Keeping You Awake At Nights

While the rest of the world battens down for the effects of US's quantitative easing - and the tsunami of billions heading for their shores - the Monetary Authority of Singapore (MAS) appears to play the smart alec contrarian.

From Australia to India, countries remembered their Economic 101 lessons and raised interest rates to stem the tide of inflation. South Korea and Japan announced precautionary measures to dampen rapid rises in their exchange rates which threaten the competitiveness of their exports. The inflow of hot money, estimated at as much as US$2 billion a day, have boosted currencies from the Australian dollar to Thai baht to record highs. Thailand is contemplating capital controls.

Initially, the economists tell us that Singapore need worry only about imported inflation, to justify maintaining the S$ at a record high against the greenback. Now they are saying the capital inflows are channelled overseas, and only a small portion leaks into the domestic economy. The vulnerable stock and property markets, which fuel asset bubble formation, have prompted Hong Kong to implement protective measures, but local experts are claiming "a vibrant stock market benefits investors", and magic bullets have been dispensed against the property madness. It's enough to keep a sane man awake at nights.

In his speech to the NUS Economics Alumni in December 2008, Ngiam Tong Dow touched on how MAS eschews interest rate as a policy instrument, opting instead to intervene directly in foreign exchange markets, trading the Singapore dollar against a basket of currencies predominated by the US$. "While such a policy may be effective against disruptive short-term inflows of foreign currencies, is it adequate as a long-term policy instrument?" he had asked his audience of peers.

Apparently the weapon of choice employed by MAS can be carbon dated to when Goh Keng Swee was still at the helm. Ngiam himself believes that our dollar should be pegged to US$ only, just as two of our major trading partners - China, including Hongkong, and Malaysia - have been doing. Which begs the question whether the MAS is wielding an antiquated blunt instrument, and whether it has left its brain on cruise-control all along. One point is clear, the competitive advantage associated with a weaker currency tends to attenuate the standard of living of the population, and who dares to spoil the partying of the rich and elites?