Ever Wondered How the Money Supply Grows in Singapore?

Linking the thought from the video in my previous post, The Real Truth About Fiat Money and the Banking System, I came across an article from the recent edition of the Business Times Weekend explaining how inflation occurs in Singapore. In it the author, Senior Correspondent Teh Hooi Ling, explains that it was through watching the video titled "Zeitgeist-Addendum" on YouTube that eventually lead her to think how money supply in Singapore is created despite the government running a budget surplus year after year.

By definition M2 is the money supply in Singapore consisting of currency in active circulation, demand deposits of the private sector, fixed deposits, Singdollar negotiable certificates of deposits, savings and other deposits. At the end of 2000, M2 stood at S$170.9 billion. By end Nov 2010, M2 had exploded, more than doubling to S$401.4 billion. That's an increase of 8.9% p.a. for the past 10 years. In comparison, the data given in article stated that GDP had grown only about 6.4% p.a. during the same period.

So how does money supply grow in Singapore?

For that I'll leave you to the author herself to explain, extracting a part of the article so you can read it verbatim, highlighting what I felt were the important bits to take note of.

"I came across a document entitled Monetary Policy Operations in Singapore on the Monetary Authority of Singapore (MAS) website. The 32-page document highlights the key aspects of MAS's monetary policy policy operations, and the various factors and considerations underlying them.

The four primary responsibilities of MAS are:

• Implementation of exchange rate policy;
• Conduct of money market operations for banking system liquidity management;
• Management/issuance of Singapore Government Securities (SGS) in support of government initiatives in bond market development; and
• Provision of banking and financial services to the government

MAS's balance sheet looks like this: 

On the assets side, a big chunk is in foreign assets, i.e. the official foreign reserves of Singapore. MAS also holds an inventory of SGS. It also has domestic credits, that is lending to banks in the course of conducting money market operations for liquidity management in the banking system.

On its liability side, the biggest component is government deposits. These are surpluses that the Singapore government run year after year. Also in this pool are contributions of members to the Central Provident Fund (CPF). Also on the liability side is currency in circulation. Under the provisions of the Currency Act, each Singdollar must be fully backed by foreign assets. As we all know, Singapore's monetary policy targets neither the interest rate nor monetary aggregate. It is centred on the trade-weighted exchange rate. As such, the monetary base is also endogenous, and its level is based more on banks' demand for reserve and settlement balances.

So this is my understanding of how the money supply of Singapore has been growing all these years. Say a foreign company wants to set up factory in Singapore because of the good infrastructure here and the convincing marketing campaign by the Economic Development Board.

The foreign firm brings in US$100 million. It needs to convert that amount to Singapore dollars to pay for the construction cost of its building, to pay utilities bills and salaries of its staff.  So demand for the Singdollar increases. If the aggregate demand for the Singdollar far exceeds the supply in the market, the local unit will appreciate too fast and make Singapore exporters uncompetitive. So since MAS's mandate is to manage the Singdollar's trade-weighted exchange rate, it will intervene by selling Singdollar to meet the demand and buy the US dollar. 

That's how money supply in Singapore grows over time. Among other reasons, demand for the currency also rises when Singapore exporters want to convert revenues in US dollars back to Singdollar, or when foreign investors are keen to invest, say, in real estate in the Lion City, given its safe haven status and its emergence as a global city. 

I've charted how Singapore's GDP in current market prices and how Singapore's M2 money supply have grown since 1980. The ratio of M2 to GDP has been rising through the years. Prior to 1998, total M2 had always been lower than the aggregate GDP. But that changed in 1998, and by end of 2009, M2 is 140% that of Singapore's GDP. Is it a wonder then that real estate prices have been so bouyant in the last few years?"

Source: The Business Times Weekend

Title: How Money Grows in Singapore

Section: Show Me The Money

For the curious and those with lots of time to spare, I've linked the Zeitgeist-Addendum video as well as the follow up movie below.

Cheers,

~K

Zeitgeist-Addendum

Zeitgeist-Addendum II

The Real Truth About Fiat Money and the Banking System

Thanks to ffnow for bringing this great cartoon video to attention. I'm putting it here as a easier reference for myself as I feel it's a good simple way to explain the situation at the moment in the US and how it came to that. You can read more great posts at his blog, A Journey Towards Financial Freedom. He has a really nice uncluttered site with lots of good nuggets. Thanks again ffnow.

On another related news, this short review in the Business Times Weekend caught my attention as well. Do read it, it'll take less than 30 seconds to make you wonder about the truth about the video. In an even briefer briefing, the important point to note is that spending isn't slowing and the deficit is heading to a mind-blowing US$1.5 trillion! Just had to bold it for emphasis heh.

Cheers,

~K

US federal deficit heading for record US$1.5t

Far from slowing, the US government's deficit spending will surge to a record US$1.5 trillion this year, the Congressional Budget Office estimated, blaming the slow economic recovery and last month's tax-cut law. What is more daunting for President Barack Obama is that it estimates a nation-wide unemployment rate of 8.2% on Election Day in 2012.

The Real Truth About Fiat Money and the Banking System

Identifying Your Fund Manager Styles

Reading the Business Times this week, I came across an article within that had some pointers on creating an investment portfolio. While reading it though, it came across as quite generic and brief. As such, I pulled out the only section that I felt had some value - a section on knowing your fund managers investment style. 

Why is this important?

The author, Mr. Edmund Teo, regional director, investment solutions, Asean, Hong Kong, Taiwan, and India at Russell Investment, says that "investors need to understand the style of different managers in their portfolio, and why they under or outperform in different market conditions. Employing manager and investment style diversification is critical for reduced volatility across market cycles." Perhaps, it may be good to give them a ring to find out their approach.

In the article, Mr. Teo listed 3 types of styles. I would like to add a fourth. 

1) Growth managers

These managers focus on companies whose earnings are growing faster than average. Often, these fast-growing companies will reinvest their profits back into their business, so the dividend yield (if any) could be lower than market average. But note that if growth slows, their stock prices are more likely to fall harder than average. 

2) Value managers

These managers look out for and invest in undervalued companies whose true value has yet to be recognized which therefore gives the share price potential to rise upon realization by the market. They believe in the saying, "buy low, sell high". Often these companies are solid, but not spectacular performers with good cash flows and at times with dividend yields above market average. The risk of investing in undervalued companies is that these companies may remain undervalued for extended periods of time with no indication when share prices may rise.

3) Market-oriented managers

These managers focus on themes within the market and the economy to decide on the companies to invest in that should outperform market averages. For example, if the manager feels that the Singapore dollar is about to rise, he or she might focus on increasing positions in companies that import goods while reducing holdings in companies heavily reliant on exports. The risk of this style is that themes can have short lives and catch investors unaware.

4) Momentum managers

These managers look out for hot stocks and for stocks that though have risen a fair amount still have fuel to rise even higher. They believe in the saying, "buy high, sell higher". They look for companies that have made new highs, and/or show strong upward trends based on technical analysis. Constant positive earning surprises is one other criteria these managers scan for. The obvious risk is that prices are constantly undergoing corrections when prices rise too drastically. As such, momentum investing could go against managers who mistime the entry of their purchase.

Hey, if any of you know of any more styles than is listed here, pls feel free to leave a comment below. And if you're willing, it'd be great to hear your investment style as well. =)

Cheers,

~K