Economics: Factors of Production

I have never studied Economics academically and always felt it was my impediment as an investor. Now that my kids are taking the subject in school, I got hold of their textbooks and took this opportunity to learn with them. Yes, learning never stops.

In the first lesson in Economics, we are taught that there are four factors of production that is needed to produce finished goods and services. These are the building blocks that form the basis of any economy. Originally, there was only three, but over time, as knowledge increases, the fourth factor was added.

1. Labour: this refers to people, workers and manpower that make things and create services. People are also consumers and as such the largest economies tend to also have the largest populations.

2. Capital: this actually refers to financial and working capital (ie money in layman's term), fixed capital (equipment, servers, buildings) and also other forms of capital such as R&D and intellectual property.

3. Land: this is raw land and also the resources like copper, oil and gold under the land. This also includes forests for timber and water reservoirs. 

4. Entrepreneurship: this is human innovation and the ability to harness the top three factors and ingenuity to generate economic growth.

In the early days leading to the independence of Singapore, economic theory postulated that we could never have created any kind of economy since we have limited capital, labour and entrepreneurship. The biggest problem was that we didn't have land. We didn't even have enough water. Our forefathers really reinvented themselves to lay the foundations of the country and the abundance we have today. 

But it's fortunate we started in the 20th century and it became possible to create an economy and relying a lot on entrepreneurship and innovation.

Huat Ah!

Minimum Wage vs U.B.I.

This was a planned post for the last General Election in Singapore where some debate surrounding minimum wages sparked my interest. It was stated that 90% of all countries have minimum wages and why is Singapore not in that group. Five years on, the world has progressed and today we are talking about U.B.I. or universal basic income and not minimum wages. So like our beloved SAF still conducting training based on WWII tactics, our economic argument on minimum wages had fallen way behind.

We were very fortunate to have survived as a nation state. Looking back, this was only possible at that exact point of human economic development. If Singapore was founded in any other century other than 19th century, we would simply be absorbed by our neighbours. Further if we somehow gained independence in 1915 rather than 1965, we would had perished. We would just become collateral damage given the global belligerence at that time with WWI and WWII. Similarly, if we gained independence today, we stood no chance competing against Shanghai, Hong Kong, Bangkok and Tokyo. We succeeded because of sound economic policies and innovative growth strategies. Let's hope our new 4G Cabinet led by Heng Swee Keat and our current economic strategies will bring us further.

Singapore General Elections, exciting since 1959!

Okay, let's come back to minimum wages. The original arguments against minimum wages were these:

1. It would cause more unemployment because employers would decide not to employ more workers if being forced to choose between hiring one more worker at minimum wage or loading up more work to its current workforce.

2. It would reduce Singapore's cost competitiveness. We have a high standard of living and by setting a minimum wage, we make our cost base even higher, hence further widening the gap between us and our low cost neighbours.

3. Once implemented, there is no turning back and the minimum wage would just keep rising with inflation. This actually hurts SMEs and the poorest the most. This could be true and hence Singapore had moved to use a levy system instead whereby workers will receive both a salary from their employers and a get levy/subsidy from the government if they worked.

Fast forward to today, disruptions and changes in the past few years have made the minimum wage argument irrelevant.

With robots and automation taking over the world, the risk of 50-60% of the world's population losing their jobs is becoming real. The argument has moved on completely. Prominent economists proposed that governments should start thinking about the concept of Universal Basic Income to be given to everyone, rich or poor, fat or thin. (Or more realistically, every household.)

The idea has the genesis that income is a basic need much like air and water. This is probably similar today to mobile phones and internet. We cannot live without these anymore. To deprive someone of income and internet is much like depriving them clean air and drinkable water. So when robots take over 50-60% of all the jobs there is out there, maybe we should give everyone a basic income. Yes, just as industrialization brought in the welfare state catering for the disabled, technological disruption might need to bring about U.B.I.

We just want basic income!

To some extent, U.B.I. is also the logical evolution for the welfare state. Expenses that are already paid out via the welfare system could simply be transferred into the new U.B.I. Alas, Singapore also never implemented a full-scale welfare system. Maybe that would that bring about another set of major political arguments. But no fear! Singapore is the land of Crazy Rich Asians. Assuming our U.B.I. would be $500 a month amounting to $6,000 per year per household, U.B.I. for all citizen households would only cost $7.2 billion, this is just half of our defense budget. We can fund this easily!

There are two important arguments for U.B.I. The first one is that it would eradicate poverty. No children will go without food or shelter. They would be able to afford education, enjoy basic rights, as all kids should. All our aged uncles and aunties would no longer need to clear trays at kopitiams (local coffee shops serving hawker food). This is just socially and morally great! The second argument: it levels the playing field for everyone. While $500 wouldn't mean much for an affluent household, it would pay for good tuition in a middle income family and change the whole game for the low income family. If the Singapore government implements U.B.I., the opposition party would have to think really, really hard to attack the incumbents!

U.B.I would not encourage people to skive because everyone gets it. It is akin to the basic salary in the army. You will always have that. If you are good and get gold for IPPT* or get promoted, you get more. Super lazy bumps or naturally unfit ones might not get IPPT silver or gold or they might stay as a Corporal for the entire National Service but they are not "skiving" bcos of U.B.I. This is an important point and ties back to the previous one: levelling the playing field. 

Most critics would also point to funding, where is the money coming from? Hence it is also key to set the amount right. It cannot be too much nor too little. World experts believe it should be around $500-1000 for most developed economies. Well, as for our own funding, we answered the question, crazily rich Singapore will have no problem funding it.

Huat Ah!

*IPPT stands for the individual physical proficiency test, a compulsory test in the army for all Singapore National Service men. In 2010, 50% of reservists/NSmen failed their IPPT. The test was recalibrated in 2014.

Negative interest rates, skyrocketing asset prices!

This is a continuation of the previous post.

Inflation had always been around, so the nominal zero that we saw was never really zero. Inflation of 3% meant that money depreciated value 3% every year, we just didn't see it so we think it's not there. When inflation is 3% and interest rate is 2%, effectively money in the bank is still being burnt. After the Global Financial Crisis (GFC), nominal interest rate became zero, but inflation was around 1% and hence real rate was already negative. But unfortunately our primitive human minds can only think in nominal terms, not real terms. Hence in the long history of financial markets, nominal interest rate  (ie the one that we have been talking all this while, which is the one always quoted on TV and news) didn't need to go subzero since inflation was always positive.

