Bullish arguments in favour of a continuation of the secular bull market in gold were laid out in this post.

This post will lay out the bear case. But first, some charts to consider and form the backdrop of our discussion. The first set of charts are 3-year weekly charts of gold, silver, and the ETFs GDX (gold miners) and SIL (silver miners).

3 year chart of gold (weekly)

3 year chart of silver (weekly)

3 year chart of GDX (weekly)

3 year chart of SIL (weekly)

The next set of charts are 7-year weekly charts of gold, silver, to get a view of a longer timeframe.

7 year chart of gold (weekly)

7 year chart of silver (weekly)

The bear case

1. The manner in which long term support was broken

Long term support has never been broken in such a manner before. Usually, the most intensive part of a cyclical correction in gold and silver will come within 6-12 months after the cyclical high is made. After that, the price will spend a few months consolidating and even moving higher, before embarking on a strong uptrend.

This time, long term support has been broken 19 months after the previous cyclical high for gold (in September 2011), and 23 months after the previous cyclical high for silver (in May 2011). This has never been seen before in the secular bull market starting in 2001. The break has also been on high volume.

Usually we should allow a few weeks to see if the price can recover and re-take long term support. Sometimes, a break merely serves to flush out the stop-losses lying just beneath it. In that case, this would be a false breakdown.

Suffice it to say, if within the next 4-5 weeks, the price of gold and silver does not re-take the long-term support and push higher, we can safely conclude this is not a false breakdown. I am currently ascribing a greater than 50% chance that the breakdown is real, and price will not be able to recover that soon.

2. Gold and silver prices are primarily a function of psychology

Gold and silver are used both in industry, and are also regarded as jewellery. However these do not form the bulk of the momentum driving price action. Unlike metals like palladium, zinc or copper, it is investment demand rather than industrial or jewellery demand which determines price.

However, what in turn drives investment demand? Gold is not a financial asset that can be evaluated on earnings or cash flow. It yields nothing (in fact, it costs money to store gold). Investment demand comes from central bank purchases and other investors who want to diversify their holdings of fiat currencies. Gold has always played a central role in the global monetary system, up till 1971 when Nixon delinked gold permanently from the US dollar. However the tradition of regarding gold as a monetary metal and holding it as a form of reserve or store of value has persisted till today.

This means the price of gold and silver is primarily a function of investor psychology. The 10 year bull market has been driven by the thinking that gold acts as a credible reserve and is a suitable hedge against the negative effects of central bank money printing, national deficits, and currency depreciation. Once this psychology is broken, it may takes years to recover.

3. Comparison with the previous secular bull market

The previous secular bull market lasted from 1971 to 1980. The current secular bull market began in 2001. It has been 12 years. History would suggest that the current secular bull is over.

Gold rose 24 times and entered bubble territory in the 1970′s because of a unique confluence of events. People had lost confidence in financial assets like stocks. Inflation was rampant. Unemployment rose to twice as high as the worst of the 2008/2009 financial crisis, and consequently, it was primarily fear which drove the markets. Geopolitical risks were extraordinarily high too, and the oil market had also entered a bubble.

Currently, confidence in financial assets have not been eroded. Unemployment, though at uncomfortable levels, is nowhere near as high as the 1970′s. There is no wage-inflation spiral as well, although there are pockets of inflationary pressure that do not appear in the government-manipulated CPI readings.

Overall, the situation cannot be compared to the 1970′s, and we cannot expect gold to perform anywhere near that record.

Even after the massive correction, gold is still trading over 5 times its secular bear market low of $250, and silver is still trading over 5 times its secular bear market low of $4. How much more do investors expect?

We cannot expect the same asset class to experience another bubble a mere 30 years after the previous bubble burst, although bubbles in general have become an increased fixture of the financial landscape after Bretton Woods was demolished by Nixon in 1971.

In general, I believe that bubbles in the same asset class happen at most once in the average lifespan of a human being. 30 years is too soon to expect gold to enter a bubble phase again.

4. The gradual demonetization of gold. Gold is not a store of value, not a safe haven, and not an “insurance policy”.

Gold is gradually being demonetized, despite the recent increases in central bank purchases from countries like China and other emerging economies. As it is, the western countries are dumping gold, as gold has ceased to be a store of value.

It has been 40 years since gold was delinked from fiat currencies. You cannot use gold to purchase goods, even in a financial crisis. You can only use fiat currencies to do so. This means that even if the worst fears of the gold bugs are realized, gold will not function as a neutral currency that will be accepted as payments for goods and services. Gold is not the “insurance policy” that the gold bugs think it is.

Gold will not protect you for a crisis in the financial markets or even a crisis in the monetary system itself. In a real crisis, as the debacle of 2008 amply demonstrated, the real price of gold will plummet along with other fiat currencies and other commodities.

In the 2008 credit crisis, only the US dollar and US sovereign debt served as true safe havens. In future crises, I believe the same will hold true. Gold will behave just like any other risk asset. It is therefore not a safe haven.

Conclusion

As people gradually realize that gold is neither an insurance policy against the ill-effects of central bank money printing, nor a safe haven with which one can weather a crisis in the financial markets, psychology in gold will fundamentally shift.

In fact, the shift may have already begun.

If, within the next few weeks, gold and silver do not re-take previous support levels with strong price action, we can safely conclude that the current secular bull market is over. The next one may be decades away. In the meantime, financial assets will outperform gold and silver and will be better long term investments.

17 April 2013

In the next post, I intend to describe what I personally deem to be bearish arguments against gold, and make out a case why the secular bull market that began in 2001 probably ended in September 2011. Undoubtedly, there will be many believers in gold who will vehemently disagree. My bullish arguments FOR gold are laid out in this post (but as my next post will explain, I think the bear case outweighs the bull case).

First however, I will need to devote one post to describing a little bit of history to set the context for the discussion. We need to understand how the current monetary system evolved, as well as its flaws.

Post World War II, the Bretton Woods system fixed global exchanged rates to the US dollar, and the USD was in turn pegged to gold at a price of $35 per ounce. The US Federal Reserve guaranteed USD-gold interconvertibility between central banks at this rate, and the free market for gold was naturally tied down by this arrangement.

The system initially worked well. The United States had emerged from the War as the sole global superpower, and it was then also a huge exporter to the global economy. The US held the majority of the world’s government gold reserves, and this acted as a stabilizing force which anchored the US permanently as the center of gravity of the global monetary system.

However, the huge international demand for US dollars in the 1950′s caused the US to embark on a deliberate policy of running a balance of payments deficit in order to provide liquidity to the global economy. The Bretton Woods system was then used to establish a triangular system of trade in which the US profited from trade with developing countries, the surplus was sent to Europe to enable Europe to rebuild itself, and Europe in turn used its new financial muscle to purchase goods from the Third World and enable the emerging economies to prosper.

However, as other industrialized countries grew and overtook the US as export economies, and as deficit spending in the US soared due to domestic welfare spending as well as the Vietnam War, the US experienced increased inflation, increased unemployment, and an ever-widening balance of payments deficit as well as a trade deficit by the start of the 1970′s.

America’s gold reserves fell drastically, and the risk of a run on the remaining reserves increased as other countries like Germany, Switzerland, France and Japan held more and more US dollar reserves. One by one, countries started leaving the Bretton Woods system as the fixed exchange rates were hurting their own economies through inflation and other price distortions.

The US dollar predictably starting falling against other major currencies, US domestic inflation accelerated, and as gold outflows from the US increased steadily, the US was also pressured to leave Bretton Woods. The dollar shortage of the late 1940′s had been transformed into a dollar glut, wrecking havoc on the global monetary system and threatening the financial stability of the US in particular.

On August 15, 1971, US President Nixon issued Executive Order 11615, pursuant to the Economic Stabilization Act of 1970, which closed the gold window, meaning that the inter-central bank convertibility between US dollars and gold was abolished.

Within a couple of years, the global currency system was firmly anchored on floating exchange rates, totally unbacked by gold, and subject purely by market forces as well as the confidence of economic participants in the integrity of fiat currency.

This is today’s fiat money system — the first truly global experimental fiat money system tried out by mankind. The monetary system of today is also known as Bretton Woods II.

The Bretton Woods II regime became notorious for engendering asset bubbles, periodic bouts of inflation, and general currency instability.

This eventually led Europe to embark on an equally ambitious experimental politico-monetary system which culminated in the founding of the Euro, the official currency of the Eurozone, and the currency used by the Institutions of the European Union (EU).

When Nixon closed the gold window in 1971 and forever doomed the world to a system of fiat currency which can be manipulated at will by central banks, gold embarked on its first ever secular bull market in the history of mankind. It rose from $35 per ounce in 1971 all the way to $850 per ounce in 1980 — an increase of 24 times within a period of 9 years.

The spectacular bull market in gold was driven also by geopolitical tensions arising from Middle East, as well as rampant inflation in the United States and other economies. It soon entered bubble territory, with rampant speculation abound.

When US Fed Chairman Paul Volcker initiated tough measures to combat inflation from 1979 to 1981, the gold bubble was burst. Inflation peaked in 1981, one full year after gold made its bubble high on 21 Jan 1980.

Volcker’s most important contribution to reducing inflation came after the US economy began to recover from the deep recession of 1982. Volcker embarked on a policy of preemptive restraint during the economic upturn after 1983. This increased real interest rates and pushed Congress and the President to balance the budget. The combination of sound monetary and fiscal policy led to price stability and a new era of benign disinflation and positive economic growth.

Meanwhile, gold never returned to its 1980 high for the next two decades, during which the price spent most of its time going sideways, and eventually drifted down to a secular bear market low of $250 in 2001.

From there, a new secular upswing emerged. It is now my contention that this second secular upswing is now over. That was be the topic of my next post.

