Economic Recession-Inflationary Spiral vs Confidence Crisis-Singapore

The written world is full of recessionista that I thought hard about contributing further to it? The markets seem to react to bad news with a vengeance and good news is being question marked all over that it normally barely moves the market. In such a climate, the down draft is definitely going to be stronger that the bullish tendencies.

Great economists like Alan Greenspan has always put forth evil that lurks behind the inflationary spiral as the most difficult to tame and goes all out to combat it with the weapon of choice which is the FED discount rate. The basic premise being that price stability is important for the growth of the economy in the longer run. That I fully agree with.

However, the reverse which is hardly spoken about is what I would term as a confidence crisis like what we are very much experiencing right now. It is almost like the mirror image of the inflationary spiral ; business expect revenue to be bad therefore hold back on their investment and staffing level leading to lower business volume both upstream and downstream. The consumer that expects to have a rough ride in terms of retrenchment, pay cuts etc will also scale back on spending and all this would translate itself into self full-filling recessionary overtone.

Between the two evils, I believe confidence crisis is the larger of the two as a consumeristic outlook is easier to tame and we have many weapons in our arsenal to fight the inflationary spiral tooth to nail. 

In a confidence crisis, our ability to spend our way out of a recession is hampered by issues like shrinking multiplier effect in a recession and for a small and fairly open economy like Singapore, there are further issues of leakages as we tend to import almost everything and the domestic economy is of limited size and amplitude thus eroding the classical economics virtue postulated by Keynesian. 

Moving over to the monetarist viewpoint, it also suffers from episodes like liquidity traps like what is happening in Japan where the interest rate is nearing zero and monetarist end up with a very blunt tool to fight the confidence crisis. There are of course other policy options like trying to increase the velocity of currency by having the government help the banks to under write part of the credit risk in the hope of the banks being more prepared to extend credit to the businesses and consumers to lift us out of the confidence crisis. A first round of such policy has been put in place in Singapore with limited success as bankers hardly budge on easing credit as they have learnt how fast toxicity can build up in their balance sheets which will at some point in time needs to be de-leveraged in a painful manner like now.

Perhaps, it is during times like these that we need strong leadership with an equally strong mandate from the people not only measured by the polls but by how the leadership can inspire the populace to a greater cause in life and paint a believable light at the end of the tunnel or a rainbow after a storm. Such leaders are normally born and not bred in ivy leagues of the world. Although I do not condone what Adolf Hitler has perpetuated during the second world war, there is much to be learned from his ability to rally people to a cause. Another good example is Robert F. Kennedy but it is unfortunate that his was short lived. Winston Churchill; the wartime prime minister of Britain was another with great ability to rally the populace. Perhaps, this time, Barack Obama would save us.


Peter Lye aka lkypeter.blogspot.com

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