Singapore joins deflation club


Perhaps in other places there might have been headlines screaming ‘deflation’, but here in Singapore, it was just a passing mention in a story about mean incomes, and made to sound like an unequivocally good thing.

Median income, including employer Central Provident Fund contributions, for Singaporeans working full-time grew 6.5 per cent from June 2014 to June last year to reach $3,798. The growth was 7 per cent after adjusting for negative inflation of 0.5 per cent.

— Straits Times, 29 January 2016, Job growth hits 17-year low, but real wages up 7%

See how it slipped in there? ‘Negative inflation’. In other words, deflation.

Most economists worry about deflation, especially if it becomes persistent. It is a self-reinforcing dampener on demand and economic vitality. In an explainer from January 2015, The Economist explains why it is a cause for worry. But the Straits Times, taking the cue from the Ministry of Manpower, presents it as a boon: it makes wage earners richer!

That said, a closer look at the consumer price index suggests that we’re not facing across-the-board deflation.


It seems rather sector-specific, stemming perhaps from the government’s deliberate cooling measures in the housing market, and the plummeting price of crude oil (thus transport). The negative-change items are counter-balanced by price rises in food and education, which suggests rising labour costs as the driver there. Rising labour costs are substantially the result of regulatory policies since so much of labour in Singapore is foreign and therefore susceptible to quotas and levies.

This suggests that if not for government action resulting in cost-push in some items, counter-balancing price rises in food and education might not have occurred. But pushing up labour costs can be dangerous, making Singapore uncompetitive.

Labour is a major component of healthcare too, yet it fell 0.1 percent. How to explain this? I think it is probably the result of government action, rolling out more subsidies.

The spiral of deflation and stagnation

In an environment of economic stagnation, deflation makes it much harder to reignite economic growth due to its dampening effect on demand.

Singapore’s 2015 GDP performance has been weak. Subject to adjustments, it has been reported to have grown 2.1% over 2014. The manufacturing sector however saw a decline of 4.8%. Warnings are being posted of even weaker performance in 2016. Given the slowing of the Chinese economy and the still moribund Japanese and European economies, it is hard to be optimistic.

Japan for the last 25 years has been the stereotype of this pernicious twinning of deflationary pressures and an economy in doldrums, though in the last five years, Europe too has been in a similar boat. Just recently, the Japanese Central Bank announced it would charge negative interest rates. Financial institutions would have pay the central bank a 0.1% fee for depositing money with it. This is a bid to kickstart the economy — for the umpteenth time.

A few European countries and the European Central Bank implemented negative interest rates earlier; it is not yet clear how successful the policy is.

The hope is that instead of stuffing excess money with the central bank, commercial banks would try harder to lend money out. But Martin Schulz of the Fujitsu Institute in Tokyo …

… told the BBC. “But their impact is unlikely to be strong.”

Mr Schulz cautioned that in the eurozone, negative interest rates are being used to tackle a financial crisis, whereas Japan is in a protracted slow growth environment.

“In Japan, credit didn’t expand not because banks were unwilling to lend but because businesses didn’t see the investment perspective to borrow. Even with negative interest rates, this situation will not change.”

“Businesses don’t need money – they need investment opportunities. And that can only be achieved by structural reforms, not by monetary policy,” he said.

— BBC, 29 January 2016, Japan adopts negative interest rate in surprise move. Link.

This reflects the conventional formulation that deflation occurs when savings exceed investment. Investment in more productive capacity is pointless when there are either structural barriers or insufficient demand.

The search for a cure

For this reason, popular prescriptions for a cure often include advice to governments to spend on (“invest in”) infrastructure when private businesses hold back. That is, for the state to create demand (at least for infrastructural goods) when consumers are afflicted with too much ennui to demand consumer goods. But the Japanese government tried that too in the 1990s, building bridges and highways that turned out to be more white elephants than economic catalysts; and soon got cold feet when the national debt started to soar.