16 April 2013

The honest answer to the above question is “I Don’t Know”. The most I can do is to list out the long-term factors for or against gold, and evaluate the probabilities accordingly.

Factors favouring a continuation of secular bull in gold

1. Central bank money printing

Central banks continue to print money and expand their balance sheets in order to fend off what they perceive as deflationary forces and prop up the economy. There is even talk of the US central bank headed by Ben Bernanke moving to a single mandate — combating unemployment.

While the money printing is not immediately inflationary due to the deleveraging process still underway, the slow velocity of money, and global excess capacity, money printing eventually leads to distorted asset prices, and should ultimately be beneficial for gold as people start to find ways to defend against the depreciation of purchasing power of fiat money.

Many in fact have argued that the current stock market rally especially in the United States has been a result of money printing.

2. Devaluation of developed countries’ currencies

The USD appears strong now, only because other currencies like the Euro, Sterling, and Japanese Yen are even weaker due to poorer fundamentals. The BOJ in fact has embarked on an aggressive policy of currency devaluation and money printing in order to create inflation and push up stock prices. The Yen will fall further, and faster than ever before.

The Euro is only marginally better. It is fundamentally flawed. You cannot have a monetary union without having a fiscal union. Now, the Eurozone is paying the price for the over-indebtedness of some of its member countries. The crisis will not be over soon. Eventually, Germany will be forced to either accede to money printing, or accept a long drawn-out debt crisis that may even cripple the Eurozone fundamentally. No matter what happens, the future is bleak for the Euro.

The USD is not a good currency, but it is nonetheless still the world’s reserve currency, and in the short term may function as a port in the storm.

But that being said, the USD is also likely to falter in the years ahead especially against emerging market and commodity currencies as the US faces its own problems of over-indebtedness and profligate spending, and is forced to eventually deal with the time-bomb of social security. This will be a very long term issue, so don’t expect immediate USD weakness, in a climate where other developed countries’ currencies are of much poorer fundamentals.

Developed countries will always eventually choose inflation and currency depreciation over austerity, higher tax rates, and cuts in social spending, because the former two options are far more politically palatable. This may not be the case for the Eurozone now, but it will eventually be, some way or other, no matter what Germany says.

As developed countries’ currencies including the USD depreciate against those of emerging economies, this could serve as tailwind for gold and other commodities like crude oil.

3. A looming funding crisis and loss of confidence in central banks to preserve the purchasing power of fiat money

The is a funding crisis looming ahead in the not-too-distant future. As developed countries show reluctance to bite the bullet and deal with their debt crisis decisively, investors and other central banks around the world will lose confidence in the sovereign debt of developed countries, and force interest rates up. This will lead to a funding crisis for developed countries which will be extremely damaging for risk assets.

A crisis in confidence in central banks, especially their ability or willingness to preserve the value of fiat money, will ensue. The process has in fact begun. As this psychology sets in over the coming years, people may start turning back to gold and silver as a form of “central bank insurance”.

To round up:

These 3 factors does not imply that gold will necessarily rebound over the coming months. These factors will take a long time to play out. In the meantime, psychology against gold can become even more negative, and selling can continue as stale bulls continue to bail out.

Over the next few years, we may see these 3 factors come into play and cause a resumption of the secular bull in gold. However, there are also factors working against gold, which may result in the 10-year long secular bull in gold (2001-2011) coming to an end.

We will examine the bearish factors against gold in my next blog post. Suffice it to say, I believe the bearish factors that I will be outlining in my next post outweigh the bullish factors I have mentioned here.

In a previous blog post last month, I ascribed a greater than 50% chance that gold and silver will break down below long term support. This prediction has come to pass.

Take a look at the short and intermediate term charts of gold and silver respectively.

One year (daily) and Three year (weekly) charts of Gold

One year (daily) and Three year (weekly) charts of Silver

As can be seen from the charts, both gold and silver have decisively broken multi-year support.

Usually, such a strong move downwards will lead to a quick bounce in the near term. However, I expect such a bounce to be short-lived. I am still holding on to the opinion that support will remain broken over the coming months, even if a short-term rally occurs.

Outlook for gold and silver over the next several months

In my blog post describing the behaviour of gold and silver over the past 10 years, I said that the metals tend to trade in cycles, with a 6-9 month upswing followed by a 15-18 month consolidation phase.

In the secular bull market is still intact — something which is highly questionable — I expect this trend should continue. We could see an extended 20-24 month consolidation phase for both metals (to shake out the numerous precious metal bulls who have been drawn in during the past few years), followed by another rally. That would mean the current cyclical bear market in both metals may have another few months to go at least.

If the secular bull market is over, however, then prices should slowly drift downwards and reach an eventual target of gold in the $700-$1000 range, and silver in the $10-$15 range.

This scenario will cause massive, widespread bankruptcies in the gold and silver mining sector because currently, the average cost of extracting one ounce of gold from the ground is around $1100-$1200, while the average cost of extracting one ounce of silver from the ground is near to $20.

These costs are expected to rise even further in the years ahead because of rising input costs and factor costs of production, as well as heightened government regulation or intervention in the mining industry. The outlook therefore for mining stocks is bleak indeed.

Let us revisit the long term charts of gold and silver. I contend that since the early stages of the secular bull market, both precious metals clearly exhibited an alternating pattern of 6-9 month upswings followed by 15-18 month consolidation phases.

The only time this pattern was altered was during the Great Panic of 2008-2009 when all asset classes were crushed except safe haven assets like the US Dollar and Sovereign Bonds which rallied to bubble highs.

Gold had an unusually long two year bull phase from the latter half 2009 to the 3rd Quarter of 2011.

Silver behaved slightly different in the Great Recession period of 2008 to 2010. It experienced an extended two-year consolidation phase before suddenly embarking on a vigorous 9 month rally that saw the price almost triple to nearly $50 an ounce.

Apart from the Great Recession period of 2008 to 2010, however, the pattern of spending 6-9 months in bull mode followed by 15-18 months in consolidation mode has been intact.

Will the patten continue to hold, or will the secular bull market finally come grinding to an end? The next few months will be critical.

Given that the secular bull has already lasted a decade, with gold currently trading at more than 6 times its secular low of $250 per ounce (in 2001), the secular bull is already long in the tooth, even if the next phase is up.

Gold and silver are at critical multi-month support. Attached below are the 3-Year Weekly charts for both the gold and silver spot price. As can be seen from the charts, gold is near the critical support band of 1540-1560 per ounce, whilst silver is near the critical support band of 27-28 per ounce.

If this important multi-month supports for gold and silver are broken, and price trades below it for more than a couple of weeks, I will expect more downside, more volatility, and a much broader trading range. I will also expect gold to eventually test the 1000-1300 range within a year in such a scenario.

Price action near the support level has been weak and unreadable. In the past 11 years since the secular bull market began in early 2002, I have not seen critical support being tested so many times (this is the fourth time since 2011) and the rebound so moribund. Currently, I am prescribing at least a 50% chance that this crucial support will break, and stay broken.

In light of the dismal price action near such an important support level, let us revisit the secular bull market. Attached are the 12-Year Monthly charts for spot gold and silver.

The secular bull began in 2002. Since then, I have identified a repeating sequence of 6-9 month bull phases, followed by 15-18 month consolidation phases.

This pattern was interrupted in 2008 when the gold and silver market plunged along with the stock market and broke support so decisively that it looked as if the secular bull was over.

However, gold and silver rebounded sharply even before stocks did. The precious metals subsequently overcame the old highs established in early 2008 and proceeded on a tremendous upswing that saw the price of gold reach slightly over $1900 an ounce, and silver very near $50 an ounce.

The incredible cyclical bull phase from 2009 to the 3rd Quarter of 2011 drew in many bulls from both the institutional as well as retail side. These bulls are now bailing out in frustration.

However, the consolidation phase since 3rd Quarter of 2011 is thus far still consistent with my previous observed pattern of gold and silver enduring up to 18 months of consolidation before embarking on a renewed uptrend.

Despite this, the dismal price action near such crucial support level makes me doubt whether support can hold. Patterns are ultimately meant to be broken. Maybe this time, the old pattern will break.

Attached are 3-Year Weekly charts of the GDX, GDXJ and SIL — the standard ETFs for gold miners, junior gold miners, and silver miners respectively.

The miners have significantly underperformed the metals since the consolidation phase began in 2011.

This is due to ETF cannibalization as well as deteriorating fundamentals of many mining companies. The inflationary pressures which should in theory lead to a rising price of gold are instead showing up more aggressively in the cost of production. The cost of extracting gold from the ground has shot up in recent years and margins of mining companies have been significantly eroded.

Many mining companies also have to content with bureaucratic red tape and operate in politically hostile environments where government policy repeatedly sabotages mining projects.

As such, I expect the underperformance of mining stocks to continue, and for the underperformance to be exacerbated should the broader stock market correct significantly from the current lofty levels.

When I was at Rice University, so many decades ago, I played a lot of bridge. I was only mediocre, but enjoyed it. We had a professor, Dr. Culbertson, who was a bridge Life Master at an early age. He was single and lived in our college, playing bridge with us almost every night. He was a master of the “end game.” He had an uncanny ability to seemingly force his opponents into no-win situations, understanding where the cards had to lie and taking advantage.

Traveling to London and on into Europe, I have some time to think away from the tyranny of the computer. Over the last year, and especially the last few months, I have written in depth about the problems we face all across the developed world. We have no good choices left, so making the correct unpleasant choice is now our most hopeful option.

As I wrote in my 2010 forecast, this year is a waiting game. There are so many choices we must make, and the paths we will take from those choices vary wildly. But make no mistake, we are coming close to the end game. Some countries and economies are closer to that point than others, but the entire developed world is lurching, in almost drunken fashion, towards our economic denouement.

