2009-03-30

Wrong Move Singapore

Bloomberg:
The Monetary Authority of Singapore may devalue the city’s currency and allow it to drop 4 percent against the U.S. dollar by June 30 to aid exporters and lift the economy out of the worst recession since independence in 1965.

The central bank will shift the mid-point of the Singapore dollar trading band at a twice-yearly review in April, according to 15 of 17 economists surveyed by Bloomberg News. The currency is “extremely and ridiculously overvalued,” Patrick Bennett, Asia foreign-exchange strategist at Societe Generale SA in Hong Kong, said last week.
Like many nations, Singapore's GDP is contracting. The problem with Singapore is that, like Japan, it has an economy based far too much on manufacturing and exports. Singapore's current account surplus is 15.4% of GDP, which indicates a currency that I would describe as "extremely and ridiculously undervalued".

Singapore wants to boost its economy by devaluing its currency to make its exports cheaper and more competitive. This is precisely the wrong move. Instead, Singapore should be trying to boost its own consumption, which will happen as the currency increases, rather than decreases in value.

Look, the logic on this is very simple. If a country has been running an unsustainable current account deficit (such as the US) then they should NOT be focusing upon boosting internal demand but upon boosting external demand. But if a country is running an unsustainable current account surplus (Japan, China, Singapore), then the best way to boost their economy is through increasing internal demand.

Put simply, the savers need to spend while the spenders need to save.

The US needs to re-jig the economy so it borrows and consumes less and saves and produces more. Producer nations like Singapore need to re-jig their economies so they borrow and consume more, and save and produce less.

Singapore is not helping anyone in this move - not least itself.

3 comments:

The Flomblog said...

Perhaps the best bet might be to leave business alone? The invisible hand and all that?

One Salient Oversight said...

The Currency market is notoriously controlled by governments the world over. The US dollar is one currency whose value is determined mainly by market forces.

And it is currency interference by Singapore that has led to a devalued currency, a massive trade and current account surplus and, in the end, a bad recession.

China and Japan are the same as well, really.

The Flomblog said...

Perhaps, like many yanks, I'm too provincial?