By Gerald Tay (guest contributor)
As an investor, I keep myself updated with the current economic and global news as much as possible. I am not an economist and neither do I profess to be an expert on global economics. However, as investors in a very turbulent financial world, it is highly important for us to keep abreast of the dynamic forces that are shaping our world and how it will impact our investment decisions now and in the future.
The key driver of the Singapore economy over the last two decades
We can attribute most of the financial crises, economic growth and creation of many wealthy Singaporeans due to the surge in property prices over the last two decades in Singapore to the giant economic power of the twentieth century, the USA.
I’d like to share my personal views on one important aspect which may concern you as an investor, the US Dollar. The US Dollar and its monetary policies have wide ranging effects on the global financial markets. With the looming ‘fiscal cliff’ and constant printing of large sums of money, and with another possible round of QE 4 in 2013, has led to opinions about the possibility of a collapse of the US dollar, the world’s anchor currency.
History of anchor currencies
First let’s discuss the history of anchor currencies and where we think they might end up. This is not meant to be a boring history class but it’s vital for any investor to know and understand past events and how they will shape our financial future.
In ancient times, India ran huge trade surpluses with the Roman Empire. Every year, India took 50 million sesterces from Rome. That huge trade imbalance implied a continual drain on gold and silver coin, causing shortages of these metals in Rome. In modern terms, Romans faced a monetary squeeze.
Rome responded by reducing the gold/silver content of their coins which led to sustained inflation in the empire. Heavy indebtedness and reckless spending over centuries are some of the reasons Rome fell from being the dominant super power at the time. However, Roman coinage continued to be accepted long after it must have been obvious that its gold or silver content had fallen.
In the sixteenth century, Spain was a superpower. Between 1501 and 1600, 17 million kg of gold made its way from the Americas to Spain, which spent the money on wars in the Netherlands and elsewhere. With the colonisation of the Americas after 1492, great amounts of silver began to flow from the New World to the old. The silver mines in Bolivia and Mexico gave rise to large silver coins. Within decades after Columbus’ discovery, silver coins were minted in the Americas and shipped to Spain. This increase in liquidity caused both an economic boom and disastrous inflation consequences across Europe, leading to one of history’s biggest bubbles, the Tulip Bulb Craze Mania in 1636.
Spain became heavily indebted and defaulted on its debt three times in the seventeenth century alone, in 1607, 1627 and 1649. (Greece has defaulted five times since 1826.) Yet Spanish coins remained the main currency used in world trade right up to the end of the American Revolution (1775-83). Most countries shifted to the gold standard by the 1870s.
The Pound Sterling continued to be a world currency until well after World War II. Even as late as 1950, more than half a century after US had replaced Britain as the world largest industrial power, 55% of foreign exchange reserves were held in sterling and many countries continued to peg against it.
The Bretton Woods system
A new economic order was established after World War II, with the US as the anchor country. Most countries including Britain were hugely indebted to the USA for funding their expensive war efforts. The Bretton Woods system linked the US dollar to gold at US$35 per ounce, with other currencies linked to the US dollar.
The flaw in the system was that it underpinned global economic expansion for only as long as the US was willing to provide US dollars by running up deficits – deficits that would undermine America’s ability to maintain the US$35/ounce gold price.
The Bretton Woods system collapse in 1971 because governments around the world, especially the USA, needed huge amounts of money to finance their political ambitions, wars and other needs of their own country. Having money pegged to gold had tremendous limitations for further monetary expansion.
I am led to believe from history, that an anchor currency can outlive its country’s power even centuries after its financial collapse or crisis. That is to say, the US dollar will still be around at the end of our generation or even our children’s. It will be hard, though, to predict the status quo a century from now.
The US’s inherent strengths
An Economics professor once listed the US’s competitive advantage versus other Developed countries which have a high debt load:
1. The US is home to the world’s top 20 universities and has the most innovative minds on our planet
This is an important measure as it tells us how many bright minds will emerge to propel an economy forward.
2. The US has institutions that can still act together in ways which Europe cannot
The US has only the Republicans and the Democrats. Europe has 27 members in the EU alone, not even counting others like Britain or Switzerland, and most of the time many of these members have conflicting views on how to run their economies. That’s why they are still in such a big mess today. If I were to place my bets, I would say the Euro would be the first to collapse rather than the US dollar.
3. The US has a fertility rate that exceeds its death rate
This means that America can ultimately outgrow its debt, unlike Japan, Europe or even China.
By 2050, Japan will have half its population over 52 years of age, making it the world’s oldest society. Japan’s population of 127 million is predicted to fall to just 90 million by 2050, with a Child:Elderly ratio of 1:1.
By 2050, Europe will have three dependents for every four adults.
By 2050, China will have a burden to support its retired people because of its one child policy. China will also be older than the USA as early as 2020 and older than Europe by 2030, thus causing an abrupt end to its cheap labour force. Its dependency ratio will rise from 38 (dependents, children, retirees) to 68 per 100 working adults. There will be 96.5 million men in their twenties in 2025, but only 80.3 million women. Demography and population may be the gravest problems for the Chinese government.
In contrast, Africa, Middle East and India may be the world’s fastest growing economies with a young growing population within a decade or so.
How about Singapore?
By 2020, 15% of the population will reach elderly status. By 2030, the percentage goes up to 22%. By 2050, Singapore will be the fourth oldest country in the world, with the average age exceeding 60 years old.
So, if you are going to invest in properties and other investments from 2013 and the next 30 years, which countries should you invest in?
By guest contributor Gerald Tay, CEO of CREI Academy Group, who exposes widely-held property investment myths that have proven highly ineffective in creating wealth, and prevent a comfortable retirement for the ordinary investor.