Over the next several months, we are going to start to explore various aspects of the end game. Whither Japan? Are they actually, as I think, a bug in search of a windshield? What does that mean for the world? How safe is the euro? Everyone over here seems to think Germany will bail out Greece. A breakup seems unthinkable to the people I’ve been talking to (so far). But what about Spain? Italy? Can you spell moral hazard?

The Fed has said it will exit quantitative easing (QE) at the end of March. But what if mortgage rates rise? Where do we find $1 trillion (plus!!!) in US savings to fund the deficit, assuming foreigners buy about $400 billion? By definition, savings and foreign investment and the federal deficit must add up to zero. (We will go into that later – just take it as gospel for now.) How can we run 10% of GDP deficits if the Fed does not print money (as they did by buying Fannie and Freddie paper, which became treasuries, as I outlined last week)? That would require almost a 10% savings rate – with it all ending up in treasuries. How can that happen? Really?

But before we get into that, a few housekeeping items. First, more than a few of you have written to say you are not getting the letter as usual. There are some problems when your distribution list is 1.5 million closest friends. We try to fix them, working with the various ISPs to stay “white-listed.” It is actually a lot of work for Doug and my publisher. If for whatever reason your letter does not get into your inbox, just go to www.investorsinsight.com and find the letter there. And we are working on other mechanisms as well to insure you get this letter. And thanks for letting us know of problems. Rest assured, we do not randomly drop any of my closest friends from this list.

Second, the invitations are starting to go out for our annual Strategic Investment Conference (co-sponsored by my partners Altegris Investments) which will be April 22-24 in La Jolla. In addition to David Rosenberg, Dr. Lacy Hunt, your humble analyst, Niall Ferguson, and George Friedman, my good friend Dr. Gary Shilling has agreed to come. There are several more rather exciting announcements I will be making in a few weeks. This conference will sell out. Unfortunately, for regulatory reasons, it is limited to accredited investors. If you have not already received an invitation, contact your Altegris Investments professional, drop a note to me, or register at www.accreditedinvestor.ws and you will get a call and an invitation.

This year we are going to focus on “The End Game.” I can guarantee you lively debate, fun times, and over-the-top wines – plus, you will be with people who are simply the coolest ever. The speakers are all friends who “get it.” They called the crisis well in advance. These are the guys who sit and think every day about how this will all end up. The panels are going to be fun. Do not procrastinate. Register now.

This Time is Different

“But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked.” – Carmen M. Reinhart and Kenneth Rogoff from their new book, This Time is Different.

I am reading (on my new Kindle as I travel through Europe) a very important book, which I will be referring to a lot in the future. Reinhart and Rogoff have catalogued over 250 financial crises in 66 countries over 800 years and then analyzed them for differences and similarities. This is a VERY sobering book. It does not augur well for the developed world to blithely exit from our woes. The book gives evidence to my adamant statement that we have a lot of pain to experience because of the bad choices we have made. This is the entire developed world, and the emerging world will suffer, too, as we go through it. It is not a matter of pain or no pain. There is no way to avoid it. It is simply a matter of when and over how long a period.

In fact, Reinhart and Rogoff’s research suggests that the longer we try to put off the pain, the worse the total pain will be. We have simply overleveraged ourselves, and the deleveraging process is not fun, whether on a personal or a country basis.

Let’s look at part of their conclusion, which I think eloquently sums up the problems we face:

“The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be. Technology has changed, the height of humans has changed, and fashions have changed.

“Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. No careful reader of Friedman and Schwartz will be surprised by this lesson about the ability of governments to mismanage financial markets, a key theme of their analysis.

“As for financial markets, we have come full circle to the concept of financial fragility in economies with massive indebtedness. All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked.

“This time may seem different, but all too often a deeper look shows it is not. Encouragingly, history does point to warning signs that policy makers can look at to assess risk – if only they do not become too drunk with their credit bubble – fueled success and say, as their predecessors have for centuries, “This time is different.”

A small confession. I am in a London hotel, it is late on a Friday, and my mind is slowing down. So rather than ramble, I am going to hand you off to Van Hoisington and Dr. Lacy Hunt, two of the brightest economists I know (Lacy will be at my conference). The following is their latest quarterly letter. I have already read it five times. It is THAT important, and chock full of intriguing concepts.

They also reference Reinhart and Rogoff, and offer up a very contrarian view about deflation. Open your minds, and let’s jump in.

Quarterly Review and Outlook – Fourth Quarter 2009

Hard Road Ahead

The U.S. is facing a long and difficult road as it attempts to correct the over-indebtedness and wasteful expenditures of the past two decades. Both current and historical research help us to understand where we are in the continuing economic crisis, and to put it in perspective.

The brilliant U.S. economist Irving Fisher first highlighted the fact that an economy’s debt level could have a deleterious impact on economic growth if it is, in fact, excessive. At $3.70 of debt for every dollar of GDP, U.S. debt is excessive (Chart 1). Fisher pointed out that the unwinding of debt levels results in prolonged economic distress, and we certainly agree. In 2009, the book This Time is Different – Eight Centuries of Financial Folly, by Reinhart and Rogoff, shed new light on the role of debt by compiling a database that looked at financial crises in 66 countries over a period of 800 years. The main standard in explaining more than 250 crises studied is whether debt is excessive relative to national income, even though idiosyncrasies apply in each case. They reiterate that this old rule (excessive debt) continues to apply, and this time is not different.

Research and the Deflation Risk

We glean five important factors from this work that pertain to our present situation. First, financial imbalances occur when aggregate domestic debt is excessive relative to income, regardless of whether the government or private sector is accumulating the debt. Once debt becomes excessive, countries do not grow their way out of the problem; they must go through the time consuming and often painful processes of debt repayment and increased saving.

Second, whether the domestic debt is externally or internally owed is not as critical as the excessiveness of the debt.

Third, government actions, even involving sizeable sums of money, are far less helpful than they appear. As the book states, “Infusions of cash can make a government look like it is providing greater growth to its economy than it really is.”

Fourth, Reinhart and Rogoff cover countries in debt crisis with a host of different conditions, such as growth and age of population, political regimes, technology status, education, and other idiosyncratic features. Nevertheless, economic damage as a result of extreme over-leverage has remarkably similar results, whether the barometer of performance is economic output, the labor markets, or asset prices.

Fifth, further increasing leverage to solve the problem only leads to greater systemic risk and general economic underperformance.

The real question for financial participants is whether all these influences result in inflation or deflation, and the authors’ research details both outcomes. As is widely feared here in the U.S., they outline that many countries have had the right circumstances and mechanisms to inflate away their debt overhang, and, in fact, have done so by debasing their currency. Those particular circumstances are not currently present in the United States.

According to Reinhart and Rogoff the norm is that major economic contractions lead to deflation. Importantly, they call our present economic circumstances the “second great contraction.”

Thus, not only has the historical “qualitative” research on the subject of deflation chronicled the deflationary impulses emanating from overindebtedness (Fisher’s 1933 “Debt-Deflation Theory of Great Depressions”), but also modern “quantitative” methods have now essentially confirmed this conclusion. Over-indebtedness and major contractions lead to deflation.

Debt Overwhelms Monetary Policy

It has been more than a year since the Federal Reserve began a massive expansion of Federal Reserve Bank credit, from $1 trillion to $2.2 trillion, flooding the banking system with reserves. This unprecedented action naturally raised inflationary fears since it was assumed that this was the beginning of a monetary creation process which would eventually lead to job and income growth, excessive expenditures, and finally massive price increases.

If the economy were not in the throes of writing down bad debts that were caused by a massive decline in asset prices, it is possible that the money supply (M2) in response to this increase in reserves could have expanded by $4 trillion, or 96%. According to the late Nobel prize winning economist Milton Friedman, an increase in M2 of that magnitude would have been highly inflationary. However, M2 did not explode. Instead, in the past twelve months this aggregate has risen only 3%. This is less than 1/2 of the average growth rate over the past fifty years (Chart 2).

If, as Friedman assumed, the velocity of money is stable (MV=GDP) then nominal GDP expansion in the ensuing quarters can be expected to grow about 3%. If prices rise about 1.5%, then real GDP growth would also rise about 1.5%, which is far below the level of growth needed to employ new labor force entrants and existing unemployed or to more fully utilize our present unused capacity in our factories. In the last six months the growth rate of M2 has slowed to near zero. If this pattern continues, it would be rational to expect GDP to grind to zero with no change in the price level.

The very first step toward an inflationary cycle has to be to get the monetary aggregates expanding vigorously. That cannot be accomplished with the Fed “printing money”, i.e., adding more reserves into banks that cannot or will not make loans. The reason this process has not begun (and will not for a time) is the overhang of excessive indebtedness and asset price depreciations. No one needs to borrow, or has the resources or balance sheet to borrow, and banks are busily writing off bad debt. Irving Fisher warned of that process (note our Third Quarter 2009 quarterly letter).

Over-indebtedness Creates Excess Supply

Despite the concurrent developments of little money growth and declining loan growth (Chart 3), the fear nevertheless remains that an inflation surprise might be just around the corner. The reason to discount this notion is that excessive debt has contributed greatly to a flat, or perfectly elastic aggregate supply curve. A country’s inflation is determined by the interaction of aggregate supply and demand. Friedman wrote that a large increase in money in the hands of the non-bank public would be inflationary because he assumed a normal upward sloping aggregate supply curve (Chart 4). In this case the aggregate demand for goods (depicted as the demand curve Line A) would shift outward to Line A1, and thus prices would naturally rise. You will note what happens to prices if a demand curve B is intersecting the supply curve in the so-called Keynesian range where it is flat. If aggregate demand increases to B1, prices do not change.

