TR EMERITUS

Money itself is like a commodity and it has a price which bows to Keynesian doctrine of supply and demand. The price of a currency is of course its exchange rate in relation to other currencies. All things being equal, an increase in supply of a currency is inflationary because it stimulates spending and foreign goods become more expensive as its exchange rate depreciates. Governments have the power to create money into existence and this opens the door to irresponsible fiscal management. Many are critical of money printing by governments, but most folks generally do not actually understand how this is done. There are two types of money – paper money (currency notes) and digital money. The credit balances in depositors’ accounts with banks are digital money. When you deposit cash into your bank account, you convert paper money into digital money. The printing of physical currency notes and digital money are of course entirely different matters. Central banks physically print currency notes all the time to constantly keep a ready stock to replace damaged notes and to meet exigencies. Theoretically speaking, increasing the supply of currency notes can lead to inflation. Many experts, from academia and industry, point to same examples where excessive paper money printing has driven countries into banana republics – Weimar Republic (Germany) in 1920s, Hungary 1946, Yugoslavia 1970s, Zimbabwe 2000s, and present day Venezuela. But they have all got it wrong with the chicken and egg situation. It was systemic corruption which feeds into economic mismanagement that led to massive hyperinflation. As the value of currency shrinks, more currency needs to be printed and in higher and higher denominations. Germany had its 100 million mark notes, Hungary had 100 quintillion pengő, Yugoslavia had trillion dinar, Zimbabwe had 100 trillion dollar notes, and Venezuela has million bolivar notes. In today’s world, a country’s money supply is predominantly in the form of digital money. Currency notes make up only a fraction of money supply. The discussion of impact of money printing basically refers to digital money. As mentioned earlier, digital money is reflected in depositors’ bank credit balances. Central banks are governments’ banker. Thus if a central bank simply adds some credit to the government account out of nowhere, ie no transaction related, it creates money for the government. Every central bank charter obviously specifically bars this. Thus in reality, it is a fallacy to say government prints money to spend. Note the US is unique in that it has no central bank. The Federal Bank System (Fed) comprises of 12 reserve banks which are privately owned by various member banks. The Fed is the government’s banker, but it is not a government agency. Although the government has certain interests and rights, the rights are not proprietary. Central banks and Fed are tasked with managing the sale and purchase of government securities and monetary policies which are matters concerning quantitative money supply and general price level, or inflation, and by extension, employment. Central banks manage monetary policies of the government whilst the Fed executes the monetary policies of the Federal Open Market Committee (FOMC) which is a committee of the Fed member banks whose policies are made in the interest of the US. Since governments do not print money to spend, where do the funds for deficit spending come from. Here we are not talking about various government agencies which in some jurisdictions are allowed to take on loans directly. We are referring to governments funding budget spendings in excess of revenue. This is done by issuing government securities (bonds). When investors buy these securities in the primary market, buyers remit proceeds to the credit of government accounts with central banks. By this manner, governments borrow to fund budget shortfalls. There is no money creation. Singapore is unique in the world. It practices a balanced budget and never borrows for spending. Well then, where is all this talk about about governments creating money to spend? Central banks manage liquidity in the market. When money is tight, there is an upward pressure on interest rates and exchange rates. Central banks pump money into the market, ie., central banks may loosen liquidity to stimulate spending which spurs economic activities and employment. This is done in open market operations where central banks purchase securities. Central banks pay for such purchases by simply crediting the seller banks’ Reserve Accounts. Thus central banks acquire assets with money they do not have. They simply create money out of nowhere by making a credit entry in seller banks’ Reserve Accounts. So now the banks have newly created money that can be used in the market. This is an exercise called QE for quantitative easing. Thus money creation via QE has nothing to do with government spending or borrowing. Some take the macro or bird’s eye view that governments borrow to spend, which then central banks buy back through QE by simply creating money, is tantamount to