Sunday, August 7, 2011

Sovereign Debt Crisis in West and Singapore

Almost everyone now knows that the sovereign debt in western countries accumulated to unmanageable level and this is a big problem. I say almost because everyone except Paul Krugman is aware of it (he is even not aware of the fundamentals of economics such as limited resources). Meanwhile it seems like many started to realize that the bubble we have seen last 2 years was not a recovery but just another boom created by money printing (US was so shameful to employ this usually third world economic destruction tool that they called it Quantitative Easing). It surprisingly (!) created no recovery (except the recovery in excessive speculation). It was so ineffective that just immediately after QE2 ended, everything went down (and just a year ago everything did not go down like this because QE2 is introduced):

“To be honest, the gains of the past two years were actually built on borrowed time, the operative word being “borrowed”” says R. Sivanithy from The Business Times. “This includes the US, with its shambolic debt ceiling deal which allows its government to borrow more money from the rest of the world; its weak economic numbers which illustrate the folly of believing that a heavily indebted economy can continue to borrow indefinitely from its future without any pain to its present; and of course Europe’s unhealthy dependence on borrowing from its richer members to live beyond its means. It’s all falling apart now, as markets come to a sudden realisation that at some point, the borrowing has to stop and payback begins.”
Source : The Business Times

Well it is of course not surprising for many out of the circle of men in suits and ties in Wall Street.  Printing money creates no real “value” which can lead to recovery or prosperity. If money printing or borrowing as there is no future would work; Zimbabwe would be the most prosperous country on the planet now!

What will happen next? The men on “the street” (not the main street) will probably cry for a QE3 and FED may go for it. This is one of the worst things that can happen for us in Singapore. We have seen that the money printed in QE1 and QE2 ended up in the laps of the same men created the economic crisis and these men, famous for repeated fund misallocation and wealth destruction, transferred all the money to commodities and Asia to create a perfect environment for resource misallocation (a bubble) here. Same will happen again if QE3 comes, we would end up having a structurally damaging low interest high inflation environment for another year which will lead many with no way other than burying their hard earned money to unproductive and currently unrealistically expensive assets like property. That would lift us all in Asia to new “heights” to crash harder later. These men on “the wall street” are very talented to destroy wealth, I advise do not let them to destroy your real savings along with the funds they have. Another stimulus package from west would just mean one or two more borrowed years and if this happens it is wise to save as much as possible for stormy days during these years which would most probably follow QE3 (or QE4).

If all these current problems lead down to another recession this year, it would be painful. Last 20 years of artificially low interest rates and continuous stimulus packages from West created a great resource misallocation of all times both in West and East, free market forces (not the fund managers and computer algorithms called “markets” in the news) does this as recession as depression to reallocate the resources to their best usages. It will be painful especially for the ones who have bought in this “recovery” illusion of last 2 years but it may be unavoidable.

Is Singapore and Asia immune to this problem? Some analysts say that in Asia we are more prepared to handle the next crisis thanks to the savings we have. While they have a point many miss one ugly truth: Global resource misallocation created by heavy borrowing in west are really global. In Asia, our production machine is allocated to produce goods specifically for west which borrows to buy them. The product mix we have as well as the market connections we have do not readily serve the people in Asia. For example China produces a lot of products for West for which there is no or little domestic or Asian demand. All the funds which would be pouring in creation of innovative production methods and product and a strong market network among Asia are parked either in US Treasuries or all kinds of properties around the world.

The next crisis may be used positively to reallocate savings and capital away from debt ridden consumption if it is used wisely. At the end, Asia's real advantage is that it has real savings which is the only way to create more capital and prosperity. Printed medium of exchange (money) or government stimulus diverted from future capital of private investors cannot create capital or prosperity. Only savings can.   

And at last, what you should do to prepare yourself? National Development Minister Khaw Boon Wan's message to Singaporeans sums up it well:

Amidst the recent American stock crash and debt crisis in Europe, Mr Khaw reminded Singaporeans that spending more than one earns is unwise, and that even a saving of $100 per month out of $1,000 would go a long way in sheltering him during rainy days.

'Sometimes you get fine weather, sometimes rainy. But if you have always saved for the rainy day, you'll be pretty steady and safe,' he told reporters. His comments come a day after Deputy Prime Minister Tharman Shanmugaratnam warned Singaporeans that the going will be tough in the next three to four years, with slow growth and possible bouts of recessions in the most advanced economies.
Source : Singaporeans should save for rainy days: Khaw

This blog article is to provide general information only and should not be treated as an invitation to buy or sell any property or as sales material.  Users of this report should consider this report as a one of the many factors in making their investment decision. Users should make reference to other sources of information and specific investment advice to obtain a more objective view of the property market. Asia Singapore shall not be responsible for losses suffered.

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