Whether the supply curve is in a flat, normal, or upward sloping position depends on the extent of excess resources in the economy. Today it is obvious that the U.S. economy has plentiful excess resources, so any increase in demand will result in little price change. This will be the case until our unemployment rate of over 17% (the U6 measure) drops by a considerable amount and we begin to use our factories well above our current 68% utilization rate.

Thus, our current economic circumstances guarantee there will be no surprise inflation. Employing those who are out of work and fully utilizing our resources will be a slow process. More importantly, it will take time to get the monetary engine reignited. Banks will have to begin lending and people and companies will have to determine that prospects are good enough to take the risk for expansion and investment. It will take years for these processes to get started because of our over-indebtedness and falling asset prices.

The consequences of excessive debt are already painful at the household level. The civilian employment to population ratio, a highly important barometer of the average household’s standard of living, fell to 58.2% in December, the lowest reading in 26 years and down from a peak of 64.7% in April of 2000 (Chart 5). Thus, the standard of living has worsened as the debt to GDP ratio has marched steadily higher. With debt to GDP still rising, a further deterioration of the standard of living is inescapable.

Debt and Fiscal Policy

Deficit spending only provides a transitory boost to the economy. It initially raises GDP, as it did in the second half of 2009, but then the effect dissipates and later is reversed, as financial resources available to the private sector are reduced. In a separate research study Rogoff and Reinhart write, “At the height of Japan’s banking crisis in the 1990s, repaving the streets in Tokyo became a routine exercise. As a result, Japan’s gross (government) debt-to-GDP ratio is now nearly 200% and a drag on what once was a vibrant economy.” Our present high deficit situation suggests that taxes will rise (including those of state and local governments), depressing economic activity further. In addition to the expiration of the 2001 and 2003 tax cuts, the Obama administration is proposing substantial taxes on financial institutions to pay for the cost of the financial bailout. Since the tax multiplier is high, this will reinforce the drag on economic activity from the lagged effects of deficit spending.

Treasury Bonds

Since 1990 Treasury bond yields have steadily moved downward in line with a more benign inflationary environment (Chart 6). Those yearly declines in yields continued last year with an average interest rate of 4.07% versus 4.28% in 2008. Obvious sharp reversals have occurred in their downward trend due to shifts in psychology reacting to generally transitory factors, as we saw in 2009. To remain fully invested in long Treasuries in this high volatility environment requires a simple discipline based on the academic literature which demonstrates that over time bond yields move in the same direction as inflation (Fisher equation).

Presently, we view the inflationary environment as benign because: 1) the U.S. economic system is overleveraged and academic research confirms that this circumstance leads to deflation; 2) monetary policy is, and will continue to be, ineffectual as efforts to spur growth are thwarted by declining asset prices, loan destruction, and adverse regulatory influences; 3) the federal government’s spending spree will necessarily cause taxes and borrowings to rise, further stunting any economic growth. These factors ensure that inflation will be quiescent. Interest rates easily can and do rise for short periods, but remaining elevated in a disinflationary environment is contrary to the historical experience. We are owners and buyers of long U.S. Treasury debt.

Van R. Hoisington
Lacy H. Hunt, Ph.D.

Home Again

I get home next Thursday night and wake up to write the next Thoughts from the Frontline. I have to say that these trips really get me fired up, as I visit lots of clients and serious hedge-fund managers who challenge me to think. Plus, I get some time to ponder the big picture.

I was asked a lot about what the vote in Massachusetts meant. My take, for what it’s worth, is that it is part and parcel with the election of Obama in 2008. The voters in this country are increasingly getting scared. They may not mind that we will tax the golden goose a little more, they just want to make sure we do not kill the goose (Peggy Noonan’s column). While they may not be sophisticated in economics, they understand intuitively that you can’t run deficits at the current levels forever. That risks killing the goose. Obama was elected with a promise of change. McCain was seen as more of the same. The recent elections (Virginia, New Jersey, Massachusetts) were pointedly saying, this is not the change we had in mind.

This is part of the equation that will give us the direction of the end game. How will the Democrats respond? Will we see the moderates wrest back control from the progressive wing? Blue dog Democrats allying with Republicans (the more things change…)? Can Republicans actually articulate a program and path to fiscal responsibility, or will they just sit on their hands, hoping the Democrats implode (a very bad idea!)? Stay tuned.

Ok, it is time to hit the send button. Last week I was with my partners at Altegris for our annual planning meeting in the mountains of Santa Barbara. It was idyllic. Part of the meeting was about the conference, and I am telling you, this is going to be the best ever.

Have a great week. I will be uber-busy, but there will be a lot of good times and great conversation. And I will be ready to get back home.

Your thinking about the end game analyst,

John Mauldin

It rarely pays to be contrarian. For the most part trends go in the same direction for some time – that’s why they’re called “trends”.  Whether it’s real estate prices, credit card debt, Treasury issuance, or Croc sales, they can continue along implausibly for far longer than you might think, sane and right-thinking and sober-minded sort that you are.

But contrarianism can work sometimes. When? At inflection points, mostly, when the trend is exhausted and can do nothing but reverse. It can then pay immensely (c.f., John Paulson) to take the other side of a cemented consensus. The trouble is, it’s just about impossible to pick such inflection points – lots of people went short residential real estate well in advance of Paulson, only to lose oodles of money.

Given this, why is contrarianism so appealing? It is appealing – and growing immensely in popularity – because it has so much smart-guy frisson. This naive contrarianism lets you pose outside the system, meanwhile keeping good company like Warren Buffett, John Paulson, the Freakonomics fellows, and oodles of self-declared fellow travelers, most of whom almost certainly aren’t doing what they say they are.

Contrarianism also appeals to our increasingly cynical nature. It is the superficial idea that most people are wrong about everything, especially if they are in government, on TV, among the putative intelligentsia, etc. They think that? Ha, I’ll take the other side, etc.

I was reminded of all of this earlier today in reading a piece in NY Magazine about the past decade’s burgeoning business of writing contrarian books & articles. The topics were wide-ranging, of course, including everything from car seats (they don’t work!) to presidential sloth (it’s okay!) to the environment (it’s all good!), to gravity (overrated!  [ed., You made that up]), but the upshot is the same: The consensus is wrong. It is to the point that as soon as something is consensus you should start a mental countdown to the day when the inevitable contrarian take shows up.

The trouble is multifold, however. First, contrarianism mostly doesn’t work – trends last until they don’t, which is often a long time, especially in a world of tight-coupling and information cascades; and long-lasting trends crush smarty-pants contrarians like bugs the whole way. Second, the consensus is more often right than the anti-consensus consensus likes to think. Call it wisdom of crowds or whatever you want, but the consensus isn’t that dumb, most of the time.

As I am stubbornly fond of pointing out, given all the flaws in human decision-making pounced on by behavioral finance sorts, decision theorists, psychologists and the rest, you’d think we humans couldn’t cross the street successfully, or invest or raise kids, or, say, wander along as a species steadily getting healthier and wealthier for a few thousand years or so. And yet, here we are. Easy and naive contrarianism about everything has become the new consensus – and that is a kind of bigoted and dumb consensus around which I’m happy to go the other way.

Count on it. For the next several years, the stock market belongs to the bulls. You’re going to see periodic pullbacks, to be sure, but they’ll be minor, transitory affairs, just enough to keep sideline money out of the market for as long as possible. 

As in every bull market in the modern era, the average investor will miss much of the harvest to be had in this cycle. They’ve certainly been on the sidelines for the initial move: For the first nine months of 2009, investors pulled $8 billion more out of stock funds than they put in. And in the face of the best year in stocks since 2003, the data show that in early October the net redemption rate actually accelerated, with a net $5 billion redeemed. 

Investor aversion to stocks is beyond bewildering, especially when stocks are compared with alternative investments. Tic-tac sized yields on cash barely beat the nonexistent yield generated from under-the-mattress investing. In the aftermath of the 1982 bear market and the 1987 crash, at least investors could hide out in cash and collect 9% and 7% yields, respectively. Now, fearful investors get slapped two different ways: They get to watch a major bull market march resolutely higher, and they get paid next to nothing while they watch. 

Treasury bonds are even worse than cash because of the inordinate principal risk that owners of Treasuries have to absorb. Paltry yields of 3% and 4% for long-term Treasuries aren’t high enough to compensate owners for the risk of inflation. Rates only have to go up modestly for the decline in value of long-term Treasuries to reach double-digits. 

It’s the stuff of a big bull market in stocks: The crowd simply doesn’t see it until after the fact. 

To capture the upside that’s coming, you’ve got to recognize the opportunity. You can do it by taking a step back and looking at the big picture. Start with this: 200 years of history that says big bull markets always follow big bear markets. Check your charts, if you must, but you’ll not find a single exception to this rule. 

Logically, big rebounds necessarily follow big declines. That’s because the value of a business equals the net present value of its future free cash flow. The “future” does not end next quarter or next year. By definition, value is a long-term proposition. Short-term, emotion-laced selling can cause huge declines in price, but it’s always temporary. As rationality returns to the marketplace, so does price, back toward the net present value of future free cash flows. 

Another way to see opportunity is to piggyback on the minds of smart investors. Early in a bull cycle, when the spread between price and value is wide, you see the shrewdest investors loading up on stocks. It should come as no surprise that Warren Buffett has been investing at his most aggressive clip in 35 years. Not only has he invested in well-known names such as General Electric (GE) and Goldman Sachs (GS) , among others, he recently made his biggest purchase ever in acquiring Burlington Northern (BNI) . 

The significance of Buffett’s latest move is difficult to overstate. He gets the big themes right: building up cash earlier this decade, his call on Internet stocks in the late ’90s, his repeated warnings about derivatives and his bullishness following the 1974 and 1982 bear markets. Because of Burlington Northern high fixed-cost structure and sensitivity to the economy, Buffett’s purchase is a quasi-leveraged bet that a return of economic growth is around the corner. 