governments creating money to spend. This notion is not correct as fiscal policies and monetary policies are entirely different affairs. Fiscal policies are managed by Treasury ministries who raise debt to fund budget deficits. Monetary policies are handled by central banks who perform QE to calibrate market liquidity and interest rates. Thus a situation is created where central banks hold an asset and the governments hold a liability. It is a case of left hand owing to the right hand. In the case of US, the status is different since the Fed is not a part of government. In this scenario, governments do not fear the amount of debts they owe. They simply net off on maturity of the securities. However, doing so will reflect debit balances in governments accounts in central banks’ books. There is no literature on some creative accounting to resolve this. In practice this accounting conundrum does not seem to have presented itself as these securities have been rolled over with more and more new issues paying off maturing ones. Government debts keep pushing the ceiling. On the other hand, the central banks have a liability for the securities they purchased as well as a valuation risk. When central banks simply credit seller banks Reserve Accounts for securities purchased, they have a liability for the money created. This liability is backed by the asset securities. On a going concern basis, central banks have no worry with the liability because as the money is circulated in the market, all that happens is just debit and credit entries in banks’ Reserve Accounts as money moves from one bank to another. Most of these securities are government bonds which have no credit risks. Some jurisdictions have seen QE extend to central banks building balance sheet with equities. Bank of Japan is one example. In which case, credit risks exist. In the case of government bonds, market risks exists. With rising interest rates, bond prices tumble. Central banks' capital takes a beating from rising interest rates. With massive balance sheet build up from QE and rising interest rates, the Fed is now actually in negative capital mode if they recognise valuation losses, which they don’t. There is another way that central banks create money out of nowhere. This happens during financial or economic crisis such as in 2008 and Covid pandemic. Huge sums of money are needed for bailing out businesses in financial distress or for financial aid packages. Central banks initiate bail out programmes, or governments push financial aid packages. For example, Fed had its Tarp, MAS has other various named programmes. These are basically loan facilities. When drawn down, central banks simply record the loan, and post a credit to the Reserve Accounts of the relevant banks. In this manner, unlimited sums of money can be created. One more way central banks can create money, although indirectly. This is through fractional banking. Banks make money work for them. They take customers’ deposit and loan them out. The full deposit amount cannot be lent out. Banks must keep a certain balance in their Reserve Account in order to maintain liquidity to meet customers’ needs. How much to retain depends on the Reserve Ratio. Suppose the ratio is 10%, if a customer deposits $100 with Bank A, it can lend out $90. This $90 is deposited with Bank B which can lend out $81. This multiplier effect work its way through the market. Theoretically, a newly created $100 and a Reserve Ratio of 10% will end up with $1,000 increase in money supply. Central banks can increase money creation by fractional banking simply by reducing the Reserve Ratio. Another way central banks create money is in its open market operations in the FX market. Central banks monetary policies are either based on tweaking interest rates or managing its exchange rates. Singapore is an exchange rate regime. Spot rates are volatile throughout the day. Most exchange rate regimes allow the rates to move within a certain band. When the rate is hitting the upper limits, central banks sell their currency to bring rates down. To settle, central banks simply credit the Reserve Accounts of the buying banks. Thus new money is created. Market intervention works both ways. Central banks buy their currency when the lower band is tested which is a reduction of money supply as seller banks Reserve Accounts are debited. Thus money creation can be netted off as negative or positive. A persistent pressure on the upper band means central banks are selling most of the time leading to more new money created. Since FX market intervention is to manage the exchange rate and not liquidity, this money created is nullified by a sterilisation process. This is done by central banks issuing Treasury Bills to mop up the liquidity caused by the new money created. Governments rollover maturing bonds with new ones and add fresh borrowings. As a result, government borrowings have snowballed. The US national debt is now $35T. Is there no end to kicking the can down the road? This can continue as long as there is demand by investors for the $ bonds. That demand will