Comments, opinions and an occasional ramble
Why worry about setting a precedent to tap on reserves?
It seems that there are some people who are quite concerned that the government is setting a precedent (and it seems to be a negative precedent) by signaling its intention of dipping into the reserves during this year’s Budget announcement. I don’t see what is there to worry about. Maybe a little story will illustrate my thoughts better.
Once upon a time, there lived a rich old man. He had a poor and difficult childhood but through a combination of persistence, hard work, shrewd actions and a dose good luck, he managed to build up a business empire and became a billionaire.
Even though he was extremely rich, he kept all his riches in bank vaults. He was so afraid that once he started spending his riches, he will not be able to stop. One day, he had a heart attack and died. As he looked down from the heavens, he realised that he had been a stupid man his entire life. Even though he had accumulated so much money, it is all sitting in the bank vaults and he can’t bring them along with him to heaven.
The moral of the story is that it is seriously stupid to hoard money for the sake of hoarding it. This doesn’t mean one should be a free-wheeling spender, though. Rather, if the situation calls for savings to be spent, then it should be spent. The number of zeroes in the bank account book is meaningless unless the money is actually used to do something.
I think the government is correct to signal that it’s prepared to use the reserves to help Singapore weather the storm if the need arises. This is not an issue of whether it’s a good precedent or bad precedent. It’s an issue of whether the money will be well-spent, and I think it is justifiable to tap on the reserves in a global recession if the need arises.
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about 3 years ago
The way I see it, its just a psychological barrier.
about 3 years ago
duh – the story continues –
the old man decided to spend on Merrill shares and Citibank shares and UBS shares, when all other banks did not think it was safe to buy these shares.
The share prices crashed. And according to some, the amount spent on the resilence package was smaller than the amount spent on these shares.
http://www.pressrun.net/weblog/2009/01/resilience-package-dwarfed-by-bank-investments.html
Can you believe it? Our people and companies are less deserving of help than these banks….
about 3 years ago
Some important questions.
Be it 200 billion or 400 billion. When and how much they tap into our reserves.
When you invests money with a bank. It is your duty to ask the banker to show you their accounts.
You will definitely want to know how your money is being invested, how much is being invested, where it has been invested, how much is the return?
Do you know that a neighbouring country publishes its pension accounts online? Well, they did not claim to be a ‘first world nation’. Of course, they can choose not to publish.
Tell me if I’m wrong. All the Ponzi scams on wall streets point to the fact that even well-audited companies can manipulate accounts to deceive shareholders and investors. Think of the extent an entity can ‘play’ with the money if they don’t even publish their accounts?
You do not need to tell me that my money is safe. Just show me the accounts.
about 3 years ago
The problem isn’t whether it is a good or a bad thing to dip into the reserve. Neither is it always a good thing to dip into your so call “reserved” when your investment is down and interest rate is low.
When you draw down on your “reserved” when your investments are low you loose money. And when you sell your investments you are not talking just “paper loss”, it is real loss. So in situation like this, it may make no sense to draw down but possibly to borrow (given the low interest rate) and wait for your investment to recover, which you can then pay off what you borrowed.
In the case of a national budget, this can be done by working on budget cycle, which in bad times plan for a budget deficit. You can plug the deficit by raising more taxes in the “good” times or use the reserve to plug the deficit. To this end, the “reserve” should not be seen as something you only draw down in bad times but should be seen as a kind of buffer for budgeting cycle. That way, there is a consistency in when the “reserved” should be dipped.
Also in the case of a sovereign wealth fund, drawing down reserved in an inconsistent manner could potentially cause a run on your assets. For example, if the market notice there is movement to sell certain investment it could trigger a shorting on assets that you hold. Especially, when they smell that you are desperate to sell!
about 3 years ago
Could the Budget have initiated measures that would have targeted workers directly in addition to trying to save jobs? Is this an opportune time to have initiated measures like unemployment insurance; which will be a means of temporary income for eligible workers who become unemployed through no fault of their own and who are ready, willing, and able to work?
It cannot be deduced that Unemployment Insurance is not appropriate for a highly industrialized Asian ‘tiger economy’ like Singapore. South Korea the first country to be identified as a ‘tiger economy’ has a (un)employment insurance scheme which was first put into place in 1 July 1995. The unemployment scheme was further extended rapidly in the wake of an unprecedented economic crisis in 1997.
My thoughts on Budget 2009: http://singaporesocialactivist.blogspot.com/2009/01/governing-first-world-country-with.html
about 3 years ago
*shrug* I have no idea what the reserve is for in Singapore anyway if it’s not for them to tap into. Oh well, it’s not like the government does not have other sources to tap into before they even touch the reserves.
about 3 years ago
Familyman,
I would prefer to see the issue of investing in Citigroup and Merrill as separate from the Budget. It doesn’t mean that if the investments weren’t made, there would automatically be more money being poured into the Budget. Investing and the Budget are two different issues which should be discussed separately.
I am not a fan of some of the things the government does, but I have to say that you are being unfair for criticising the Citigroup and Merrill deals. Over the course of Singapore’s history, there is bound to be some mistakes made in investments. Even Warren Buffet made mistakes. The question is, in the long run, did we do well? My sense is that we did well. Do you think we can even use the term ‘reserves’ so nonchalantly as if it meant to be taken for granted if the government is seriously inept at investing?
