Wednesday, September 04, 2013

Lessons from Singapore’s Central Bank: Central Banks are Vulnerable to Bankruptcies

Mainstream media and their favorite experts continue to impress upon the gullible public that foreign currency reserves acts as a shield against the risks of a crisis.


Well based on this theory, Singapore’s humongous forex reserves (more than twice the Philippines) imply that the current meltdown suffered mostly by emerging markets should have Singapore the least affected. 

Reality has shown otherwise. 

10 Year Singapore government bond yields continue to unsettle now at 3 year highs

The Singaporean Dollar has been sold off. The USD-SGD on an uptrend since December 2012.


The ASEAN meltdown has Singapore’s STI reeling from the ASEAN bear market forces.

While Singapore has technically not yet in a bear market, the break below the June lows and the recent ‘reprieve’ or tepid ‘suckers’ rally reveals of the STI’s vulnerabilities.

In my view, the stress in Singapore’s markets exhibits an ongoing deterioration of trade and financial linkages with ASEAN.

Now Sovereign Man’s prolific Simon Black propounds on how central banks can go bankrupt using the recent Singapore experience. (bold mine)
A few months ago, the Monetary Authority of Singapore (MAS), the country’s central bank, released its annual report for the fiscal year ending 31 March 2013.

And the results were ‘shocking’, at least for those of us who read central bank annual reports cover to cover like a Harry Potter novel.

The bottom line for MAS showed a mind-boggling S$10.2 BILLION loss (roughly $8 billion USD), about as much as General Motors lost in its worst year.

This is the antithesis of what one would expect from Asia’s dominant financial center. And it begs the question– how can a central bank, which has the power to conjure money out of thin air, even suffer a loss, let alone such a heavy one?

Simple. MAS was desperately trying to hold back the Singapore dollar’s rise against the US dollar.

Because Singapore is a trade-based economy and the US dollar is so central in international trade as the world’s reserve currency, MAS has been trying to keep the Singapore dollar somewhat restrained vs. the US dollar.

Essentially MAS was buying US dollars and then intentionally selling them at a lower price in order to create artificial demand for US dollars.

This was a completely failed strategy.

Singapore’s ultra-healthy economy attracts investment from around the world, and the natural tendency is for the Singapore dollar to rise.

This rise has been even more pronounced given Ben Bernanke’s journey into monetary madness over the last several years.

Since 2008, the Singapore dollar steadily appreciated by more than 20% from peak to trough as investors sought a more stable currency alternative. After all, Singapore is a very strong, growing economy with zero net debt.

Because of these factors, MAS lost a prodigious sum trying to prevent its currency’s natural rise; the S$10.2 billion they lost constitutes roughly 3% of GDP.

In fact, Singapore’s economy only grew by S$11.5 billion from 2012-2013… so MAS managed to blow through 87% of the country’s economic growth last year fighting Ben Bernanke. Crazy.

This is something that is clearly not sustainable. And while that term is a bit overused today, such losses cannot continue indefinitely.

A central bank CAN go bankrupt, often creating a major currency crisis. And this is what suggests to me, above all else, that the fiat system is on the way out.

Fiat currency has been the greatest monetary experiment in the history of the world. Four men control over 70% of the world’s money supply, giving them control over the price of… everything.

And this system is so absurd that, healthy nations like Singapore are forced to lose billions in order to keep playing the game.

That’s exactly what it is– a game. Like most nations, Singapore has been playing this game for decades while the US changes the rules whenever it sees fit.

And it’s becoming obvious that the cost of playing is now far exceeding the benefit it receives. The hard numbers are very clear on this point.

This spells one inexorable conclusion: game over.
Another interrelated consequence of this US dollar recycling (vendor finance scheme) by Singapore’s central bank has been to blow homegrown bubbles 


Growth in the loans to the private sector has virtually been skyrocketing


Singapore’s surging housing index has passed the 1997 Asian crisis highs!


And domestic credit to the private sector at 112% of GDP is about the highs of the 1980s and similarly approaches the Asian crisis highs of 1997.

I don’t have data on the claims to the banking system on ASEAN by Singapore and vice versa, but I suspect that there may be significant private sector exposures on the ASEAN investment corridor, as well as ASEAN investments in Singapore

Should the ASEAN meltdown continue or deepen then the risks of a regional crisis grows. 

We should thus be vigilant on the conditions ASEAN markets

And despite the denials of media and their clueless highly paid mainstream experts, we should expect the unexpected 

Mounting losses compounded by economic slowdown or recession will place central banks on the spotlight.

Caveat emptor

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