disappear when the $ looses its role as world reserve currency. BRICS is working on developing an alternate currency to reduce dependency on $ in international trade. It is easier said than done. However, their success will mean the downfall of the powerful USD. All the offshore $ will come home to roost and the massive debt of $35T will need to be paid off as bonds mature, for they no longer can be rolled over as the market for $ bonds disappear. But the massive debt will not bankrupt the US. Any country with monetary sovereignty can always pay off debts in its own currency. The Fed can always credit bond holders' banks' Reserve Accounts. Simply create money $ to pay off debt. But the massive $35T created will drive the $ exchange rate to the ground and bring hyperinflation and deterioration to standard of living. It will impoverish Americans. This explainer on money creation shows why even though the governments can print money, they still have to borrow. It also shows the fallacy of massive printing of paper money leads to high inflation, but rather, the reverse is true. Hyperinflation leads to massive paper money printing. The generally held belief is massive money creation leads to high inflation. The past decade or so have seen central banks all over the world build up massive balance sheet in QE exercises, pursued on the belief that liquidity and cheap money stimulates the economy. Strangely, the massive QE have not resulted in massive increase in money supply and high inflation. This seems like one more fallacy but it's for another day. Addendum: To make this primer complete, there is one more way central banks create money, but it is a special situation that has no inflationary impact as the money will not be used. Central banks arrange standby currency swap facilities with each other to provide liquidity for foreign currencies in the event of financial crisis. A swap deal is where one currency is exchanged for another at market rate (spot deal) and reversed at a future date at an agreed rate (forward deal). For example say MAS has a USD/SGD swap facility with Fed. During a financial crisis where USD became difficult to source, MAS can provide liquidity to the market by availing the swap facility. MAS will buy USD from Fed against SGD say for 6 months. MAS pays for the USD by crediting Fed's account in SGD. Massive sum of SGD may be created this way but it has no effect on inflation because the Fed is never going to use those SGD. The Fed's SGD deposit will be reversed 6 months later when the forward deal matures.   Patrick Low * Article first appeared on Down The Rabbit Hole.   Editor's note: The 1st short introductory paragraph of the article has been removed as it relates to a video that we cannot reproduce, link or embed. The removed content is not directly related to the context of this article.        Read More →

Lawrence Wong has taken the less than conventional pathway. And he is not pedigree. He was a divorcee. He married after, but has no kids. Except for VJC, he attended Haig Boys’ Primary and Tanjong Katong Secondary. He is not from RI, Hwa Chong or ACS. And his father is no politician or PM. For 12 years before 2011, when he entered politics, Lawrence started out as an economist in MTI. He was “rejected by the prestigious Administrative Service,” and was not initially involved in policy work. It reports that “his job was to crunch numbers, using economic models to analyse the likely impact of changes on the Singapore economy.” As a typical young man, he said something many people his age now are able to identify with: “I figured…I can do exactly the same kind of economics work in the private sector too, and they are paying better. The thought did cross my mind: “Maybe I should just leave and join private sector, maybe a bank.”” Well, he nevertheless stayed on under the persuasion of his bosses, Mr Khaw Boon Wan and Mr Lim Siong Guan. In fact, KBW was later assigned to select the next 4G leader after HSK stepped aside due to health reasons. In his interview with KBW, Lawrence recounted how it went: “(KBW) listened, he asked me some questions, and then at the end of it, he said: “There is a consensus emerging.”” That was it. He was picked. Though surprised, Lawrence said: “But we had been prepared for it because she (his wife) knew I was part of this process. And we knew that going into this we would accept the outcome of the process.” “And if this is the result, then I would step up and I would take on the responsibility.” He will be our nation’s fourth PM. Thus far, we have two Lees, a Goh and now a Wong. On the next lap of our country’s journey, I note two realities after the passing of the baton. First, we can expect continuity in leadership. It’s about building on what his predecessors have built upon. “It is not so much that we are going to slay a sacred cow for the sake of doing so…But we are prepared to re-examine all our assumptions and consider, under different circumstances, different societal expectations and needs - what might we do differently,” Lawrence said. I therefore trust that meritocracy, multiracial