How long can SG insulate itself from US CPI inflation?

matchy (08Mar2012) wrote:

Re: [ST forum] Protect CPF savings from inflation
u mean u wan the govt to give a inflation-tagged yield?

Yes, I understand that Consumer Price Index (CPI) for USA was only started in 1913 and since then, much due to laws progressively allowing total fiat currency: 1937 Roosevelt says no more local USD-gold exchange and 1971 or so Nixon said no more international USD-gold exchange (France wanted to get gold for USD), the US govt has been in sense self allowed to print as much USD as it needs. [Wikipedia: Gold standard] It legitimacy of US printing USD has allowed almost every other country to print currency: e.g. China printing more Yuan so that the USD Yuan is favorable to China US trade etc.

As inflation in the volume of USD currency goes up, so does the same in everywhere else in the world.

The following chart off the internet shows cumulative US CPI inflation since 1913 till 2011:

This image has been resized.Click to view original image

[pict source]

It is my understanding that where currencies are legally pegged to an exchange value of gold (you can get gold at govt promised equivalents for your currency from the govt)- limits govt printing of currencies to facilitate war/ excessive spending etc as the US inflation 1774-2007 chart shows (on off gold std inter-spaced by war etc):

[pict source]

MikeDirnt78 wrote:

im trying to show the current high 5 to 6% inflation number is skewed by factors that majority of the people dont need.

Hi Mike, no offense but I think that simply excluding housing and pte transport cost is myopic because the desire for these goods by CEOs and politicians would drive up their salaries and thus both production and taxation costs (e.g. GST) and affect all.
On another note, the high cost of housing impacts many families whose HDBs are still mortgaged since interest rates would surely rise since newer families need to borrow $$$ to buy their first property/ car: this raise of interest rates would significantly add to the cost of Singaporeans living in their 'own' but also mortgaged HDB flat.

In anycase, it is my suspicion that the printing of $$$ ALWAYS results in FIRSTLY a spurt in property prices since that is where the rich traditionally park their spare cash, BUT it only takes time for this wave of inflated currency volume to spread across the economy as such sense of 'affluence' increases prices across all sectors of the economy as even lenders are now willing to lend more. The destabilizing effect of this economic boom also has the side effect of bubbles bursting: e.g. Japan where property prices have deflated it seems over the last 20yrs- hurting some home owners rather drastically.

Perhaps including in the CPI either the median interest payable on their property mortgage or else lodging rental costs might be a good start rather than just claiming that property cost be excluded from the CPI sub-category for Singaporeans totally.

That said, if CPI were to hit 10% in some years to come, then Singaporeans would be getting a raw deal if OA interest rates remained at 2.5%: pls note that as a small country, Singapore cannot not be insulated from inflation in US CPI for very long. The choice of inflation protection is only a suggested option to protect Singaporeans against a highly inflationary economic situation. The aforementioned picture of a Zimbabwean boy with billions of Z$dollars is the worst of extreme situations however.

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09Mar2012: [ST forum] Protect CPF savings from inflation