Singapore’s growth model and the weakening US dollar
I saw a very interesting post on Dailykos. In it, the author explains his prognosis that very soon the US dollar would lose its status as the world’s reserve currency. China in particular is seeking to reduce its holdings of US Treasury bills and in particular they’ve recently increased their gold reserves, an indication that they have less faith in other countries’ currencies than they have in the US dollar. See this as well.
The implication for Singapore is foremostly, like China, Singapore also has substantial foreign reserves, managed by GIC Singapore. How much of those are denominated in US Treasury bills and notes? Likely a hell lot. And more importantly what is the government going to do about this?
Back to the Dkos post, China’s decreasing investment in US dollars may only mean that the Treasury has to turn more and more to the Fed Reserve to fund government spending:
(Reuters) – China and other emerging nations back Russia’s call for a discussion on how to replace the dollar as the world’s primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.
Calls for a rethink of the dollar’s status as world’s sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.
It’s not difficult to deduce from the above that all these are exacerbating projected future inflation in the US.
Apart from this, the author also has another very interesting post on how the US has long functioned as the world’s largest consumer for exported goods churned out in export-oriented Asian economies such as Singapore’s:
How Bretton Woods II has worked since 1971 is that America runs chronic trade deficits, and then foreigners use their trade surpluses to buy our debt. This enables foreign exporters to keep their currencies artificially low, thus undercutting American producers. It also keeps interest rates artificially low in America, thus enabling American consumers to borrow more than they can pay back.
To put it another way, Americans can buy things they don’t need with money they don’t have so that we can continue to be the mouth of the world. It’s a totally dysfunctional, unsustainable, and unhealthy system, but it’s been the global monetary and trade system for as long as most of us have been alive.
But now the long-term problems in this system have become short-term problems. The unsustainable has reached the end of its days.
It wasn’t foreign creditors, tired of buying our bad debt, that finally gave up. It was the American consumer, unable to find good jobs at home, or take on more debt from yet another asset bubble, that finally gave up.
Our imports are falling off a cliff, thus the number of dollars available to be recycled into our debt is drying up.
So how exactly does this affect Singapore? For one thing, Singapore has become less dependent it has on the US as it was in the past, no doubt due to the government cozying up to China as the world’s future sole economic power. The US in particular was Singapore’s not first nor second, but third largest trading partner. China has displaced the US at for spot no. 2. Source here (PDF file).:
Note: All figures are in Singapore dollars.
- Malaysia $110bn 19.4%
- China $92bn 16.2%
- USA $88bn 15.5%
- Indonesia $66bn 11.7%
- Japan $54bn 9.5%
- Hong Kong $53bn 9.4%
- Taiwan $37bn 6.5%
- South Korea $35bn 6.2%
- Thailand $31bn 5.5%
Of course the major problem is that China isn’t going to take over the US’s old role as functioning as the world’s demand centre for consumer goods, and this is borne out by their decreasing (yes decreasing) domestic consumption rate even as their GDP surges.
So here’s a question: How long can Singapore sustain its export oriented economy as a main engine for economic growth in the light of this?
Update: This NYT article published today explains the problem well:
Add the decline in consumer spending to the planned expiration of government stimulus spending, and a painful readjustment in demand for goods and services could occur, economists say. The effect would be felt here and abroad, as many developing economies also depend on America’s big-spending ways.
“If Americans cut back, as they almost have to do, what will replace that source of demand?” asked William G. Gale, director of the economic studies program at the Brookings Institution, a liberal-centrist policy research group.
“The easy answer is the Chinese consumer,” he said, but unlike their more prodigal American counterparts, the Chinese save about a quarter of what they earn. “We may cut back faster than they expand into that space, so there might be a lull.”
And to top if off, what is the Chinese consumer likely to purchase? His country’s cheaply manufactured goods or those of Singapore’s whose export pricing has had to contend with higher costs of production?