and multicultural harmony, and continuing to raise the economic tide for all are sacred cows that will be kept as they are. For meritocracy, Lawrence aims to build “a country to be a place that embraces different pathways to success.” Schools will follow suit, with emphasis on diversity of talents, respecting different learning pace, and more tailored teaching methods and bonding styles. We are on the right track in respect of keeping the harmony and unity of the country despite its diversity. Laws are enacted in response to external threats and the changing technological landscape, which has become more excitable and agitated of late. These laws stand sentry to remind citizens to respect boundaries. And for economic growth, I believe it has always been the leadership’s most sacred cow. Economic downturns, high unemployment rate, wage stagnation and high inflation can be devastating for a country. Our strong fundamentals ought to keep us in good stead for the near future. This brings me to the second reality. It’s part existential and part philosophical. It’s more personal. It’s about the 5Cs. It seems like there’s a change of tide and expectation. According to Forward Singapore report released last October, “Singaporeans no longer focus on the “five Cs of condominium, car, cash, credit card and country card membership.”” Lawrence said that the good life is now “measured not by narrow metrics based on material success but also by meaning and purpose.” He added: “I think these are very noble aspirations.” In truth, I don’t really know how you rate or balance the 5Cs with these noble aspirations. Is it a priority issue? Which should come first, and which is still secretly coveted? They are definitely not mutually exclusive, but in a highly unequal society, income and status (or material aspirations) are still the sacred cows some will have more of and some have less of. Our society is not only dislocated and fragmented by technology and AI, but the relentless pursuit of material possessions also keep us disjointed and fragmented. I anticipate that this will be a tough nut to crack, that is, juggling between economic growth as first priority and hoping that our society will be satisfied/contented with what are noble aspirations. The raw reality is, there are many still struggling to catch up in a world where the unbridled material successes of the few are within a click of a button. After all said, Lawrence ended the interview with this: “I do not have to write my legacy today. Hopefully, at the end of my time and tenure, I will leave people to write my legacy and what kind of a prime minister I am.” Well, tbh, I wish he will be the kind who keeps the Solomon-like balance of things/goals, that is, between what is material success and what is noble aspiration, focus on those left behind or are struggling to catch up and give them hope and assurance, and develop his unique style of leadership that embodies the courage to deviate from the beaten path or the official script, even if it would invite stares and frowns from the status quo.   Micheal Han    Read More →

In history there were Nazi Germany Adophl Hitler and Indonesia Achmed Surkarno who crew to the world of their political dominance and achievements while their people suffered in their livelihood. In Singapore Lee Kuan Yew and his superlative politicians including Dr. Goh Keng Swee made world history by transforming Singapore from third world to first world status. His successor woody Goh Chok Tong showed outstanding talent in enhancing the prosperity and harmony of Singapore. Then came sonny boy Lee Hsien Loong who showed great promise coming fresh into his authority of prime minister. His was an unencumbered tenure because it was plain sailing with the communists out of action. He did not experience the baptism of fire that his father went through. Anybody with any sense of ingenuity will be able to achieve what Lee Hsien Loong had daunted his guillible audience with his achievements in his farewell speech on Mayday lst May. It shows his lack of modesty and humility in portraying himself as some kind of titan in bringing Singapore to its present prosperity and racial harmony. That he should be credited for his part in accomplshing this cannot be overlooked.but to sit o their fat asses and enjoy the luxuries of life at people's expense after our sacrifices in fighting the communists is character at the bottom of the human pit. What made him to hand over his baton ahead of his scheduled date is a mystery but will his successor Lawrence Wong be up to the scratch in taking over. He strikes me as a flamboyant and ostentatious figure with an avid guitar player background. Singapore needs more than a guitar player to take it our of a crisis when it faces one. But Lee Hsien Loong is head over heels as to his competence. Let's wait and see when he takes over and performs if it's not too late.   Yoong Siew Wah Editor's note: This article was written on May 6 before PM Wong was sworn in but somehow it was wrongly scheduled to a later date. We apologize for the error.    Read More →