But now that inflation is negative, things are really different, and actually also dangerous. It might make sense for interest rate to go negative. In real terms, we will still be fine though. In negative inflation or deflation, money now appreciates in value, so negative interest rates serve to stop that appreciation which is not normal and actually harmful.

Banana money issued in Singapore during WWII

You see, deflation is a silent killer. It is not as dramatic as hyperinflation when money becomes worthless like how Singapore's own history with banana money showed (pic above). Banana money notes worth $10 might be just $5 a few months later and then dropped to $3 after a year or two. By the end of the war it was not even justified to be used as toilet paper. There was a famous anecdote told by our late founding father Mr Lee Kuan Yew that when he received his salary in banana money, he simply bought anything he could because the money would be worth much less very quickly. So he quickly bought stuff like a billiard table, machines and what not even when he had not much use for them. It turned out to be an important strategy.

When the next global financial crisis hits, it might be worthwhile to learn this because fiat currency and investment assets could become worthless as the global financial system comes to a halt. It would be vital to own hard assets that are useful for sustaining life: land, livestocks, electric vehicle, solar panel and power generator etc. Well, that's story for another day.

The topic of the day is not inflation but deflation.

Deflation, as alluded to in the previous post, causes a different set of problems. First prices to decline, that's by definition. This procrastinates consumption, slows innovation and brings economic growth to a standstill, which exacerbates further price declines. It creates a vicious cycle and leaves the economy in stagnation. It's a slow death process that could trap an economy indefinitely. Again, we have go back to the Ant-Man analogy. It really feels pretty much like being trapped in the subatomic quantum realm.

Quantum realm, or rather, the black hole from Interstellar

Economic theory tells us that interest rate is the key lever to pull to regulate the economy. Inflation is one of the results that we see, the others being employment and growth. In an economy that is growing well, inflation is usually at around 2%. Interest rates could be around 2-3% to be moved up and down accordingly. If the economy is weak, interest rate should be lowered to stimulate growth and vice versa to prevent overheating. However, conventional wisdom put a limit on this powerful interest rate lever. Interest rate cannot go below zero. When the Global Financial Crisis (GFC) happened, interest rates were lowered to zero. But it wasn't enough. Now that China is at the risk of imploding, coupled with the world slowing drastically, the global central bankers are at their wits end.

Drastic times calls for drastic measures. In order to stimulate the global economy which is not growing and having negative inflation, a few countries started with negative interest rates. If zero interest rate is not enough to get people to borrow money, then we pay them to borrow money! In theory, this should work if it's not prolonged. People would wake up, work harder, come up with ideas, create new businesses which would require capital, borrow money, increase consumption, innovate and in no time, the economy is up and running again.

Unfortunately, reality works differently.

If money being deposited into the bank costs money rather than earning interest and if lending to people means I have to pay the borrowers instead of them paying me, then I better do something else with my money. What will happen is asset inflation. For quality assets, it would be massive asset inflation, perhaps even hyper inflation. The most accessible hard asset for most people is property. So negative interest rates also mean that property prices will skyrocket. This has important implications for Singapore's property market.

Stylized chart of Singapore Property Price vs Value

The chart above shows how Singapore property price and value had move over the past 10 years. Essentially prices nearly doubled from 2005 to 2008 but collapsed as a result of the GFC but went on to more than double, peaking at 220% of 2005 prices in 2013. The red line shows my estimation of the true value of Singapore's property. Recall that in value investing doctrine, we buy when price is less than value. Unfortunately, this only happened once in the last 10 years for Singapore property. This was in 2009 when the blue line i.e. price dipped below my estimation of value which is the red line. Well, we might get a chance in 2016 and 2017 if the world hadn't gone into negative interest rates.

In the following chart we try to understand what happens to value and ultimately price in the negative interest rate environment or NIRE. This has nothing to do with basketball shoes. Here we show prices in blue (price) and red (value) again, essentially the same data points from the previous chart but we also added a purple line.

Stylized chart of Singapore Property Price vs Value in NIRE

In the red value curve, I assumed that Singapore property value grew at 4-10% over the past 10 years. (4% growth during the lean years and 10% for the boom years) and should grow around 4% until 2020. Singapore is a mature economy and hence growth at 4% would roughly mirror GDP growth which is fair. This is just simple compounding at work and we see that in 2020, Singapore property value should be around 2.5x of what it was in 2005. In the graph, it reads about 250 on the y-axis. This means that if property prices remain where it is today until 2020, value gets to be higher than price and we would be able to buy Singapore property soon!

Alas, with the reality of NIRE hitting us (NIRE again stands for negative interest rate environment and has nothing to do with basketball shoes), what is likely to happen is that global money will start chasing high quality assets as discussed in the first half of this article. Singapore property is at the forefront of high quality assets. Global rich started buying Singapore around 2005 which caused prices to skyrocket as we had seen. Billionaires from all over the world starting to buy up bungalows. District 9, 10, 11 properties are already used for money parking of rich Chinese, Indians and Indonesians. This is going to further exacerbate.

This is depicted in the purple line in the same chart. While the red line shows a pedestrian growth in value mirroring GDP growth, negative interest rates know no bounds. We know that property value doubles when rental yield drops by half. Now that yield can go negative, it could only mean value can only skyrocket! In the chart, I arbitrary computed that value could shoot up to 600 by 2020 (vs only 250 for the red line).

To put this into better context, let's use some real numbers. In the past, say a good property in a good location (i.e. District 9, 10, 11) have provide a monthly rental income of S$4,000. This comes up to around S$40,000 a year after subtracting the peripheral costs. A property, valued at 4% rental yield means that its value should be S$1,000,000. As global interest rates fell, some of these good properties are being valued at 2% rental yield, which mean S$2,000,000, which is roughly what it is today.  This was more or less what happened with the Singapore property market over the past decade. Then the government stepped in to cool it down, some rationality prevailed and prices finally started falling in 2014 and 2015.

With negative interest rates, it means that money being put in the bank would lose value. The banks will be charging 1% for funds park there. These rich people having 10 million dollars in the bank will not be happy paying that bank $100,000 every year. They will be happy to buy Singapore property at 1% yield or even 0.5% yield. At 1% yield means the same property we talked about is worth S$4,000,000 and at 0.5% it is worth S$8,000,000. We may see Sky Habitat selling at $3,000 psf some day. This is the reality facing us.

Can this prediction be wrong? Of course, and actually it shouldn't be viewed as a prediction.