Are the ingredients in place for a long bull market? 

Probably the most exciting dynamic in this bull market is the off-the-charts pessimism that permeates the thinking of virtually all market participants, from investors who refuse to invest, to CEOs who have hoarded record amounts of cash (11% of corporate assets are now in cash, up from 4% in the early ’90s), to the majority of market pundits who view the future with fear and trepidation. Implicit in the pervasive pessimism is that this bull has years to run, because it will take that long for complacency and enthusiasm to return and gain traction. 

Historical data also support the notion that this bull is a babe, with years of ample returns to come. After every incremental 10-year period when the S&P 500 has lost ground — the market is down about 25% for the last 10 years — the ensuing 10 years see the S&P compound at 10% or more. 

And if the data are not enough to fire up your enthusiasm for stocks, there’s always the big picture. In the annals of economic history, there has never been a stage set for worldwide growth quite like the current era. We’re in the midst of two historic, ongoing revolutions, the likes of which will never be repeated: the opening up of the world for business, and the massive changes wrought by technological advances. Alone, either one of these paradigm-changers would augur well for stocks over the next decade. Together, the potential for wealth-building in the years to come is on a scale that should take your breath away.

Arne Alsin is the founder and principal of Alsin Capital Management, a California-based investment adviser. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.

What is Men In White all about? How different is it from previous books on Singapore’s ruling political party?

Let me clarify what the book is not.

It is not a re-telling of Singapore’s transformation from Third World ghetto to First World city, a story which Minister Mentor Lee Kuan Yew so vividly documented in his memoirs. It is also not about the PAP Government and the art of policy-making.

Men In White is the untold story of the rise, fall, capture, split and resurgence of one of the world’s most successful and longest ruling political parties, a story narrated for the first time through the voices of the victors and the vanquished as well as eyewitnesses to its unfolding history.

It is untold because many of these voices had not been heard in earlier books on the PAP – the voices of former PAP stalwarts and grassroots activists and their adversaries.

The story is untold because the voices of the Mandarin- and dialect-speaking, Malay-speaking and Tamil-speaking cast of characters often overlooked are also aired for the first time.

The result is a story of the PAP, warts, blemishes and all.

It is a story which details the ups and downs and twists and turns of the PAP and the pivotal moments in its history. It is a story which combines political theatre with human drama.

It tells of friends who turned foes when they found themselves on different sides of the ideological divide and of ordinary people who rose to meet extraordinary challenges in extraordinary times.

This book marks the culmination of a seven-year journey for our project team led by former SPH editor-in-chief Cheong Yip Seng and later by Straits Times editor Han Fook Kwang.

It all started in May 2001 when then-Prime Minister and PAP secretary-general Goh Chok Tong broached the idea of a book to mark the 50th anniversary of PAP in 2004. Mr Goh and Mr Cheong agreed that it should not be a commemorative coffee-table book, and that it should be well-researched. More importantly, it should be non-partisan and not written for the PAP, but rather the authors’ version of the PAP story.

When Mr Goh Chok Tong told then-Senior Minister Lee about the book, the latter said that it would make for compelling reading if it covered the views of all the players in the struggle – those for and against the PAP.

Mr Lee told the team: ‘If you’re going to tell my side of the story, then you might as well not write the book. This has to be your book.’

He stressed that the authors – Sonny Yap, Richard Lim and Leong Weng Kam – should get the facts right but stand by what they have written.

When the initial drafts were shown to him, he pointed out factual errors but did not question the narrative thread or request that any of the critical and contentious points surrounding him be taken out.

This approach meant keeping an open mind, unfettered by any preconceived notions. Just let the story unravel – through the voices of about 300 people interviewed and of some 200 oral history interviewees recorded in the National Archives as well as the voices resurrected from unpublished memoirs and declassified documents.

The challenge for the team lay in tracking down former political players lost in the fog of history. After locating them, the next great challenge was in cajoling and coaxing them to give their side of the story.

Many were initially sceptical if not cynical. Some were downright hostile, assuming that the book would be just a propaganda exercise.

Typical of their responses were: ‘Why should I cooperate with you to do a book on the party whose government locked me up for so many years?

‘Are you sure that whatever I tell you will be printed?’

Fortunately, most of the people contacted gave the writers the benefit of the doubt and agreed to be interviewed. Despite being on the losing side and spending years in detention, many former leftists betrayed little bitterness or rancour and extended full cooperation to the team.

Some of them are now with us in the chamber: Fong Swee Suan, Dominic Puthucheary, Lim Chin Joo, Chen Say Jame and Low Por Tuck.

Unfortunately, some had passed away since their interviews.

What proved to be a treasure trove of precious insights were the 200-odd oral history interviews released by the National Archives of Singapore.

They included the voices of Lee Kuan Yew and his wife Kwa Geok Choo, S. Rajaratnam, C.V. Devan Nair, E.W. Barker, Fong Sip Chee, Richard Corridon, Lord Selkirk, David Marshall, S. Woodhull, James Puthucheary, Ong Chang Sam, Soon Loh Boon and Chen Say Jame.

Apart from listening to hundreds of hours of oral history interview tapes, the researchers pored over reams of documents, scanned reels of microfilm, ploughed through volumes of Chinese and Malay newspapers and sought the help of libraries and government agencies for the required information.

The team was also fortunate in gaining access to confidential party documents such as PAP’s Analysis of the 1984 General Election; declassified diplomatic records from British National Archives; Mr Lee Kuan Yew’s correspondence in the 1950s before he became PM and unpublished papers and memoirs belonging to Francis Thomas, Maurice Baker, SR Nathan and others.

Singaporeans might ask: Why should we know the PAP story?

Since 1959, PAP has won 12 general elections making it one of the most successful and longest ruling elected parties in the world. The 55-year-old party has ruled Singapore for 50 years. So whether you are for or against PAP, knowing the history of the party would mean knowing the political development of Singapore.

As former leftist leader Fong Swee Suan said, modern Singapore and PAP are inseparable. Their stories are intertwined.

They say that history favours the victors but in Men In White the voices of the vanquished are also aired.

Many of the leftists and communists who found themselves on the wrong side of history were idealistic young men and women, fired up by the Chinese revolution and the rise of socialism, to fight against the colonialists and champion the plight of the working class and the poor. Their support for PAP in the early years contributed to the victory of the party in the 1959 elections.

In some way, belated as it may be, the book has accorded recognition to their roles and contributions in the political development of Singapore. Thanks to their inputs and insights, Men In White is a rounded and balanced account of the Singapore Story.

In relating the fortunes of Singapore’s ruling political party, the book also highlights the values, convictions, ideals, instincts, beliefs and world views of the generation of politicians who laid the foundation for today’s Singapore. Whether as protagonists or antagonists, they were fighting for the future of Singapore.

The reader will be struck by the idealism, integrity and self-sacrifice of the first generation of PAP and non-PAP leaders: Lee Kuan Yew charging little or no fees as lawyer for political activists and trade unionists; Goh Keng Swee bringing soap flakes on his overseas trips to do his own washing to save taxpayers’ money; ministers and legislative assemblymen refusing to accept bribes; Francis Thomas requesting the Ministry of Education to drop his expatriate allowance after he became a Singapore citizen; and leftists leading an austere life which compelled PAP leaders to do likewise to win the hearts and minds of the people.

Indeed Men In White can be read as a tribute to the generation born before the war who suffered under British colonialism and Japanese occupation, endured unimaginable poverty and privations, underwent social and political upheaval, and yet were able to overcome the tears and the trauma to lay the foundation for a new nation.

If not for the thrift, frugality, hard work and tremendous sacrifices of the leaders and the people, the present generation would not enjoy the privilege of being the beneficiaries of Singapore’s peace and prosperity today.

We believe that the book will be new grist for the mill, a source of reference for future writers, researchers and scholars to pursue new lines of enquiry and expand on the themes and issues raised in the book.

This huge project will not be in vain if the book helps to equip a new generation of readers to rethink the Singapore Story, overturn some longstanding assumptions, question some conventional wisdom and debunk some myths and taboos.

For the project team, it has been an epic journey into a long forgotten and fractious past.

Many of you present here have helped our team to bring the past to life again. We thank you for sharing your recollections of those turbulent days.

Whether you were on the side of the PAP or against the PAP or were bystanders and witnesses to unfolding history, you are honoured guests today.

Directly or indirectly, in one way or another, you have all helped to contribute to the political development and common good of Singapore and your voices deserve to be heard.

IT WAS a historic moment with friends and foes gathered together under the same roof where they last met more than four decades ago – at the Old Parliament House.

The occasion was the launch of a new book on the People’s Action Party (PAP), which brought together Minister Mentor Lee Kuan Yew and his former political rivals.

Against the backdrop of the august chamber, Mr Lee rose to shake the hands of his one-time rivals: people like PAP founder turned Barisan Sosialis leader Fong Swee Suan, and Mr Dominic Puthucheary, a Malaysian lawyer who was PAP assistant organising secretary before he joined the mass defection that led to the formation of the Barisan Sosialis in 1961.

Many of them were later detained or exiled by the PAP Government. Among the 10 or so former leftists present yesterday however, hardly any rancour was evident.

Instead, there were smiles as one by one, they greeted Mr Lee who then requested a group photo.

It was a kodak moment that former PAP leader and leftist unionist Chen Say Jame, 77, had been hoping for but missed as he stepped out for a toilet break.

Still, he returned to the chamber in time to say in Mandarin: ‘Hello, do you remember me’ to MM Lee who replied: ‘Of course, I do. How are you?’

The poignancy of the bittersweet reunion was not lost on Mr Chen, who last saw Mr Lee in the House in 1961 – when the Legislative Assembly took a vote of confidence in the PAP Government. After some harrowing twists and turns, the PAP won eventually by a razor-thin margin of one vote.

