Tuesday, August 9, 2011

What does zero interest until mid-2013 mean for Singapore?

Jim Rogers thinks that the man is an idiot. Rogers has a point, the man knows nothing other than printing money. If printing money could help "something" Zimbabwe would be the most prosperous nation on the planet now. But I think Bernanke is not an idiot he is just a man who assumes US public is idiot. He has to assume this because it is a prerequisite for his hard mission: saving his buddies on the Wall Street from even slightest pain even if this means damaging the productive parts of US and global economy. This makes him a very dangerous man rather than an idiot. He is really playing a dangerous game with other’s money:
“You know if you charge no interest, it’s pretty easy to make the interest payments...And then what would happen is the rates would eventually reset and the borrowers wouldn’t have the income to support the adjusted payments...A lot of the borrowers found themselves upside down and effectively in default.  
The same risk is true broadly for all sorts of borrowers public and private borrowers.  If we have zero rates in place for an extended period of time, borrowers become used to very small amounts of debt service that can cause them to become very over-extended and over-confident in how much debt they can handle.  If at a later time the interest rates end up resetting to a higher level, you can wind up with a real crisis.”
David Einhorn -  Federal Reserve Policies are Quite Dangerous
Since the men on the Wall Street grasp the free money and exports the inflation far away to Asia, he thinks he can provide free money until mid-2013. As expected, trading algorithms and investors cheered with FED’s commitment to provide free money at all cost. What does this mean for Singapore? Since Singapore is directly exposed to zero interest rate policy, this probably means more inflation, more dangerous asset bubbles and worse: more and more mis-allocation of Asian resources due to damaging high inflation - negative interest rate environment. FED is effectively pushing the global investors, especially the ones here in Asia to look for yield in risky assets. If they do not, they will lose cash to inflation so they will do. And this is not the best thing to do now, in an uncertain environment. And yes, property bubble may ride on to levels which dwarfs the pre-Asian Financial Crises numbers! 

Filling the economy with artificially free money and expecting people to make sound investments under these conditions is like filling yourself with bottles of alcohol and expecting to drive well back to home. In both case it is effectively a suicide:
“The housing bubble they inflated have blew up with all the carnage and all the bankruptcies. And now what is their solution: well just do the same thing we did before. Instead of having interest rates at 1 per cent, let's keep them at zero. And let's buy everything we can. Let's print money and buy mortgages, buy credit card debts, buy student loans. Let's buy bunds, let's drop money from helicopters to try to get to the same excessive risk taking and gambling on the Wall Street. Let's convince American's already loaded with huge debt to go and buy new stuff and go into deeper to debt. The banks do not want to lend money, let's make them lend more money. This is economic suicide."
Peter P. Schiff Euro Pacific Capital - Overdose: Next Financial Crisis

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