Nothing is ever cast in stone. The future is always a set of probabilities ascribed to a few scenarios. This could be one future reality. Its probability of actually happening gets higher if more central banks adopt negative interest rates. The big swing factor being the US Fed. There is always the alternative reality that the world finds its growth trajectory again, we move away from NIRE *Phew* and we get one chance to achieve the Singapore 5C dream again!

Let's hope that's the future waiting for us.

Welcome to the World Of Negative Interest Rates!

The world is going to be a very different place. Since time immemorial, interest rate had been positive. This was very logical, at least to humanity. If we lend someone money, we are expected to be paid interest and at the end of the loan, we would get back the principal. No, that doesn't work anymore. The new rule is if we lend someone very, very credible some money, we would pay this person interest for the privilege of lending him money. Sounds great yah for people like us who are very, very credible! Welcome to the world of negative interest rates.

How did this absurd logic happen?

Well, we need to trace back its origin to the Global Financial Crisis a.k.a. the GFC. It was always said that there were three parts to this trilogy. It started in the US with the expansion of sub-prime credit which finally caused the Lehman bankruptcy. It then spread to Europe, as European banks held a lot of bad mortgages as well. This culminated to the Greek sovereign debt crisis. Now the issues are moving to Asia. This is the last instalment, when the excesses created by the Chinese government trying to avert the GFC caused bad debts and shadow loans across its whole financial system, which is now starting to implode. 

However, the world cannot afford to let China implode. In order to prop up global economic growth, central banks all over world needed more tools. Alas, the most powerful tool it had in its toolbox always had a limit - central banks could not reduce interest rates below zero. It contradicted human logic. So they used other half-fucked methods like QE, QQE, QE2, QE Infinity. It didn't work. Hence, we override the regulator and decided that we should go subzero into the quantum realm, In other words, we removed the arbitrary limit of zero and introduced negative interest rates. 

Ant-man going subatomic to fight his nemesis

Who said interest rates should always be positive? 

The Swiss and the Swedish were the first to experiment with the subzero realm, they have already dropped rates to minus 1%. This actually resulted in bizarre situations like some Swedish sex therapist actually receiving seven Kroner every month for her consumer loan. She's not complaining. The European Central Bank then went negative as well. And last week, we saw Kuroda Sensei bringing out his bazooka and brought the 10 year Japanese government bond interest rates to -10bps. This means that whoever lends money to the Japanese government is willing to pay the Japanese government 0.1%, every year, for ten years. The Japanese government is after all a very, very credible borrower. Investors are happy to pay to lend them money.

Okay, so much so for bizarre advanced countries. Now how might this impact the man on the street? 

So far, bank deposits had been shielded. While consumer banks pay central banks to put reserves with them, the negative spread that these consumer banks incurred were absorbed. However, if rates go further negative for much longer, it would come one day when we have to pay the bank to put money with them. After all, this is again a human-made logic that banks should provide banking deposit services for free. Why should it be free? 

Years ago, when the local banks imposed a fee for deposits less than $1,000 or some other amount, consumers cried foul. Today, it is the norm that is recognized widely: there is a cost to maintain a bank account and we need to put in at least a decent amount. So if we extrapolate the argument, we might some day need to pay the bank to put money, any amount. Theoretically, it could be up to 2-3%. Most credit cards companies charge 2-3% for using their network to settle financial transactions. It had been shown that this could work. So when push comes to shove, the banks might charge 0.5% to 1% initially and move it up to 2-3% for deposits over time. 

Those not willing to pay up can start buying high tech safes to store cash at home. At the same time please make sure no policeman sees your cash and be very careful if they were to conduct an exercise to determine that your safe is indeed safe by asking you to transfer the cash elsewhere. You don't want another Iskandar Rahmat to come after you! The moral of the story here is that there is a cost to deposit money, so consumers would come to the idea that they would have to pay for this service.

The other bigger implication would be inflation of goods and services and more importantly - asset inflation. Interest rates had always had a counterpart called inflation, the invisible enemy. Inflation is much tougher than Ultron or the other Avenger enemies that we have seen. Inflation cannot be too high, once it goes beyond 15-20%, it would morph quickly into hyperinflation becoming uncontrollable and would bring down the space-time continuum and the destruction of the universe. No lah, not so dramatic, but still, it could cause money to be worthless almost overnight, like the Deutsche Mark after WWI or our own banana money during WWII. During those days, whole existence of central banks centered on how they would fight inflation.

Inflation: the metaphorical Ultron

However inflation cannot be too low either. Inflation at 0-1% quickly meant that they would slip into the negative zone. This creates another set of problems like what we saw for Japan from the 1990s till today. Deflation meant prices kept falling, people procrastinated consumption, the economy stagnated, nothing grew, innovation stopped leading to more falling prices and less consumption. It became a vicious cycle. This was why Kuroda Sensei meant literally he would do whatever it takes to tame deflation. He had fired rounds of QE and now the negative interest rate bazooka.

Unfortunately, the world is slipping into this same problem Japan had faced for two and a half decades now.

Interest rates were setup by central banks to calibrate inflation into the sweet spot of 2%. But this is a profound art. It's so hard that no one has succeeded. Alan Greenspan was supposed to have succeed but it could now be argued that by eliminating the normal cycles over that many years (again around two and a half decades from c.1980 to 2005), the Fed created the GFC. We all need our ups and downs to recharge and grow. Earth has days and nights, summer and winter. Life has birth and death and offsprings. That's just universal.

So when inflation goes negative, in order to effectively combat that, interest rates had to go negative. This could be the future.

More on this topic in the next post!

The Impossible Trinity and the Tapering

Quick Summary:

• The Impossible Trinity is an economic theory that states that a country can only control two of the following three levers: Exchange Rate, Free Capital Movement and Monetary Policy.
• The recent Emerging Markets Crisis is a real world manifestation of this theory.
• Countries in ASEAN often chose to control their exchange rate and free capital movement thereby allowing US interest rate to dictate our domestic interest rate.
• This has created stock market and property bubbles in this part of the world and the recent tapering by the US Fed is causing these bubbles to deflate.
• It is not easy for so-called Emerging Markets to actually emerge to become developed countries.

