Singapore’s foreign reserves
Nobel Prize-winning economist Joe Stigliz said the following in a recent Newsweek interview:
FOROOHAR: You’ve been talking for years about how the dollar reserve system is broken. Why is everyone getting on the bandwagon now?
STIGLITZ: A reserve currency has to be stable to be effective, and for some time now, it’s been clear that the dollar is not. The financial crisis has brought this home with a vengeance. The Fed’s balance sheet is surreal. They are in uncharted territory, and there are serious concerns about inflation, and its subsequent effects on the dollar. The Chinese are clearly very concerned about this. They see that some of their investments in the U.S. (like Blackstone) have gone badly wrong, and they worry that they will have worked so hard to save their $2 trillion in reserves, only to see it blown away by inflation. At the same time, there’s this broader concern about how the current reserve system basically entails poor countries lending to the U.S. at very low interest rates. It’s inequitable, and it also reduces consumer demand at a time when it’s really needed.
This reminds me strongly of Singapore’s foreign exchange reserves. Like China, Singapore has amassed huge foreign reserves though policies which artificially depresses consumption to boost net exports. A good reason to be concerned is that we still do not know how much of our reserves are denominated in US dollars. Just it may be unwise to spend too much and save too little, it is equally unwise (or perhaps even more foolish) to allow these savings to be wiped out by inflation caused by extreme quantitative easing practiced by the Fed Reserve.
On another note, Stiglitz makes a point on America eerily similar to what has been going on in Singapore for the past few decades:
Do you think that the European welfare model is actually better suited to the economic needs of the moment?
Yes, definitely. Europe’s social safety net can actually act as a kind of economic stimulus encouraging people to keep spending, or not to save so much, because they feel more secure. What’s clear is that the American model of corporate welfare —taking care of companies, but not of people—is broken.
Note the italicised text. For decades this has been the norm in Singapore.