How money grows in Singapore

Between 2000 and 2010, M2 money supply grew 135%, or 8.9% a year in the past 10 years, to $401.4 billion.

Thu, Feb 10, 2011
The Business Times

By Teh Hooi Ling
Senior Correspondent

IT all started with a friend's Facebook status update a couple of weeks back. She posted: 'The critical ingredient is getting off your butt and doing something. It's as simple as that. A lot of people have ideas, but there are few who decide to do something about them now. Not tomorrow. Not next week. But today. The true entrepreneur is a doer,not a dreamer.' - Nolan Bushnell: Founder of Atari and Chuck E Cheese's.

Her friend Cindy Gallop liked the post, and commented by including a link http://www.ifwerantheworld.com/

Ms Gallop had quit a successful advertising career as chairman of Bartle Bogle Hegarty in 2005 to do something different. Today, she continues to work in branding and advertising as a consultant, but is also tending some fascinating projects of her own. She launched Make Love Not Porn at TED2009. In January last year, she launched If We Ran The World, a simple web platform designed to bring together human good intentions and corporate good intentions, and turn them into collective action.

So I went to the If We Ran The World website and found a simple page with the words: 'If I ran the world, I would (...)'. I typed in' deemphasise the money culture' in the blank space, and pressed 'enter'. The next screen which appeared said: 'There are 16 available micro actions, three superheroes and 11 action platforms that match your good intentions.'

Of the list, the one item which caught my attention was: 'Watch Zeitgeist-Addendum on YouTube or Google.'

I did. It was a two-hour show which talked about how the modern world has such unwavering faith in money. The capitalist world is built on the notion of scarcity. A better system, the film argued, is a resource-based economy where all goods and services are available without the use of money, credits, barter or any other system of debtor servitude. The premise is that the Earth is abundant with plentiful resource, so all resources should become the common heritage of all of the inhabitants, not just a select few.

One part of the film talked about the monetary system. It claimed that the growth of money supply is inherent in a capitalist system,which is why inflation is inevitable. Evidence: an apartment which was bought for $20,000 in the 1970s can now be sold for $500,000.Basically, there is just more and more money being circulated as time goes by.

The film showed a chart of the money supply in the US since the1950s and juxtaposed that against the chart of the US national debt.The trajectories of both charts are strikingly similar, leading the film makers to conclude that money is created out of nothing but government debts. That in fact is the argument of the Modern Chartalism theory, which states that under a fiat money system, net currency is created by government through deficit spending.

That set me thinking. The Singapore government runs a budget surplus year after year. How is the money supply in Singapore created? And oh my, how the money supply in Singapore has grown.

M2 money supply in Singapore - which includes currency in active  circulation, demand deposits of the private sector, fixed deposits,Sing dollar negotiable certificates of deposits, savings and other deposits - totalled $170.9 billion at the end of 2000. By November last year, M2 in Singapore had ballooned to $401.4 billion. That's an increase of 135 per cent or 8.9 per cent a year in the past 10 years.In comparison, the gross domestic product (GDP) grew by about 6.4 percent a year during that period.

So what makes the money supply grow in Singapore? I came across a document entitled Monetary Policy Operations in Singapore on the Monetary Authority of Singapore (MAS) website. The 32-page document highlights the key aspects of MAS's monetary policy operations, foreign exchange and money market operations, and the various factors and considerations underlying them.

The four primary responsibilities of MAS are:

• Implementation of exchange rate policy;
• Conduct of money market operations for banking system liquidity management;
• Management/issuance of Singapore Government Securities (SGS) in support of government initiatives in bond market development; and
• Provision of banking and financial services to the government.

MAS's balance sheet looks like this: On the assets side, a big chunk is in foreign assets, i.e. the official foreign reserves of Singapore.MAS also holds an inventory of Singapore Government Securities. It also has domestic credits, that is lending to banks in the course of conducting money market operations for liquidity management in the banking system.

On its liability side, the biggest component is government deposits.These are surpluses that the Singapore government run year after year.Also in this pool are contributions of members to the Central Provident Fund. Also on the liability side is currency in circulation. Under the provisions of the Currency Act, each Sing dollar currency note must be fully backed by foreign assets. As we all know, Singapore's monetary policy targets neither the interest rate nor monetary aggregate. It is centred on the trade-weighted exchange rate. As such, the monetary base is also endogenous, and its level is based more on banks' demand for reserve and settlement balances.

So this is my understanding of how the money supply of Singapore has been growing all these years. Say, a foreign company wants to set up a factory in Singapore because of the good infrastructure here and the convincing marketing campaign by the Economic Development Board.

The foreign firm brings in US$100 million. It needs to convert that amount to Singapore dollars to pay for the construction costs of its building, to pay utilities bills and salaries of its staff. So demand for the Singapore dollar increases. If the aggregate demand for the Sing dollar far exceeds the supply in the market, the local unit will appreciate too fast and make Singapore exporters uncompetitive. So since MAS's mandate is to manage the Sing dollar's trade-weighted exchange rate, it will intervene by selling Sing dollar to meet the demand and buy the US dollar.

That's how money supply in Singapore grows over time. Among other reasons, demand for the currency also arises when Singapore exporters want to convert their revenues in US dollars back to Sing dollar, or when foreign investors are keen to invest, say, in real estate in the Lion City, given its safe haven status and its emergence as a global city.

I've charted how Singapore's GDP in current market prices and how Singapore's M2 money supply have grown since 1980. The ratio of M2 to GDP has been rising through the years. Prior to 1998, total M2 had always been lower than the aggregate GDP. But that changed in 1998, and by end of 2009, M2 is 140 per cent that of Singapore's GDP. Is it a wonder then that real estate asset prices in Singapore have been so buoyant in the last few years?

The writer is a CFA charter holder

This article was first published in The Business Times.