Economics can explain the recent events surrounding the demise of the global emerging markets where countries with weak current account deficits face fund withdrawals and see their currencies crashed and burned. This theory that has caught my fancy some time back is worth mentioning today. It goes by a fanciful name: the Impossible Trinity. The Trinity - as in the female lead in The Matrix. Well... never mind. The theory states that a country can at one time only control two out of the following three economic levers:

1. Exchange Rate

2. Free Capital Movement

3. Monetary Policy (Interest Rate)

It is a futile effort to try to control all three at the same time as dictated by another "chimmer" (more difficult) theory called the uncovered interest rate parity which I have no idea what's it really about but it doesn't really matter. Today, it's about Trinity and the Matrix. Let's go through an example to see how deep the rabbit hole goes see this clearer. We shall use Singapore, our beloved motherland.

Singapore controls exchange rate and enjoys free capital movement. Long ago it was determined that Singapore's small economy would be subjected to the global economic forces and it made more sense for us to control our exchange rate rather than our domestic interest rate. By having control of our exchange rate, we can make our exports competitive and we can also curb hot money flows and tame inflation. This meant that we then gave up control of our monetary policy ie domestic interest rate. Singapore's monetary policy is then, and still is, dictated by our trading partners which are the world's biggest economies and needless to say, the US monetary policy matters the most.

Ok let's now go into the specifics. Are you ready to take the red pill?

Say, Singapore wants to also control its monetary policy. We think that our red-hot property market is too hot. We need the final cool down bazooka measure. Raise interest rates. The impossible trinity states that this cannot be done.

When we raise the domestic interest rate, traders will want to invest in our SGD because it would be more attractive than that of our trading partners. Free capital movement means that hot money would flow into SGD, causing the SGD to appreciate. But at the same time, we want to control our exchange rate. So MAS, the Monetary Authority of Singapore, our central bank, would sell SGD to try to bring the exchange rate to where we want to be. This causes the base money supply of SGD to increase. When money supply increase, the price of borrowing goes down, thereby reducing the interest rate that we wanted to raise in the first place. Back to square one.

Conversely, say Singapore's property market has crashed and burned, led by the skyfall of Sky Habitat in Bishan. If we now want to lower interest rate to help give our property market a boost, again free capital movement allows hot money to leave the country (since lower interest rate meant that hot money should flow to other countries with higher interest rates) thereby causing the SGD to weaken. But we also wanted to maintain exchange rate remember? We want to have the cake and eat it! Not forgetting the cherry as well! So now, MAS needs to use reserves to defend currency ie buy up SGD in the forex market. This reduces the base money supply of SGD dollars which ultimately forces interest rate to go up. And this defeats the original purpose of us wanting to lower interest rate in the first place.

It's the most intriguing economic trilemma!

The origin of the recent crisis in the emerging markets has a lot to do with this. Although it was triggered by different mechanisms: namely tapering and current account deficits.

Most Asian economies have similar models as laid out by the Impossible Trinity in the sense that we allow our monetary policies to be dictated by the US. We just tried to control the other two levers: fix the exchange rate and allow free capital movement. In order to contain the Global Financial Crisis (a.k.a. the GFC), Alan Greenspan, Ben Bernanke and now Janet Yellen allowed the interest rate in the US to be lowered to zero. When that was not enough, they printed money. Lots and lots of money. It's like trillions of dollars annually, that's bigger than a lot of Asian economies - combined. 

It was like opening a tap and just let the liquidity run. The faster the better. All the money/liquidity gushing out had to go somewhere. Anywhere!

Remember that we (as in most Asian countries) fixed our exchange rate? Well we fixed it too low in order to make our economies competitive, the excuse was to allow our exports to sell in the global market. Chinese cheap goods, Thai made cars, Singapore made hard disk drives (well we used to make them before Flash memory came along), Korean gadgets etc. So all these money fled from the US, and from Europe to be parked in Asia. In our stock markets, our private properties and our banks. Yes that's how Sky Habitat soared!

This created the Asian boom from 2009 to 2013 as we saw most Asian stock markets hit highs. But as the US economy recovers, the need to maintain the liquidity tap on diminished. So US talked about tapering. It was a big thing! Tapering wasn't about turning the tap tight and off. It was just like hey let's just twist in by a little, just a little, so that the liquidity gush becomes, well, less of a gush. After all, in Singapore, we are always taught to save water. Now, most public taps don't even allow you to turn it. It's all sensor controlled!

A typical tap in Singapore's public toilets

What happened when the US hinted about tapering? Markets from India to Indonesia crashed. Now it's Argentina, Turkey and the other Fragile Five. China had its own truckload of problems. Man, Tapering became the new Agent Smith (the biggest villian)! And Asians the poor victims... Of course, not all victims are created equal.

Countries with current account deficits got hit very hard. Basically these are countries that import more than they export. So with tapering, money flows out, their currencies weaken, further exacerbating the current account deficits which could result in a vicious spiral that they cannot get out. In short, weak currencies leads to bigger deficits which leads to even weaker currencies. Crash and burn! This is not unlike the Asian Financial Crisis in 1997 when some of the currencies declined 70-90% vs the USD, never able to recover since then.

In the end, emerging countries have seldom proven if they could really emerge. Most don't. Even China is having a tough time trying to catch up with the rest of the developed world. It's still much easier to stick to investing in global names with proven track records.

Meaningless Millionaires

We might have reached the end of the line for fiat currencies. This has been talked about in economic circles but perhaps the most people are still not aware of its drastic consequences. While nobody thinks it will be anything like Germany after WWI or Singapore's banana money after WWII, the end result is not great. We are going to see a lot of meaningless millionaires.

I just found a good description of what it means to be a millionaire from my favourite encyclopedia.

From Wikipedia: A millionaire is an individual whose net worth or wealth is equal to or exceeds one million units of currency. It can also be a person who owns one million units of currency in a bank account or savings account. Depending on the currency, a certain level of prestige is associated with being a millionaire, which makes that amount of wealth a goal for some, and almost unattainable for others.

The story started in 2008 during the Lehman collapse. The US govt pulled out all the stops to save the global financial system. It printed and printed and printed money. It is often said, Bernanke is a student of the Great Depression. If he had to throw sacks of dollar bills out of the helicopter to encourage people to spend, he would do it. And he did, figuratively.

This lead to the debasement of the US dollar, the world reserve currency.

Now we are seeing it in Europe. While the political bickering stopped the 27 governments from carrying out its actions promptly, ultimately, back-stopping everything that can go wrong by printing is recognized as the way out.

Well, there is another painful path, which is to let parts of the system fail and start over, like Iceland. However, policy makers cannot risk that and thus we go back to the printing press. Anyways this path also leads to the collapse of the currencies involved.