Both men went their separate ways as the former PAP assistant secretary-general was detained in 1963 under Operation Cold Store, during which more than 100 leftist leaders were arrested.

When asked about the past, he said in Chinese: ‘No point thinking too much, just let it go.’

About 100 guests attended the launch, most of them former and current politicians. Apart from MM Lee, no current Cabinet minister was present.

Mr Ong Pang Boon, PAP founder and Singapore’s first Home Affairs Minister, declined to speak to the press apart from saying that he was last in the chamber in 1988. He stepped down as PAP MP that year.

Former Speaker of Parliament Tan Soo Khoon, who quit politics in 2006, also declined comment.

Former PAP MP Augustine Tan, who stepped down in 1991, described the gathering as a unique event, saying: ‘Many historical figures are here, which is a once in a lifetime event. It is good as it can help bring some healing.’

Mr Teo Ser Luck, a 41-year-old serving PAP MP, added: ‘MM and the leftists opposed each other; there may be some bitterness still. But to see them bring closure today was really the best moment.’

It was history in the making even as history was unveiled through the book, Men In White: The Untold Story Of Singapore’s Ruling Political Party.

The book, published by Singapore Press Holdings (SPH), chronicles the PAP’s rise, fall, split and resurgence in the past 55 years since the party was formed in 1954.

It is written by three senior Straits Times journalists – Mr Sonny Yap, Mr Richard Lim and Mr Leong Weng Kam – who interviewed 300 people, went through 200 oral history interviews, and pored over confidential documents.

It was not an easy process as some interviewees were downright hostile, assuming that the book was a PAP propaganda exercise, the authors noted.

But they managed to persuade most of them to share their stories, resulting in a book which SPH chairman Tony Tan said was ‘a story of the PAP, warts, blemishes and all’.

Dr Tan, who was Deputy Prime Minister until 2005, said in his speech: ‘Whether you are for or against the PAP, knowing the history of the party would mean knowing the political development of Singapore and understanding how Singapore has evolved to what it is today.’

Men In White, he pointed out, captures alternative voices such as those of leftists and communists – some of whom were key players in the founding of the PAP. Many were giving their views for the first time.

‘In some ways, belated as it may be, the book has accorded recognition to their roles and contributions in the political development of Singapore,’ he said. With their input, the book provides a more ’rounded and balanced’ account of Singapore’s history.

He added that the book, which was seven years in the making, would not be in vain if it helped a new generation of readers to rethink the Singapore story.

It will also help ‘overturn some longstanding assumptions, question some conventional wisdom and debunk some myths and taboos’, he said.

To Mr Lim Chin Joo, however, Men In White marks ‘just the beginning’.

The younger brother of the late Barisan Sosialis leader Lim Chin Siong believes more can be done. ‘I hope more can be written as there are still plenty of stories that remain untold,’ he told The Straits Times. ‘If they are told, it may change the picture of the Singapore that is known to us. We owe this much to the younger generation. They ought to know everything, the whole story.’

Mr Lim, who was actively involved in left-wing student and trade union movements agitating for independence from the British, was arrested in the 1960s and spent nine years in detention.

He described it as a ‘wonderful feeling’ to be mingling with the other guests at yesterday’s reception. ‘After all this while, we can still be, and ought to be, friends. As far as I’m concerned, what we’ve done is not for personal interests but for the country.’

PAP founder-turned-Barisan leader Fong Swee Suan, who spent more than four years in detention under Operation Cold Store, was equally peaceable: ‘I’m happy to have seen old friends. Like Mr Lee Kuan Yew…half a century and we haven’t talked face-to-face.

‘Today, I asked him how he is.’

sueann@sph.com.sg

MORE than one for the album, this was a picture for the history books.

If not for the numerous photographs capturing the moment, many would have scarcely believed what took place yesterday in the Old Parliament House – in the same chamber where the People’s Action Party (PAP) fought its fiercest battles with its breakaway faction, the Barisan Sosialis, in the early 1960s.

Minister Mentor Lee Kuan Yew, a PAP founder, exchanged smiles and warm handshakes with those who had been his rivals from the country’s early years.

Among them were Mr Fong Swee Suan, Mr Dominic Puthucheary and Mr Lim Chin Joo, all of whom, despite their advancing age, looked in fine form.

At the launch of Men In White, a book chronicling the PAP’s history, the conflicts and differences of half a century ago seemed all but forgotten.

The old foes agreed to stand together to have their picture taken. It was perhaps a fitting way to launch a book documenting their history: by creating another bit of history.

(From left: Madam Ho Puay Choo, Mr Teo Hock Guan, Mr Low Por Tuck, Mr Ong Chang Sam, Mr Fong Swee Suan, MM Lee, Dr Tony Tan, Mr Dominic Puthucheary and Mr Lim Chin Joo.)

A COLLEAGUE remarked to me the other day that something had struck him as he read Temasek Holdings’ updated charter released last month: Nowhere in the 200-word document is there a mention of Singapore.

There is talk of delivering long-term value for its stakeholders and being an active investor. There is talk of Temasek’s corporate social responsibility (CSR) agenda. The five areas where it wants to work with its portfolio companies – including values, human capital and strategic options – are listed. But there is nothing to identify Temasek as Singaporean. Indeed, it might have been the charter or mission statement of any private sector investment firm, my friend said.

In the 2002 formulation of the charter, ‘Singapore’ appears four times. The opening alone mentioned the country twice: that Temasek ‘holds and manages the Singapore Government’s investments in companies, for the long-term benefit of Singapore’.

It went on to say that Temasek would ‘help broaden and deepen Singapore’s economic base’ by nurturing the vibrant international businesses of its stable of companies. And at the end, the charter said that Temasek ‘may also, from time to time, invest in new businesses, in order to nurture new industry clusters in Singapore’.

When news of the updated charter broke, a large part of the attention was focused on the first of these four points. Temasek said that its relationship with its sole shareholder, the Ministry of Finance, had normalised – meaning that the Government was now more like any large shareholder in any other corporation. Temasek now has other stakeholders besides the Government: institutional investors who have bought Temasek’s bonds, for example.

The removal of the first reference to the Singapore Government, therefore, seems natural because it brings the charter closer to today’s truth. There is also a strategic advantage to weakening the Government link, as it could help the agency manage foreign perceptions when pursuing investment opportunities.

But what of the other references to Singapore that were dropped?

The first is the pledge to manage investments ‘for the long-term benefit of Singapore’. In 2002, there was much talk about this, partly because of speculation over what Temasek would or would not divest.

Temasek said at the time that it had a list of ‘Group A’ businesses in which the Government would hold a majority or significant stake – including the seaports, airport, water, power and gas grids.

Such assets are indeed critical infrastructure that Temasek should own on behalf of the Government. But there is also a significant grey area in which Temasek arguably also plays a ‘national service’ role.

I’m referring to businesses or projects that do not make commercial sense in the short-run – especially to cash-strapped private-sector investors in the midst of a recession – but are nonetheless essential projects for the long-term.

The $1 billion to 1.5billion liquefied natural gas (LNG) terminal on Jurong Island is an instance in point. It is critical because Singapore needs to diversify its gas supplies. But the financial crisis caused the project’s delay and the Energy Market Authority had to take over from the private sector backers of the project.

Should Temasek make it its mission to own and manage projects like these? If Sands or Genting ever pulled out of building the integrated resorts, should Temasek take over, given their importance?

Then there are the giant overseas projects, such as the Tianjin Eco-City. It is a commercial development for sure, but it also serves to showcase Singapore. Shouldn’t Temasek hold such investments, some might ask, instead of companies like Keppel who have private sector shareholders to answer to?

The second reference to Singapore in the 2002 charter was building Singapore companies so as to deepen the country’s economic base. I take this to mean building companies with a global reputation for excellence.

Ask any man on the street and the names that spring to mind are Singapore Airlines (SIA) and perhaps Keppel. These companies are where they are today because of many years of careful attention from the Government. In their early years, at least, they may not have made commercial sense to short-term investors.

So the question some people are asking is this: If Temasek does not perform such roles, who will? Who will grow the next SIA or Keppel? Shouldn’t this special nurturing role be part of Temasek’s role?

Finally, the 2002 charter committed the investment agency to invest in new businesses in order to nurture new industry clusters in Singapore. Whether in wafer fabrication or the life sciences, the birth of a new industry cluster here has always been a much more complex affair than simply enticing large multinationals to set up factories in Singapore.

For new clusters to truly succeed, there needs to be an ‘eco-system’ of large and smaller supporting companies interacting with each other and the outside world. The Government cannot ‘buy’ this eco-system and set it up overnight, but it can have an important role in catalysing its growth.

This can mean setting up assistance schemes for private-sector firms. But sometimes it can also mean owning companies that plug gaps in a sector’s value chain.

Here is where Temasek can play a role. In fact, there have been many calls for the investment agency to earmark some of its resources for investment in smaller Singapore companies that need that extra boost to grow.

The updated Temasek charter walks a fine line between the short-term and the long-term, as well as between its public and private sector objectives.

The trouble is that when it comes to what Temasek can or should do for Singapore, the commercial-speak of pure dollars-and-cents or global best practice is not enough.

Perhaps Temasek’s bond with Singapore comes so naturally to the organisation and its staff that it can remain unspoken. Let’s hope this is the case and not that Temasek really isn’t interested anymore in developing and deepening Singapore’s economic base.

ignatius@sph.com.sg

This group was affected most by food and housing prices in first six months

By Joyce Teo

SINGAPORE’s poorest 20 per cent were hit twice as hard by inflation than better off households during the first half of the year, new Government figures show.