There is no road or path hidden from view on the other side of that bridge -- pic by journeyman, in

There is no road or path hidden from view on the other side of that bridge — pic by journeyman, in

It doesn’t seem to me that there is much understanding of the morass that is deflation, and for this reason, there is no clear path out of it. Partly it is because inflation was the more persistent problem in the 20th Century, occupying the brightest economists’ minds.

Would reducing wealth inequality help?

What is striking is that there is a parallel in the lead-up to the Great Depression and what happened in the last 20 – 30 years that has brought us to this point where deflation and anaemic economic growth are so widespread. And that parallel lies in wealth inequality.

Here’s a chart provided by sociologist Eoin Flaherty accompanying a column he wrote for The Guardian (Was there ever a time when so few people controlled so much wealth? 29 January 2016). It shows the income share of the top 1% of the UK population since records began in 1918.


Here’s another chart, by economists Emmanuel Saez and Gabriel Zucman whose research is the subject of an article at ThinkProgress ‘Wealth inequality is now as bad as it was during the 1920s‘.


It would immediately remind you of the the study by Credit Suisse which found that the richest 1% of the world’s population now owns 50% of its total wealth. This was reported in an article in in October 2015. The year before, Credit Suisse found that the top 1% held 48% of global wealth.

“Credit Suisse says wealth inequality was actually falling before the financial crisis but has increased every year since 2008,” reported Forbes.

My little bit of intuition tells me that stashing wealth with the rich (and not only the top 1%) is another way of saying we’re saving more and more. It is the 99% who have a greater tendency to spend what money they have — they need to, to live their daily lives —  but if the share of wealth in their hands is in relative decline, so aggregate demand too would shrink.

Wealth is not always money. But there is probably enough of it sloshing around in banks and their financial instruments that interest rates have been very soft. The rich are constantly looking out for new ways to get better returns which in turn may explain the asset bubbles that pockmark the financial history of the last few decades with increasing frequency.

So how?

If my intuition means anything, two solutions creep above the horizon.

The first is to confiscate (i.e. tax) and redistribute that wealth. I am reminded of something I wrote perhaps 15 years ago about the hubris of capitalism post-demise of the Soviet Union, and how no one should discount the return of communism or bright red socialism. The current enthusiasm for Bernie Sanders in the US Democratic Party primaries, even if it eventually passes, will suggest in a small way that Americans too are not immune.

The second is to print money to create inflation. It’s been tried over the last 5 or 6 years: quantitative easing. The final judgement about the effectiveness of this approach is not yet in place, but if its effects have been felt to be ambiguous, it may well be because central bankers have been too timid, not too bold.

Moreover, quantitative easing has largely been conducted by central banks through financial institutions. But herein may lie a flaw in the plan. Seeing how banks are mostly focussed on lending for investment, yet the problem with sluggish economies is not the lack of investment but insufficient demand or consumption, working through financial institutions may be self-defeating.

An alternative would be to just print cash and distribute a flat rate of X dollars per head directly to people. Or if we’re concerned about people stashing the cash into their bank accounts and doing nothing more, we could give people spending vouchers which they must use within a short time.

Printing money can lead to inflation, but in times of deflation, a bit of the former is what we may need!

1 Response to “Singapore joins deflation club”

  1. 1 HT 1 February 2016 at 19:17

    I. YB wrote: ” An alternative would be to just print cash and distribute a flat rate of X dollars per head directly to people. Or if we’re concerned about people stashing the cash into their bank accounts and doing nothing more, we could give people spending vouchers which they must use within a short time.

    Printing money can lead to inflation, but in times of deflation, a bit of the former is what we may need!”

    II. I just received the WDA SkillsFuture letter for $500 as part of the Nation wide initiative. This seems to be what you have just described above.

    But because our Government is “rich”, instead of printing money, this re-distributes money for everyone to upgrade. Otherwise this money would have got salted in our reserves and likely “invested” overseas.

    III. Now if not because I am a long timeYB reader, I would have thought this is a ST post glorifying the Government foresightedness.

    IV. Personally I think this post of yours in very insightful.

    Cheers !

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