China had done its part with the 4 trillion stimulus although the effect on the yuan is less visible due to the peg. Most of it ended up in shadow banking and also the foreign reserves.

The Swiss came out with a bang with its unlimited intervention to keep the Swiss franc competitive.

The British more or less didn't have to do anything while the market sells its pound to historical lows.

The last major currency holding out is the Yen. But with its Government debt to GDP at 200%, higher than Greece, Italy and Spain, it might just be a matter of time before the yen implodes. Meanwhile, they are doing some stealth intervention.

What about the Singapore dollar? Our Govt has always maintained that we need the SGD to remain strong in order to offset inflation.

But there is a limit to how strong SGD can get, if not, our exports will crumble, or worse: we might give the Chinese or global HNWI (High Net Worth Idiots Individuals) the impression that Singapore's property is the safest haven in the world and the SGD can never depreciate. ie all the more reason they push up the red-hot property sector. This will lead to more unhappy Singaporeans and bring about the end of the PAP regime. So that's a no-no.

So basically all global currencies are going into competitive devaluation, what this means is inflation, or worse stagflation - inflation without real growth.

Actually, the story didn't start in 2008. The prequel was when Alan Greenspan took over as Fed Chairman in 1987. And for the next 20 years he re-engineered growth of the global economy into a one that doesn't go through normal business cycles of boom and bust but rather grow in a 45 degree straight line for more or less 20 years.

This has a drastic impact on inflation longer term but the effects were not felt for the most part of the last 2 decades. The true inflation is also masked by obscure methods of calculating inflation like adjusting for productivity or quality. For example a laptop bought this year at the same price as last year is counted as -50% in price (bcos the CPU speed doubled), imagine the impact on inflation with a portion of the 350 items counted like that!

All-in-all, what these means is that money is worth less, much much less than it was 20 years ago. Long term inflation as stated in textbooks is always roughly 2-3% per year. But I would say that the true inflation over the last 20 years might be closer to 5-6%.

In the last 3-4 years, inflation basically went stratospheric, in Singapore it is 5-6%, but again, the true rate might be double of that at 10-12% or even more. Just roughly speaking, taxi prices when from $15 for airport to town, to $30 now, with peak surcharge and airport surcharge and ERP and another couple more dollars if you suay suay ganna the premium cabs like the black Chrysler.

That is roughly over the span of the last 5 years, so that's 100% inflation over 5 years - ie 20% per year.

With that in mind, 6% inflation for the last 16 years, and 12% for the last 4 yrs.
That means that 100 dollars 20 years ago, is probably worth like 25 dollars today.
This also means that a millionaire today only has 1/4 of the true net worth or spending power compared to a millionaire 20 years ago.

In a capitalist society like Singapore where aspirations of financial freedom, millionaire by age thirty-five are abound, the implications are profound. Who wants to be a millionaire? Sorry, it's actually who wants to be a $250k-aire?

The truth is, being a millionaire is no longer enough. A millionaire today is not even half of what it was.

A millionaire tomorrow is basically meaningless.

It means you can probably buy a HDB flat (which would have taken up 70% of that amount) and live happily for like 5 years. Then inflation catches up and you realize that a proper restaurant meal costs $150 (today it's about $60 today for a family of four), your car cost $200k and your insurance can cover your taxi fare to the hospital ONLY.

Even if you don't count the first property (which is traditionally the way to determine a true millionaire, ie not counting the first property), it's still pretty meaningless. Bcos a millionaire definitely cannot buy a 2nd property anywhere in Sg and the same food, transport, medical inflation would destroy wealth faster than you can say "final answer".

So, who wants to be a millionaire?

The New Singapore Economy - Part III

This is a continuation of the previous two posts:
The New Singapore Economy - Part II
The New Singapore Economy - Part I

I guess the one major issue with the paper's Rengeration Plan as it was called, was actually the sustainability of the various measures. Just to jot down a partial list of proposals:

1. Doubling the no. of schools and teachers
2. Doubling the no. of hospitals and medical professionals
3. Waiver of Govt fees and taxes such as GST for basic items etc
4. Reducing the cost of raising kids: free education, monthly allowance, more maternity and paternity benefits etc

The problem here is that both schools and hospitals do not make money. Hence the first two proposals increases the burden on the State. At the same time, the last two proposals take money away from the State by reducing its revenue, either with lesser tax and fees or increasing cash outflow such as more allowance, more benefits etc.

While I think we can accept that the first $60bn sunk into building the initial infrastructure can earn zero return (after all it's a Govt, not a profit making entity), it might not be prudent if, on an on-going basis, all the measures simply run losses with no possibility of breaking even on an annual cashflow basis.

Just take an example of a school. The new school has on average say 600 students. Suppose we double the no. of teachers from currently maybe 30 to 60 teachers. In order to attract more people to become teachers, we need to pay them more, say on average $80k per teacher. This means that payroll alone is close to $5mn, including other running costs such utilities, peripheral services like security, maintenance etc, we might be talking about $6-8mn annual cost per school.

With zero revenue since school fees are proposed to be free, and 800 primary schools in Singapore, this alone is $5-6bn. Today, Education consumes just $8-9bn in our Budget including secondary schools and tertiary education. Hence this Regeneration Plan with the doubling of just primary schools and teachers will almost double the burden to the State, with no way of squaring the equation on the revenue side.

Of course the argument is that our Govt always incur surpluses, year in year out, which means that it has too much revenue in the first place. So doubling the burden is just making things right. It is okay to have a $14-15bn Education spending, which by the way will make Education the biggest spending, even bigger than Defense at $10bn.

Nevertheless, it might be prudent for these schools and hospitals to introduce some kind of revenue measures to offset the huge costs. Sustainability has always been a key aspect of our system and I believe our leaders really did get it right for some of the best sustainable systems put in place in the early years.

So how can we make the plan more sustainable?

With schools, we could have a two-pronged approach:
1. Endowment/Foundation for Primary and Secondary Schools
2. Aim to be a Tertiary Education Hub attracting foreign students

The Govt can setup an Endowment Fund for all Singapore primary schools and encourage old boys and girls to donate to their alma mater. Their donations can be tax deductable which would mean those who are successful would be keen to donate more.

Some of the most prestigious universities in US have endowment funds that are so big that they need to invest this money professionally for a good return. Our endowment funds should strive to do the same.

For tertiary education, we have already made some inroads in the private sector. Insead and Chicago have their MBA campuses here. The Govt should devise a comprehensive plan to make Singapore an overall education hub in Asia. Revenue made at the tertiary level can be used to subsidize primary and secondary schools.