Largely because of rising food and housing prices, the low-income group experienced inflation at 1.6 per cent in the six months to June, compared to 0.7 per cent for the middle 60 per cent and 0.9 per cent for the top 20 per cent of households.

But these price rises are well down on the levels seen just a year ago.

Overall, the average household saw a 0.8 per cent inflation rate in the first half of the year, compared with the whopping 7.1 per cent in the same period last year, said the Department of Statistics yesterday.

The steeper rise for the lower paid is largely down to their being disproportionately impacted by higher prices for basic commodities such as housing and food.

July’s consumer price index (CPI) – the main measure of inflation – was down 0.5 per cent on the same month a year ago due to lower transport, housing and recreation costs.

Comparing July 2009 with July 2008, housing costs dropped 1.3 per cent – largely down to cheaper electricity – while transport and communications costs fell by 3 per cent, mainly because of petrol price falls. With lower holiday travel costs, recreation too dipped by 0.9 per cent.

Economists are expecting these mild year-on-year price falls to turn positive soon.

‘Although prices are still dropping year-on-year, the rates of decline are starting to slow,’ said Mr Song Seng Wun, an economist from CIMB-GK which is expecting mild deflation for the remainder of this year.

After stripping out the ‘seasonal’ effects, the CPI was up 0.3 per cent in July over June, after rising 0.2 per cent in June and 0.8 per cent in May.

This was largely due to a 1.4 per cent hike in housing costs because of higher electricity tariffs, plus service and conservancy charges. Rebates were given in June, but not July.

Also, food prices dipped 0.1 per cent in July over June, while transport and communications costs rose 0.7 per cent, according to CIMB-GK.

Mr Alvin Liew, an economist from Standard Chartered Bank, Singapore, said the data suggested that there may be price pressure building up even as the year-on-year figures could still be negative for a few more months.

‘Price increases now look to be rising faster than expected,’ said UOB Economic Research economist Chow Penn Nee.

‘The CPI will probably register monthly increases throughout the year, with economic indicators gradually improving, and crude oil price and accommodation costs also rising in tandem.’

The Monetary Authority of Singapore (MAS) is predicting full-year inflation will come in at between minus 0.5 per cent and 0.5 per cent.

Looking forward, it is the lower income groups who will be the ones most at risk from higher food prices, said CIMB-GK’s Mr Song.

Current higher crude oil prices and potential food supply disruptions because of El Nino may jack up utility and food costs from the fourth quarter, he warned.

joyceteo@sph.com.sg

WE REFER to the letters, ‘High HDB prices: Squeezed even harder’ and ‘Two shortcomings: Public housing too correlated to private market, and HDB has not regulated supply’ (both Aug 22); and ‘Flat hunting: Why was cash over valuation ever introduced?’ (Aug 20).

# Cash over valuation: Resale flat prices are the result of negotiations between willing buyers and sellers. Cash over valuation (COV) arises when buyers are willing to pay more than the market value of the flat, as determined by professional valuers.

However, for financial prudence, HDB and the banks will provide a loan of only up to 90 per cent of the market valuation. Therefore, if a buyer is willing to pay more than the valuation, the excess will need to be paid in cash, thus the term cash over valuation.

COV is not determined nor imposed by the Government. However, we can expect a flat seller to ask for as high a price as possible. On their part, buyers should first arm themselves with relevant information before negotiating with flat sellers.

To help buyers and sellers make informed decisions, HDB provides information on recently transacted resale prices and COV on its website. In July this year, 31 per cent of resale transactions were conducted with no COV. The median COV level was $7,000. Given the wide range of flats in the resale market, flat buyers should buy a flat they can afford.

# Supply of new flats: Besides resale flats, new flats form another part of the housing supply to meet demand. In response to rising demand, HDB has steadily increased the supply of new flats. From just 2,400 new flats in 2006, in the first half of this year alone, 4,300 new flats were offered. Given the continuing strong demand, HDB will increase the new flat supply under the Build-To-Order (BTO) system this year to at least 8,000 units.

# Affordability: HDB aims to make public housing affordable for eligible first-time households. These households are generously subsidised for their purchase of new or resale flats. On average, first-time households used 21 per cent and 25 per cent of their monthly income to service their loans on new and resale HDB flats respectively in non-mature estates. These figures are well below the international affordability benchmark of 30 per cent.

The monthly household income ceiling of $8,000 allows a vast majority of Singaporean households – about 80 per cent – to qualify for subsidised housing. Households whose income exceeds this ceiling can buy resale flats, where there is a wide range of supply to suit varying budgets.

For example, if a household with a monthly income of $10,000 buys a five-room resale flat in a non-mature estate at the average price of $364,000, it would need only about 15 per cent of its income to service its loan.

Ignatius Lourdesamy

Deputy Director (Marketing & Projects)

Housing & Development Board

‘Public housing too correlated to private market, and HDB has not regulated supply in line with immigration and demographic trends.’

MR TREVOR TAN: ‘Thursday’s report, ‘Cash upfront for HDB resale flats doubles in a month’, suggests that the recent ramp-up in HDB prices during the most severe recession since Independence signals that the system requires a thorough review. Two failings come to mind – that public housing has become too correlated to the private market, and that HDB has not regulated its supply in line with immigration and demographic trends. As housing is the largest financial obligation for most Singaporeans, I fear this ramp-up in prices will create a batch of young couples who are too highly leveraged and tied to their mortgages. Come the next economic downturn, we will have a demographic group unable to deal with the loss of their jobs, as they will be laden with other obligations such as their children and ageing parents.’

THE HDB resale price index has surged relentlessly since 2007. Since the first quarter of 2007, the index has increased 35.3 per cent and is now at a record high, even though the economy is still recovering from downturn.

This is an anomaly the Government should examine.

The recent Punggol Residences launch by HDB, which drew seven applications for every unit on sale, is another case to show the Government needs to increase supply to prevent housing prices escalating further.

While there is the additional housing grant to help the lower-income group, I urge the Government not to overlook the sandwich class group – those who are not eligible for subsidised public housing, yet cannot afford private housing. The escalation of mass market property prices has made the dream of owning a private property even more distant.

I urge the Government to reconsider the income ceiling of $8,000 as a criterion to be eligible for the Central Provident Fund (CPF) housing grant, which has been in place since 1994. Since 1994, the CPF Ordinary Account contribution rate has decreased from 30 per cent to 23 per cent and the HDB resale housing index has almost doubled from 75.5 to 140.2.

The supply of executive condominiums has also come to a halt. For those who aspire to condo living, Design, Build and Sell Scheme units launched by private developers range in prices from $550,000 to $720,000. Given the income ceiling of $8,000, couples who buy such flats must take huge loans which may not be proportionate to their income.

I urge the Government to look into the following to help the sandwich class:

# Raise the income ceiling of $8,000 to take into account the almost doubling of housing prices, as well as general inflation;

# Increase the supply of executive condominiums;

# Increase the supply of new public housing so unsuccessful applicants for new HDB flats will not put additional upward pressure on the resale housing market; and

# Implement anti-speculation measures to cool down private property prices.

Given that the HDB resale index may be a lagging indicator since resale transactions entered by buyer and seller may take up to three months before HDB approves the resale application, the housing price index is even higher than it appears. It is already common in the resale market for sellers to ask cash over valuation ranging from $15,000 to $30,000.

The Government is encouraging families to procreate, but imagine what future generations will have to fork out to own a place that they call home.

Chew Kim Cheer

This blog post originally appeared on RealMoney Silver on Aug. 26 at 8:11 a.m. EDT.

Back in early March, there were signs of a second derivative U.S. economic recovery, the PMI in China had recorded two consecutive months of advances, domestic retail sales had stabilized, housing affordability was hitting multi-decade highs (with the cost of home ownership vs. renting returning back to 2000 levels), valuations were stretched to the downside and sentiment was negative to the extreme. These factors were ignored, however, and the S&P 500 sank to below 700.

To most investors, back in early March, the fear of being out was eclipsed by the fear of being in. Despite the developing less worse factors listed above, bulls were scarce to nonexistent in the face of persistent erosion in equity and credit prices.

It was at this point in time, on RealMoney Silver, in an appearance on CNBC’s “Fast Money,” on “Mad Money” and in multiple appearances on “The Kudlow Report,” I confidently forecast the likelihood that a generational low had been reached.

I went on to audaciously predict that the S&P would rise to 1,050, a gain of nearly 400 points from the S&P low of 666 during the first week of March, by late summer/early fall. I even sketched a precision-like SPDRs (SPY) expectation chart that would reach approximately the 105 level (a 1,050 S&P equivalent) within about six months.

Yesterday the SPDRs peaked at 104.20, within spitting range of my intrepid March forecast of 105, and the S&P nearly touched 1040 in Tuesday’s early morning trading.

Arguably, today investors face the polar opposite of conditions that existed only a few months ago, with economic optimism, improving valuations and positive sentiment.

To most investors, today the fear of being in has now been eclipsed by the fear of being out as the animal spirits are in full force. Bears are now scarce to nonexistent in the face of steady price gains in equity and credit prices.

As if the movie is now being shown in reverse, the bull is persistent, stock corrections are remarkably shallow, cash reserves at mutual funds have been depleted, and hedge funds hold their highest net long positions in many moons.

Stated simply, in the current bull market in complacency, optimism and a boisterous enthusiasm reigns.

As I have written on these pages, the investment debate has morphed in a dramatic fashion from concerns as to whether U.S. economy was entering The Great Depression II to whether the current domestic recovery will be self-sustaining.

The primary question to be asked is, Will the earnings cycle dominate the investment landscape and cause investors to overlook the chronic and secular challenges facing the world’s economies, particularly as the public sector stimulus is eventually withdrawn and paid for and the economic consequences of the massive public sector intervention manifest themselves in the form of higher interest rates and marginal tax rates?

