THE GLOBAL ECONOMIC FORCES: What Investors Must Know

Singapore is a small, but very prosperous, city-state conducting business within a global economy over which it has no control. To invest wisely, it is not enough to know what is happening locally, Singaporeans must have a firm understanding of the forces driving global economic developments – because it will be those forces that ultimately determine the direction of the Singapore stock market, the Singapore property market, the value of the Singapore dollar and trade volumes.

While the global economy is far too complex for anyone to fully understand, it is possible to grasp the most important aspects of it at any one time. The global economy is in crisis because so much credit has been created around the world that it cannot all be repaid. The modern financial system is highly leveraged and poorly regulated. Therefore, a relatively small amount of credit defaults could cause a systemic collapse that would destroy most of the world’s savings. That very nearly happened in 2008.

To picture this situation more clearly, we can picture the global economy like a giant rubber raft – but one that has been inflated with credit instead of air. Floating on top of the raft are all the asset classes (stocks, bonds, commodities and real estate) and the world’s population of seven billion people. Unfortunately, the raft has become fundamentally defective. The income of the seven billion people is insufficient to service the interest on all of the debt that has been created and keep the raft afloat.

Success Resources: http://www.srpl.net/

Another problem is the credit that is continually being destroyed by defaults causes holes in the raft. And that’s where we are now – on a sinking raft.

When it starts to sink, the stocks, bonds, commodities and real estate lose value and the seven billion people become endangered. If the raft really goes under, government policymakers around the world are terrified this will turn into a replay of the Great Depression. So, they respond by pushing the value of these assets back up whenever they become too weak. When they do, raft reflates, all the assets increase in value and the immediate danger to the world’s seven billion people diminishes.

This policy action has profoundly impacted Singapore’s economy. For instance, when the Federal Reserve, the US central bank, prints money and buys assets (an operation known as Quantitative Easing), it affects Singapore in a number of ways, but we most keenly feel the pinch when it causes inflation in Singapore to soar by pushing up the cost of food and energy. In China, its economy very nearly collapsed into crisis in 2009. Chinese policymakers responded by allowing the total amount of bank loans in that country to expand by 60% in just two years. That extraordinary expansion of credit not only pushed up global commodity prices, it also drove up property prices in Singapore as foreign investors in China parked their money here in Real Estate; driving up demand and causing property prices to rise sharply.

Success Resources: http://www.srpl.net/

While the local government has taken steps to control the impact of the global economy on Singapore, there is only so much they can do. We are in a state of extreme disequilibrium and this crisis is far from over. Yet, fortunes will be made by the wise investors here who can accurately judge when government policymakers will reflate the raft with new credit and be prepared to respond accordingly.

Success Resources: http://www.srpl.net/