For hospitals, there is only one option: become a medical hub. ie they would have to attract overseas patients. This means that Singapore has to become a 1st class medical hub that can compete globally with Bumrungrad in Thailand and Mayo Clinic in the US. The potential is definitely there. Our private hospitals such as Mt E Hospital have already made an impression in the region. It shouldn't be too difficult for the Govt to succeed as well.

It will take some time to achieve sustainability so perhaps the most important task for the Govt when it does embark on the Regeneration Plan is to optimize its revenue from taxes such that it can support the system during transformation (as the schools and hospitals try to gain sustainability).

It would probably mean more taxes from the rich and famous, more revenue from property (the playground for the rich and famous) and perhaps some cost savings by de-emphasizing Defence, reducing fat from every civil sector and *drumrolls* reducing Ministers' Pay: the No. 1 item on the voters' wishlist!

The New Singapore Economy - Part II

This is a continuation of the last post.

As with the Govt, various Ministers took pain to tear down the proposals in the paper by biting on points that appeal to peoples' hearts and emotional logic. These are:

1. The $60bn Price Tag
2. Raiding Temasek
3. Loss of Manufacturing Jobs

The first big rebuttal that came about was the big price tag. $60bn is unheard of. Our Govt annual budget is roughly around $30bn. Big no.s floating around are usually terms of millions or single-digit billion like YOG cost overrun ($300mn), Grow and Share Package ($3bn) and Lehman Crisis Emergency Help Everybody Fund ($10bn or so, which drawdown our Reserves for the first time).

However, it was not mentioned that the $60bn would be spent over 5 years. In fact I think it is more likely that it is spent over 10 years. This would be a more reasonable $6-12bn per year. Also it was highlighted that the Govt surpluses over 5 years (over $100bn) would have been more than enough to fund the $60bn.

An additional funding source mentioned was Temasek Holdings. $60bn was roughly just 1/3 of Temasek's portfolio and hence not a major issue. In fact by reducing Temasek's stakes in various listed entities (over a couple years), we could add liquidity to our equity markets and attract more investors to invest in Singapore.

While I do not know if that's entirely workable bcos it would cause major stock price disruption to the various listed entities and change the way investors look at these companies, I think the idea deserves scrutiny rather than the usual simply-brush-it-aside bcos it didn't originate from the Govt.

Perhaps the biggest hoo-ha came from this 3rd point of de-emphasizing manufacturing. 25% of Singapore's economy relies on manufacturing which support hundreds of thousands of jobs. Is this guy crazy to even suggest this?

On closer look, maybe not, you know... Below is a list of countries and the size of their manufacturing sector in % terms relative to the size of their economy.

China 33%
Korea 25%
Singapore 25%
Japan 22%
Germany 22%
Italy 18%
Brazil 15%
US 13%
UK 13%
France 5%

As you can see, most developed countries have a small manufacturing sector (less than 20%) unless they have an edge in manufacturing such as Germany and Japan. Of course in China and Korea, they compete on other factors such as lower cost. But what is the edge that Singapore has against these countries? Why are we pursuing manufacturing? Can we make better cars than Germany? Or better ships than Korea and China? There is no good answer.

The model that we have pursued 50 years ago might no longer be so relevant. Back then Singapore was as cheap as China today, we had a young population and we needed to provide a lot of jobs, fast. Today, we are so different. Things have changed.

On the other hand, the service industry suits our highly educated workforce and is not subjected to the volatility of global consumer demand. Singapore already have some brand with its education, healthcare and creative industries. We can definitely leverage on that and grow them bigger.

Granted, there will be a lot pain during the adjustment but what was proposed does make sense. Again my point is that we shouldn't just brush it off. Someone should be doing more study into whether this actually works.

Of course, the other angle is also that actually our Govt is already doing it. They might have started to shift out of manufacturing years ago. And we did get LucasArts to setup shop here and we got Chicago and Insead to have their MBA campuses here. But still, we shouldn't have built the casinos, right?

Next post, we look at some of the real issues with the paper.

The New Singapore Economy - Part I

One of the Powerhouse Opposition candidate Mr Tan Jee Say wrote a comprehensive paper to revamp Singapore's economy recently. I had the opportunity to read it in full and I must admit it's IMPRESSIVE. You have to give it to him (and the Govt training that he went through). After all that's the quality we would expect from a former high ranking civil servant and PPS (Principal Private Secretary) for the top officials.

Here is my unabashed point form summary that really doesn't do justice to the 45 page report. I urge readers who are free to read it in full. It's available on the onlinecitizen website. Here are the points:

1. Mr Tan Jee Say thinks that Singapore's economy should move away from manufacturing as this industry takes up too much land, labour and resources and Singapore is in short of all three elements. Manufacturing also adds volatility to our business cycle as it relies on global exports which is dependent on fast-changing consumer demand. In today's knowledge based economy, Singapore's reliance on manufacturing does not make sense.

2. Partly due to our big manufacturing industry (and also other reasons), the Singapore Govt had to rely too much on cheap foreign labour to generate GDP growth. This resulted in economic benefits trickling down to foreigners rather than the bottom 20%-30% of the population, causing their income to stagnate or even fall.

3. Singapore's future lies in the service industry but the Govt went into the wrong kind of services by building casinos. The emphasis should be on education, healthcare and creative industries.

4. Cost inflation in Singapore is largely driven by the rise of non-tradable goods and services (55%). While import prices accounted for the rest (45%). This means that costs like labour, fees and perhaps most importantly rental accounted for a significant portion of cost inflation in Singapore.

5. He proposed a $60bn package to address various needs including a restructuring of the manufacturing industry, promoting education, healthcare and creative industries, improving neighbourhoods and quality of life and a reduction in various fees that has added to cost inflation.

The paper also highlighted economic irregularities amongst various issues that really challenges some of our basic assumptions in Singapore. At least to me, it was a totally worthwhile read that was not only informative but also highly educational on economics, policies and moral issues.

Just as an example: he mentioned that the Sg Govt usually resort to price-mechanism to control demand such as in the case of ERP for driving and Foreign Work Levy in the case of importing foreign labour. However there are flaws with price-mechanism bcos the crux of the issue sometimes lies in supply or demand dislocations and using price does not solve the issue but simply add money to Govt coffers.

Take the case of ERP. The real problem has to do with too many cars and not enough roads. In 10 years the car population increased by 20-30% while the length of roads stayed the same. So is it a surprise that raising ERP doesn't work but just add money to the Govt coffers?