As for whether the Budget is generous enough, I think for now it is. The government has a habit of announcing off-Budget measures so we should wait till the year is out before pronouncing the Budget as a _______ (insert adjective) Budget.
about 3 years ago
Whostolemycheese,
You’ve got a good point there. Without full disclosure, we don’t know if we have going on here a Ponzi scheme that dwarfs Madoff’s. The problem here is the same as Madoff’s; there is no incentive for anyone to blow the whistle. Those who are in the know of things are probably paid handsomely. I would like to see the accounts too, although accounts can be faked too.
about 3 years ago
Micheal,
Great point. But right now, who’s willing to lend money to us? I don’t know if investors are willing to buy our government bonds for an effective yield of zero, just like what investors are doing with US Treasury bonds.
about 3 years ago
Ravi,
The idea of unemployment insurance is clearly with good intentions, but insurance is not free. There is a cost to it, and I believe it can be an extremely expensive business, especially when it is abused. Of course, you can argue that we can afford it but my next question would be, how do people in third world countries survive without umemployment insurance? Are we so comfortable that we are unable to take hardships anymore? This is not a callous statement, by the way. It’s something I do myself to remind me that if people in these places can survive hardships far tougher than mine, being in a relatively more prosperous place, the ‘hardships’ here should be much easier to handle.
about 3 years ago
RSE,
Happy new year! It’s been a while. Hope you’ve been well. Anyway, I think the government doesn’t need to tap into the reserves. It’s really for show. A large part of the current crisis is really a crisis of confidence, so I believe the government’s announcement of tapping into the reserves is to shore up confidence. How effective that is, I don’t know.
about 3 years ago
Aaron,
True, issuing government bonds with zero interest is not attractive.
But the government makes great play about how much “reserve” we have. Now it begs the question, despite all these wonderful “reserve” the government is still unable inspire confidence (e.g. by offering better yield but not one that is unsustainable) to borrowers than clearly the reserve is really not much use as emergency funds, is it?
Same principles as you wanting a house that has high valuation, you want to in times of need to use it as collatoral for emergency loan. The last time you want is to sell your house to get cash that you need right now. Now if your valuation cannot be trusted for an emergency loan than the bigger question is really your house a form of financial security is no use.
Ok it is worth pointing out that what I was making is a general point. I hope I am not giving the impression that the choice is as stark as to drip or not to dip into the reserve. Nor am I suggesting that it is an easy one for anyone to steer the economic fortune of the country right now.
Mike
about 3 years ago
Ravi,
Fully agree with you about the unemployment insurance scheme. However, as ever with the PAP regime, ideology often drive policies rather than a cold objective view.
I have in other discussion advocated this notion of unemployment “insurance” but the problem often in engaging in debate about such a scheme is (a) the label and (b) “balance-sheet” ideology.
As you can see from the reaction of Aaron*, when you use the term “insurance” it immediately conjure up “cost” (i.e. the money thing). If you had used the word “benefit” you conjure up the spectre of “welfarism” and given PAP ideology that is a no-no. It is always difficult to get past the labels and get people to understand what you are actually proposing.
The fact is that in the current recession, the unemployed need help, in any sensible discussion you will have expected debate ought to be the mechanics of how to help. If the mechanics resemble an “insurance” scheme than so be it. If the mechanics resemble a “welfare” scheme than so be it. But unfortunately, in Singapore we often find the debate really centre of the label of things.
On the issue about your idea of an “insurance”, for want of term, I feel that trying to implement one in the face of a recession is fraught with problem, particularly, when the need is so urgent. The “insurance” schema that you are proposing/advocating/suggesting would be effective in the future. The problem is that the unemployed need the money now. So, in my opinion the PAP had miss the boat.
The PAP should have done it when the times where “good”. In fact, it should have be implemented together with a wholesale reform of the CPF and the modus operandi or the so-call “reserved” — more in the mould of Norway’s sovereign wealth fund (see my explanation in earlier). But again they didn’t because ideology stood in the way.
However, maybe the midst of a crisis is probably a good time to make fundamental change especially mindset ones. After all, that is the time when people can see failing more clearly.
Mike
*Aaron: The statement was NOT meant to a reflection of your character. It was to illustrate the kind of reaction one would get when discussing topic about “insurance” or schema with similar effect, in the context of wrong labelling.
about 3 years ago
Dear Michael,
I am not completely against the idea of insurance. I am more interested in the cost-benefit ratio of umemployment insurance versus other methods of helping people in a recession, that’s all. I don’t even consider it a labeling issue. It’s really a matter of what gets the best value for the same amount of money.
I personally prefer the government investing in our human capital during the downturn and only provide cash to those who are really struggling to make ends meet rather than across the board unemployment insurance, be it whether the newly unemployed person has a few hundred thousand dollars or a few hundred dollars sitting in the bank.
Fundamentally, I don’t think it’s the government’s business to provide for people who can survive on their own. Perhaps a well crafted unemployment insurance scheme can address my concern and if there is indeed one, then why not? Money well-spent is money worth spending, regardless of the form of spending.
about 3 years ago
Happy new year to you aaron! I’m doing rather well for myself. Despite the crisis I’m constantly getting job offers from various places, but not everyone is as lucky. It helps that I played my cards right and obtained some very rare skillsets in the industry. I’m thinking of pursuing a PhD instead of working more.
Unfortunately this isn’t a crisis of confidence Aaron, it is going to hit Singapore really bad due to the way the economy is structured here. Besides, the 1997 crisis did actually help Singapore stay ahead somewhat. This crisis will not.