e wealth. Singapore is stable and peaceful and PAP has strong support not for nothing.

Anon 3.15pm

If you still have your job, leave your spare cash alone and save more.

If you lose your job, use the spare cash. The more spare cash the better because you can afford to be jobless longer and relax longer.

Anonymous said...

Anon @ 12.48 pm

I am a bit more pessimistic. There are many 'traps' therein lay in Singapore. From my perspective, inflation is an issue that is very contentious. If you look at the 'basket of goods' used in the computation of inflation, you will be surprised and know why we can always keep inflation at 3-6%. (If I am not wrong...) All you need is to look at cost of things around you. I was born in the 70s. Just use the example of a packet of soft drink; around 84-86, you can buy a packet of soft drink from the coffeeshop at 50 cents. By the time it reached the 90s, it was already $1. Presently, it hovers between $1.20 and $1.50. In about 20 years, the price of a packet of soft drink has risen 3 times. Cost of living is but just another indicator. Inflation will be something that is of primary concern for Singaporeans in the coming years because we know that wages has more or less been quite stagnant. Obviously, not every fresh graduate will be earning 4K when he/shen graduates (contrary to what the Straits Times had reported). For the last 10 years, wages, at least to my knowledge (using fresh graduate's pay), have been topsy-turvy. If you are born in the 70s, you will also find that the amount of savings that you can save is getting smaller which does not bode well because of the increasing medical costs and other necessities plus many other issues which Lucky has already highlighted. Thus, I fo not know about the good life to come, but I do know that people my age and the younger will need to plan a tad harder and cross your fingers for the coming years.

Anonymous said...

Confused

Inflation are not markers to indicate recession is gone. It still could happen if out government is excessively "printing" currency and result the devaluation of the currency. Things will cost more to import due to weaker $SGD. I already seeing price increase for Japanese foodstuff by 9%. Whether this increase due to distributor jacking up the price to increase profit margin or due to inflation there no way to affirm.

Anonymous said...

the neccessities are controlled and can be controlled - the gov does it very well.

any other non essential, inflate at your own risk!

Anonymous said...

Just look at MAS report, the M3 double in 8 years.

And 9 billion lost largely on Foreign asset. No detail of exactly which investment lost.... so much for accountability. It's the fault of the crisis, nothing to do with the 'helicopter' view's management.

Anonymous said...

I can see quite a no. of "hou lian" talking here. That falls nicely into the trap of the bigger hou lian Greedy Lee to divide and conquer.

Anonymous said...

It seems like on AVERAGE people seems to have lots of cash and assets. But AVERAGE is not a very relevant concept in Singapore as we live in a very unequal society.

For example, if you read the Business Times today, they will tell you that only 1000 elites (yes, only a thousand) own all 2500 good class bungalows in Singapore. That’s 0.8% of the population who own very expensive properties that are 100 times more expensive than your average Singapore citizens. And you can extend that idea to many other egregiously unequal facets of life in Singapore.

The Pareto power law really works in Singapore.

So be careful when using the concept of average, especially when you have a much skewed distribution i.e. a few data points have extremely high values that dominate and distort your average.

Anonymous said...

I think Lucky talks about inflation is because if as reported in the newspaper that the worst is over, then inflation will follow because of the stimulus package they used to overcome the situation. I think historically by using such economic strategy, the side-effect will be inflation. However, in Singapore, the issue of inflation is already an issue that is quite hazy. My lecturers did question about the inflation of Singapore which was kept at 3-6% constantly over the years. I am not an economist or an expert on this matter, but looking at the some of the comments posted, I do not share the optimism because even without the recession, like what Lucky has written previously, I believe there are inherent problems in the fabric of the Singapore economy. Therefore, assuming the worst is over, we will most likely be experiencing the side-effects of the stimulus package by US. I think this is what Lucky is trying to say. Remember our elites told us that we are very much dependent on the external effects of the global economy. I am a pessimist in the sense that we, the ordinary, will still very much suffer more.

I am the same anon @ 3.49 pm

P.S. If you have only about 100k when you retire. Medical costs will wipe you out if you are unlucky. As for assets, do you think you can sell the house and used the $$$ for whatever in your old age or your children education. Costs will still likely to increase in the future, I do not see any increase in wages to compensate for the increase. Judging from the wages in the past 10 to 15 years, I do not see an increase in wages across the board except for some talents. : )

Anonymous said...

when monkeys can now use their brain to control robotic arm to feed on peanuts, the future is certainly....bright

hahaha

Anonymous said...

deposit your money in the currency that you think it will be the strongest. You see in 1965 when we seperated from MY both currencies were at par. Today our one appreciates so much. If your grandpa had a million to bank in at that time and chose to bank in here he could exchange the amount for about 1.5 million ringgit more than he banked in MY.

Anonymous said...

Dear Sir,

Not everyone would have 100K in their bank account when they retired. Do not forget, many people who were retrenched in the late 90 have not fully recovered from their loss. Many have sold their house to continue living.

In 2003/4, there are still many who lost their jobs. A friends of mine who live in Pasir Ris told me that they are many poor families living in those 4-room flats.

Since 1998 to-date, there are many poors in Sing. I sorry that I am not able to provide any data. Talk around with people in their forties and above and you can have a feel of the ground which our elites can't feel it.

I am one of the above 40-jobless-poor-graduates living in a 4-room flat and I do not have 10k (ten) in my bank account and/or cpf if I will to retired tomorrow.

Confused said...

Reading all the comments here it seems it is naive to depend on CPF or value of our properties to see us through retirement. $100k cash saving at retirement will not go very far. Ignoring the elites with millions in assets, I seriously wonder the value of assets the bottom 80% of the population will have at retirement. In fact ignoring the bottom 20%, I wonder what the average middle class will have at retirement. We're talking about today's dollars. If we start factoring inflation for the next 20 years.

Anonymous said...

To Anon 3:15pm

I am in the same situation as you. Having cash & CPF sitting in Banks with little returns. With my HDB fully paid, I have been planning to purchase my second property for the last 3 years. Did not commit because price where high during the boom years. Thought the chance came when last year the Bubble burst in US, but alas, the properties here is not moving down but on the recording breaking instead. What is happening here? I am loosing hope and is lost now. Need some guidance.

Anonymous said...

@Lucky

Central Banks are not printing money. That is so last century. Its just a few keystrokes.

Dun worry about ur hero Bernanke. He is doing a fine job. As per his job scope, the bankers at Goldman and JP morgan are on track for record bonuses.

As for Sinkapoor, stupid people do not know fear. It is as simple as that. Do them a favor. Ignorance is bliss.

Anonymous said...

In a society where u have a bottom 60% and next 30% middle class, u dun use "average". u use "median".

HaveAHacks said...

Having cash & CPF sitting in Banks with little returns. With my HDB fully paid, .....What is happening here? I am loosing hope and is lost now. Need some guidance.

Is that sarcasm or are you for real ? You have cash in the bank and you are losing hope ?

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