In the case of Foreign Work Levy, raising the levy benefits neither the employer nor the employee. Instead it benefits the Govt. So obviously, the Govt would use it in the first instance to restrict employers from recruiting too many foreigners. However this does not solve the fundamental problem: manufacturing and some industries like construction, low-end services are not suitable for Singapore's knowledge based economy. Hence we need to import foreigners to fill the gap.

On moral grounds, the paper also highlighted that is was not just economic no.s that matter, Govt should implement measures that are also morally right.

So, casinos was a major setback. While the Govt tried to promote a different image via the concept of Integrated Resorts, the truth of the matter is casinos come with social costs/issues that are very difficult to avoid.

Minimum wage, besides having a strong economic argument, is also morally right. If we ask for the service and effort of others, we should pay them what is an acceptable minimum amount in our society. When foreigners come, this concept is totally lost and the lower income households bear the full brunt.

Next post, we look at some Govt rebuttals!

Wealth, innovation, hardwork and others

This post serves as clarifying some economics concepts for myself also. It has to do with wealth and how it links to being rich and famous and getting adored by the masses.

Imagine that the world has only 2 pple: 1 farmer and 1 fisherman. The farmer harvests some rice every day and the fisherman catches some fishes. The farmer will sell some rice to the fisherman and vice versa. So the money supply in this world has maybe like $4, $2 with the farmer which he gets from selling 2 kg of rice and $2 for the fisherman who sells 2 kg of fish.

So the question is how can either of them get richer?

This is quite easy to answer, say the farmer is the aspire-to-be-rich kind, so he contemplates to be richer than his other companion on this lonely Earth. Well, what can he do? He can raise prices.

Say previously he sold 1kg of his rice for $1 to the fisherman. Now he can sell $2 for 1kg. Then he will be earning twice as much! How wonderful. But then since there is only one other person on this lonely planet, i.e. the fisherman, he will raise prices too unless he is stupid or something.

Then we get into a situation called inflation. Nothing really changed just that things got more expensive. It doesn't mean that if you have more dollar notes, you are richer.

So how does the farmer REALLY gets richer than his companion?

1) He can work harder than his companion, he harvests more rice and sell more to his companion. But since his companion may not be as hardworking, i.e. the fisherman only catches the same amt as previously, he will not be able to sell more fish to get more money to buy more rice.

The farmer's wealth in this world is restricted by the total money supply of $4 so the farmer get "richer" by way of having more free time since he can store up his harvest and wait for the fisherman to have more money to buy from him.

Or he can sell more rice on credit to the fisherman and now he gets more dollars in his safe deposit box while the fisherman has some debt.

2) He can cross pollinate the rice grains and sell a new grain of rice which is more delicious and charge his companion more for each kg. The fisherman "naturally" has to understand the quality difference and is willing to pay more for delicious rice. But again bcos the fisherman may not fish better quality fishes, he is again limited in his capacity to spend and the farmer gains by having more free time or getting money on credit again.

So in other words, the farmer get richer than the fisherman either by working harder, by thinking harder (innovate a new grain of rice) or by luck. Well, the farmer can get lucky and somehow the rice mutate by themselves into a better grain and he then sells it more expensive to the fisherman.

Well there is a fourth way, but it delves into immorality like by cheating the fisherman, telling him the rice is a kind of new grain but in fact it is not. Sadly, a significant proportion of rich people actually amass wealth through this fourth method.

So how can both of them get rich?

It can only be through improvement in efficiency (or technology advancement) for both of them. Say both the farmer and fisherman somehow managed to harvest and fish much more in the same time versus previously, they can then sell to each other in higher volume and get more dollars from each other (i.e. an overall increase in wealth).

If you think of these issues in our world today. Usually most people get rich by through their own hardwork or innovation or luck (or some through deceit), and they managed to amass wealth ahead of the population. But bcos the population is not as advanced as these rich people are, the poor simply gets left behind, becoming poorer in a relative sense. In our 2 pple world, the money supply is restricted bcos there is only 2 pple so the rich farmer can only get more free time or earn money on credit. But in the real world, the rich amass fortunes from 6bn other poor pple. So they get a lot of dollar bills - which are credit to buy services from the society.

The true accomplishment would be the raise the bar for all pple so that everyone gets richer. But this is a feat that is difficult to achieve. Why would the rich raise the bar for everyone so that they become poorer in the relative sense? But for those that do that, we gotta take our hats off to them.

Near Monopoly Part 2

To illustrate Pt 4 and 5 of the previous post, we look at a Singapore company: SMRT. As with railroads in other countries, SMRT is a kind of natural monopoly bcos the capital outlay is so intensive, no competitor can come in and build a similar infrastructure just for the sake of competition. Even our beloved Government tried that and failed when they gave the North East line to another operator only to realize it doesn’t work.

So SMRT is in a good position to basically do whatever they want to enjoy supernormal profits.

First, they raise prices like nobody’s business. Well it’s subjected to approval from the LTA but heck, LTA always approves anyways. So the Singaporean passengers comprain and comprain like there’s no tomorrow. Actually in my opinion, it helped bcos SMRT became less aggressive somewhat after seeing the social repercussions. The truth is, Singapore train fares are probably still quite low at 70c for 1 station compared to global average of roughly US$1. So prepare for MORE fare hikes to come.

And after raising fares, the quality of service actually drops. That’s probably the unforgivable action. Trains take more than 10 min to arrive at non-peak hours and they frequently break down with minimal repercussions. Talk about 1st World Service!

Nonetheless, the shareholder benefits. SMRT shareholders have seen net profits grown S$100mn to S$160mn over the past 10 years. Dividends more than doubled from 3c to 7c. If you have bought SMRT at 60c (roughly the IPO price), dividends over the past 10 yrs would have reaped 40c. Not to mention the price today is $1.6.

With increasing population and real estate potential from re-developing its stations, SMRT’s future growth may not slow down unlike some other Singapore monopolies like SPH and Singpost. There is also the wildcard of whether the other future lines (Circle, Downtown etc) will be given to SMRT to manage as well. Again since most of the capex is done by the Government, it's a free lunch for SMRT and its shareholders.

However, it is likely that the company will continue to squeeze the commuters by providing ever declining quality of service and at the same time raising fares whenever the opportunity arises. Hence it is prudent for every commuter to become an SMRT shareholder.

As a shareholder, besides the dividends and capital gain, you can go and eat free food at the AGM and screw the management by asking tough questions. Hopefully they wake up their ideas and start to look at BOTH profits and services.

