The recent developments in global finance has been unsettling for many. The effects of pandemic measures continue to be felt, the supply chain disruptions adding to increased prices of goods, and the economic downturn is causing people to worry about their savings.
As some of the members in the Hugosave Community had expressed their ongoing concerns, we invited Mr Richard Jerram, the former Chief Economist at Bank of Singapore to engage in a question-and-answer session on our Telegram Group. He had also previously worked as Chief Economist at various global financial services firms during his 20+ years in the financial industry.
Read his responses below.
What’s the difference between today’s stagflation and the last one 30 years ago?
Richard: There are many differences, but perhaps the most relevant one is the huge increase in private and public debt. That can make us doubt the commitment of governments in many developed economies to control inflation.
After all, if prices run ahead of interest rates for a few years, then it will help to ease the government debt burden. Was this consideration behind the Federal Reserve’s extraordinary refusal to tighten monetary policy in 2021, or was it just incompetence? I suspect the latter, but remember that inflation – or more precisely, inflation that is higher than borrowing costs – transfers wealth from those with assets to those with debts.
How does stagflation impact a globally reliant economy like Singapore?
Richard: Singapore is a very open economy so it’s going to be very hard to avoid being caught up in a global inflationary trend. I suspect it might also show that having a monetary policy based around targeting the exchange rate is no longer ideal. In almost all other countries, the central bank controls short-term interest rates.
Recently, the Fed announced a rate increase. Tell us about its implications in Singapore, specifically.
Richard: Higher US interest rates will feed through to a rise in borrowing costs in Singapore as well because, effectively, Singapore imports the monetary policy decisions of its major trading partners due to the way the MAS manages the exchange rate. And it’s not just US interest rates that are going up.
How does this impact the average consumer with regards to their personal finances?
Richard: Higher interest rates might feel welcome, if you are a saver with money in the bank. But any benefits are likely to be eaten away by higher inflation. If interest rates are 3% and inflation is 4% then the real purchasing power of your savings is going down. Further increases in interest rates will keep pressure on equity and bond markets. It’s been painful, but it’s probably not over yet.
The effect on the housing market is going to be interesting. It’s usually a good idea to hold physical assets when there is significant inflation and the relative size of homeowners’ mortgage debt could shrink. In the short term, I suspect some property investors will suffer the stress of higher loan payments. Much will depend on the position of the MAS and whether they shift policy towards housing.
The destruction of Hong Kong as a regional economic centre means there is going to be underlying demand for Singapore real estate from abroad for many years to come, so I wouldn’t worry too much about any short-term fluctuations.
What do you foresee in the near and medium term, and how do you think Singaporeans should respond to make the best out of the situation?
Richard: The unfortunate truth is that pandemic-related policies drove global equity and bond markets to excessively high valuations. They were always going to correct. The rush of inflation – and the interest rate hikes that unavoidably followed – has made the adjustment unusually fast and brutal. It isn’t over and there is nowhere obvious to hide.
Don’t respond to weak equity markets by gambling on nonsense like cryptocurrencies and NFTs. Minimise losses by reducing risk. Sorry to say, you’re probably going to be poorer at the end of the year than you were at the start, so focus on limiting the damage.
Share with us your thoughts/forecasts on how the different asset classes will perform, especially relating to precious metals.
Richard: It’s too early to look for a bottom in equity or bond markets. There are probably some shocks to be revealed in private equity markets – just because there isn’t a daily price published doesn’t hide the fact that the value of many of their investments will have collapsed.
Gold should be a good hedge at times like this, but it has failed to benefit from the inflation and geopolitical turmoil we’ve seen in recent months, so it is hard to see what else might make it rise.
Those are my thoughts. I know it can sound quite gloomy, so I advise caution moving forward.