Most now have accepted the notion that due to the replenishment of historically low inventories, extraordinary fiscal/monetary stimulation and the productivity gains from draconian corporate cost-cutting, the earnings cycle is so strong that it will trump the consequences of policy. More accurately, most believe that they can get out of the market before the full effects of policy are felt.

I am less confident as a decade of hocus-pocus borrowing and lending and 35-to-1 leverage at almost every level in both private and public sectors cannot likely be relieved in the great debt unwind over the course of only12 months.

It is important to emphasize that when I made my variant March call, I expected many of the conditions that now exist — namely, a resurgence of economic and investment optimism during the summer to be followed by a multiyear period of weak investment returns. Specifically, I expected a mini production boom and an asset allocation away from bonds and into stocks to be embraced and heralded by investors, who would only be disappointed again in the fall as it becomes clear that a self-sustaining economic recovery is unlikely to develop.

My view remains that it is different this time. Again (now for emphasis), the typical self-sustaining economic recovery of the past will not be repeated in the immediate future for 10 important reasons that will weigh on the economy and markets like the governor that controlled the speed of the Good Humor truck I drove when I was in my teens during the summer:
Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

1. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.
2. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.
3. The credit aftershock will continue to haunt the economy.
4. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.
5. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.
6. Commercial real estate has only begun to enter a cyclical downturn.
7. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.
8. Municipalities have historically provided economic stability — no more.
9. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.
10. Just as I looked over the valley in March 2009 toward the positive effects of massive monetary/fiscal stimulation within the framework of a downside overshoot in valuations and remarkably negative sentiment, I now suggest another contrarian view is appropriate as I look over the visible green shoots of recovery toward a hostile assault of nonconventional factors that few business/credit cycles and even fewer investors have ever witnessed.

Yesterday, the OMB/CBO provided an exclamation point to the secular challenges that the domestic economy faces in forecasting an accumulated deficit of $9 trillion over the next decade (up $2 trillion from the previous forecast just two months ago), and public debt as a percentage of GDP is projected at an alarming 68% by 2019 (as compared to 54% today and only 33% in 2001). Thus far, the drop in the U.S. dollar (influenced, in part, by the mushrooming deficit) has been viewed favorably by the markets, but we must now be alert to a downside probe that becomes a threatening market factor. In other words, what has been viewed positively could shortly become negatively viewed.

A double-dip outcome in 2010 represents my baseline expectation. When the stimulus provided by the public sector is finally abandoned, it seems unlikely to be replaced by meaningful strength or participation by any specific component of the private sector, and the burgeoning deficit (described above) will ultimately require a reversal of policy, leading to higher interest rates, rising marginal tax rates and a lower U.S. dollar. My forecast assumes that the market’s focus will shortly shift from the productivity gains that have been yielding better-than-expected bottom-line results toward these chronic and secular worries.

Even more important, my forecast of a 2010 market peak reflects that the aforementioned nontraditional influences (and the untoward policy ramifications) will, at the very least, yield a broad set of uncertain economic outcomes that (in consequence and in probability) tilt away from a self-sustaining economic scenario sometime in the following 12 months.

Stocks bottom during times of fear. With the benefit of hindsight, the March 2009 lows represented a dramatic overshoot to the downside.

Markets top during times of enthusiasm. I believe that the markets are now overshooting to the upside and that the U.S. stock market has likely peaked for the year.

Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass’s daily trading diary, please click here.

At the time of publication, Kass and/or his funds were short SPY, although holdings can change at any time.

SEVERELY mentally disturbed patients at the Institute of Mental Health (IMH) now spend far less time strapped to their beds or in straitjackets.

They also spend less time – 21 days, down from the previous 27 – in the hospital’s eight-month-old high-dependency psychiatric care unit before being moved to the general wards.

The IMH’s approach in handling acutely disturbed patients bagged it the Most Outstanding Project prize in the Customer Service Project category of the recent Asian Hospital Management Awards held in Ho Chi Minh City, Vietnam.

The 10 beds in the $400,000 high-dependency unit are laid out in two rooms and monitored round the clock.

At any one time, six to seven beds are taken, and the nurse-to-patient ratio is one-to-one, or, at most, one-to-two.

IMH declined to say what the previous nurse-to-patient ratio was.

The patients there have ailments like those in the general wards – such as schizophrenia, anxiety and bipolar disorders – but are in a more serious condition and are less stable.

Most cannot be cured, but early and aggressive treatment gives them a chance to resume life in the community, say psychiatrists.

Dr Habeebul Rahman, an associate consultant in general psychiatry at IMH, said the move to step up intensive care for this group of patients – which brings standards in line with those in Britain, Canada and Australia more than 10 years ago – has made a difference.

He explained that IMH’s approach is three-pronged:

# Biological, through the prescribing of higher doses of medication;

# Psychological, through care associated with the medications provided; and

# Social, through counselling.

Mr Aziz Abdul Hamed, a nurse clinician at the high-dependency unit, said of the patients there: ‘Like you and I, these patients just need someone to hear them out most of the time. We do that and try to allay their fears and anxiety.’

Still, every nurse there – though trained to handle these patients – carries a handheld device to raise the alarm in case a patient turns violent.

Closed-circuit TV cameras also monitor what is going on.

Dr Habeebul stressed that while some patients lash out when they hallucinate or become paranoid, not all severely disturbed patients are aggressive.

‘Most of them tend to be depressed and suicidal and need intensive monitoring,’ he said.

He said IMH was looking into introducing ‘step-down care’, in which patients and their family members or caregivers are educated on the importance of following through with the medication after their discharge.

This can speed up recovery rate and cut the length of hospitalisation for these patients.

There are no figures for bipolar or anxiety disorders here, but an estimated 20,000 people suffer from schizophrenia here, 10 per cent of whom need institutional care.

Written by Ng E-Jay, for the Online Citizen
06 Aug 2009

Original TOC link

What does it mean to be “one united people”?

Does it mean forging a national identity that can be shared by all Singaporeans regardless of race, language or creed? Does it mean accepting and respecting all our differences, whether in terms of political affiliation or sexual orientation? I can certainly agree with this.

Or does it mean adopting an unquestioning attitude towards Government policies and social issues, and agreeing to make personal sacrifices whilst the PAP reaps the benefits, in the name of “staying together, moving ahead” (PAP’s 2006 GE slogan)?

Does being united mean having to welcome large numbers of foreigners and accept them as part of the community, even if there are social consequences?

Does it mean agreeing to allow our heritage and our sense of belonging to be watered down in order to achieve some higher national goal that the Government tells us is right?

This year, Prime Minister Lee Hsien Loong has called on Singaporeans to stay united on at least four occasions.

Touting the concept of “Singapore United” at the 50th anniversary celebration of the Singapore Manual and Mercantile Workers’ Union (SMMWU) on 28 March, PM Lee called on Singaporeans to stay united and focus their energies on finding practical solutions to the economic crisis. In the past, this has meant accepting cuts in CPF contribution, lower wages and longer working hours, while the Government continues to fatten its coffers through indirect taxation like GST and our ministers continue to pay themselves multi-million dollar salaries.

At the same event, PM Lee also urged Singaporeans not to react emotionally during the downturn by lashing out at foreign workers and immigrants (Straits Times, “Singapore United the way to go”, 29 March 2009). This is an ironic way of passing the buck to Singaporeans, as it is the Government’s overly liberal pro-foreigner and pro-immigration policies that created the problems to begin with.

In his May Day rally speech, PM Lee again called on Singaporeans to stay united under stress, and he acknowledged that two potential divides that we have to overcome are the divides between Singaporeans and non-Singaporeans, and between different races and religions in Singapore (Transcript of PM Lee’s May Day Rally Speech by Prime Minister’s Office, 01 May 2009). He admitted that in a downturn, the Government is concerned that non-Chinese workers will be more affected because larger proportions of them have lower skills. After 50 years of nation building and paying themselves astronomical world-class salaries, the Government still has not found an effective solution to this conundrum.

Speaking ahead of Racial Harmony day on 21 July, PM Lee mentioned the threat of terrorism for the umpteenth time and told Singaporeans to stay united and resist that threat. I agree that the threat of terrorism is real and eternal vigilance is necessary, but by repeating it ad nauseum, the Government has slowly turned the issue into a bogeyman used to scare Singaporeans into focusing their minds on external threats rather than on the failings of the Government. By repeatedly mentioning terrorism In connection with racial and religious harmony, the Government has also indirectly reinforced unfortunate stereotypes that the Government itself tells Singaporeans to be mindful of.

And finally, at the opening of the Sengkang Sports and Recreation Centre on 26 July, PM Lee again urged the nation to stay united against any challenge the country may face (Channel News Asia, “PM Lee calls on nation to stay united to meet all challenges”, 26 July 2009). His reason for regurgitating this tired refrain escapes me. Is PM Lee somehow afraid that the government is slowly losing its grip on this illusive unity that it keeps talking about?

When we “pledge ourselves as one united people”, we are reaffirming our common identity as Singaporeans, that our similarities are more important than our differences, that we are proud to be collectively identified as Singaporeans regardless of our ethnic, cultural or religious backgrounds, that we resolve to work together to tackle the nation’s challenges and make Singapore a better place for all citizens.

But this unity, this sense of purpose and the sense of having a shared national destiny can only be realized if we feel Singapore is truly our home, and not merely a stepping stone for all and sundry to use before venturing to greener pastures.

This unity and togetherness can only come about if the Government places Singaporeans first and refrains from treating us as mere economic digits in a rat race that they themselves have created.

PM Lee likes to parade his unique brand of unity, but his Government is not creating the economic and socio-political climate necessary for that unity to flourish. Until their policies change, all this talk about unity will be like echoes in the wind.