Near Monopoly

Companies with dominant global share are usually capable of generating supernormal profits. Sadly, in Singapore, such companies are hard to come by and hence this important factor is rarely looked at and discussed.

As Economics 101 would tell us, monopoly or near monopoly creates many conditions that is ideal for the market leader. These includes

1. Huge economies of scale – hence able to produce at a lower cost than most competitors

2. Bargaining power with clients and suppliers – to the extent of pricing out other competitors or ousting them in other ways

3. Advantage in capital outlay – a market leader does not need to spend as much as a competitor when increasing capacity bcos it can always leverage a lot on its existing structure (including distribution, sales and marketing etc)

4. As a result of stifling competition, the market leader now has pricing power. Basically it can price its product or services at any rate and customers will need to accept as there is no alternative

5. Reduction in cost of operations, and hence leading to a reduction in quality. The market leader now can reduce its cost of operations – including perhaps reducing the amount of input material cost or cutting sales force. This leads to reduction in quality of product or service

I guess the whole Singapore society is an apt reflection of monopoly works. Prices are ever rising yet quality of product or service keeps dropping. As consumers, Singaporeans keep suffering. Hence it is important for us to become shareholders as well, and so more or less offset the shit thrown at us as consumers.

*Sigh*, that's life in Singapore. Tomorrow will be better. Or so we hope.

Anyways, as an example to illustrate Pt 1, 2 and 3, we have HP laser printers. HP has a dominant share in the global laser printer market. Around 60% market share. As a result of this, they have huge economies of scale. They can produce laser printers and more importantly, the ink cartridges, at a much lower cost than all other competitors. However there is no need to sell the cartridges at a lower price than competition bcos they enjoy a good brand name. But if they wanted to, they could easier crush all other competitors by selling their cartridges at a much lower price.

Since they are the No.1 leader, they can always demand the best shelf space in electronic stores, or lower distributor margins, or bargain for lower prices with their parts supplier (those who supply the various small components inside the printer).

Of course, they can build new production lines and bring in new capacity at a much lower cost than all others. So how can anyone compete at all? Despite this, the never-give-up Korean superpower Samsung is fighting hard to break HP’s monopoly. We shall see if they have the same success with LCD TVs.

Next post, we look at a Singapore company on Point 4 and 5.

More on inflation

In the last post, we talked about how inflation will hurt us badly. Today we shall discuss some countermeasures.

So inflation is a major issue if you think hard about it. All your savings goes down the drain and you are back to square one. You think you save S$1mn for your retirement and that should be enough. But hey 30 yrs from now, S$1mn cannot even buy HDB, Bcos the value of S$1mn in 2038 is worth only S$300,000 in 2008 and basically you might even have lost money even though you saved like mad for the past 30 yrs. What the heck! What should we do?

Actually there is nothing much we can do, except to invest in stocks and real estate properties. Historically these are the only two asset classes that can keep up with inflation. With stocks, you are buying pieces of companies and good companies will create value for their shareholders, inflation or not. The same goes for real estate.

There are some other unconventional methods to beat inflation completely original from this blogger so just read for fun and implement at your own risk!

1) You can increase your debt! Inflation helps debtors bcos the money they owe also decline in value, so if you borrow tons of money before inflation kicks in, next time you only need to pay back less than what you borrowed in real terms. But you must not put them in your bank and earn fixed D bcos then your fixed D also decline in value and you suck thumb. So you must borrow money and spend them asap, like buying Prada bags and Ferragamo shoes and satisfy your immediate desires! So maybe not much help to build your retirement nest.

2) Buy stuff that will retain its value over time, this means buying things like limited edition Rolex watches, silver, gold, white gold, platinum jewellery or other maybe pure gold bars. (Not diamonds btw, if the real supply of diamonds are released into the global markets, 1 carat diamond is worth as much as 1g of sand, the perceived high value of diamonds can be regarded as the biggest marketing gimmick in our times. Sorry girls, diamonds are worthless, contrary to what you think).

So back to the original solution: nothing beats buying stocks and properties to combat inflation, so keep your savings in these asset classes. The rest of the asset classes like cash, bonds, other currencies sadly will not help much.

The return of inflation

Most of us never really lived through periods of high inflation, thanks to very effective central banks throughout the 80s until today. But with recent rise in commodity prices translating to higher food prices, higher raw material prices, higher property prices, higher taxi fare, higher this, that and everything else, inflation may be coming back to haunt us. And believe me it's gonna be scary.

It is generally accepted that mild inflation is actually good for the economy bcos it helps increase wages, improve productivity, encourage employment and keeps the economy churning along and all is well. But usually this means inflation of 2-3% per yr or something. And if wages increase by 5% per yr then it is a real increase over inflation and everybody is happy!

However, this time round, the world, and hence Singapore (or maybe more Singapore) may be going into a period of not-so-mild inflation. This means inflation of maybe 5-10% per yr. Although not as bad as hyperinfation, this has very drastic consequences for value investors, or rather, everybody.

A bit of digression here. Hyperinflation refers to inflation getting totally out of whack and hence the value of the currency of the sovereign entity goes down the drain. This means that in people's eyes, the currency has no value and becomes as good as banana money (read further down to know more abt this) or simply worthless paper. The worst case of hyperinflation is of course Germany in the 1920s when the inflation rate was 10^27 times.

For those who fail to comprehend the significance of this, it means that $1 today get reduced to 1/1,000,000,000,000,000, 000,000,000,000 of its value. To put it in another way, even if you are a gozillionaire in Deutsche Mark, ie you have 1 million billion trillion Mark, all you have becomes $1 at the end of the day.

Basically your money is worth even less that the paper used to manufacture the note.

In Singapore, of course, we have our infamous case of the banana money issued by the Japanese military during WWII. Luckily or unluckily $1 of banana money becomes only 1/1,000 of its value by the end of Japanese occupation.

Well all these seems a bit far-fetched and probably we will not see such dramatic times again. So back to the real story, if inflation hits us at 5-10% per yr what happens? Well let's work with 8%pa (I like my blog name you see). This means that your money loses 8% of its value every year. Basically in 6 yrs, every dollar you save becomes 50c. Even if you invest wisely and earn 8%pa return, it only means that your $1 stays at its original purchasing power.

In reality $1 you invest becomes $1.08 after 1 yr but your Kopi-O also jump from $1 to $1.08 so effectively your investment did not help you build up your wealth.