As many macroeconomists would know that the original Phillips Curve relationship between unemployment and inflation works well from 1861 till around 1970. The relationship broke down in the 1970s and 1980s. It was later discovered that when plotted in an unemployment-changes in inflation rate space, the downward sloping inverse relationship holds true again using data from 1961 till 2005.
This modern Phillips Curve is known as the expectations-augmented Phillips Curve. Now, why the need to “drag” this into our earlier discussion? Most importantly the modern Phillips Curve shows a short run trade off in the rate of change of inflation vis-à-vis change in unemployment rate. There is empirical evidence to support an estimated short run trade-off between unemployment and inflation in the ratio of 2 to 1 assuming inflation expectations remain constant. Based on Okun’s Law, 1% rise in unemployment equates to 2% fall in GDP. Linking both relationship (theoretically) gives a sacrifice ratio of 1% fall in inflation to 4% decline in GDP.
Another renowned economist Lawrence Ball gave an estimate of 2.39 instead of 4 for the sacrifice ratio. Why the discrepancy? This is because inflation expectation changes and tends to be lower during disinflationary period. As we know, the US FED FOMC meeting in Dec 2021 signaled 3 possible interest rate hikes this year (2022). This is where the “problem” is? What is the relationship between change in interest rate and change in inflation rate? In other words, how much and how fast to hike interest rate to lower the inflation rate to the long run target of 2%?
To be continued in Part 2 – 2 Leo 81
Disclaimer: Please do your own research. The comment/ writing above consists mainly of personal opinion or interpretation &/ or to be and must be used by any party for informational purposes only. Any party should take financial advice from professionals in respective fields or do their independent research and verify any information found here for the purpose of investment decision or otherwise.
7 comments:
Here it comes, Singapore's "anti inflation" moves, plus pay back all that "COVID welfare" we gave you.
Stronger SGD, plus higher GST. Singapore Dollar---stronger than Bitcoin and Gold 🤣
Go, Fortress Singapore! 🚀 Keep on ROCKING!🎸😎
https://www.bloomberg.com/news/articles/2022-01-11/singapore-tax-hike-bolsters-case-for-mas-to-tighten-policy
When a tiny piece of rock, floating in a turbulent sea, rocks too much, it is inevitable that it will sink.
The British's impregnable fortress was proven to be a propaganda stance to bluff the Japanese before the Japanese forces came down from Vietnam and Thailand, through Malaya within 70 days.
Singapore could not even hold on for 7 days when the Japanese Imperial Armies cycled down the Bukit Timah Road.
What Fortress Singapore?
FORTRESS of the mind, soul, your "happiness" (whatever that is to you) and your private property ie.your assets, yourself and your relationships with your family and kindred.
It's not a fortress against war, per se...although we can tahan 1-2 weeks before our "defense partners" show up. The likelihood of that happening is remote, so don't worry about stuff you can't control...enjoy your life.🥂🍾🍻
If we can take anything positive away from this pandemic, let it be that we should cherish what we have and make the most out of being alive, sharing as much time with the people we hold dear. i.e. Create as much "value" as you can, while you can. (Hint: "value" isn't always about money. At the end of the day money is just a tool)
Top 20 Predictions in 2022
Part 2 – 2
2022 Prediction (2) – A Turning Point?
The US CPI will be out on 12 Jan 8.30am local time. Market forecast is at 7.1%. Actual figure could be higher given the demand and supply factors (and shocks in 2021) in the goods as well as the tight supply in the labour markets.
Another possible factor for the much elevated price level (at least to some extent) could be the concept of money neutrality (given the current massive US$8.8 trillions in the US FED balance sheet, some from “rollover” from the 2009 to 2014 US FED QE1,2,3 (Quantitative Easing) & Operation Twist and the remaining about US$5 trillions since July 2019, when they reversed the QT (quantitative tightening) embarked on in Oct 2017 by then US FED chairwoman Janet Yellen starting at US$10 billion per month and incrementally raised by US$10 billion in each succeeding quarter capped at US$50 billion, but mainly from the QE Unlimited by FED Chairman Jerome Powell since Mar 2020.
An additional factor could be what is called ”Voodoo Economics” (a term coined by Bush Snr during the 1980 US Presidential Election campaign about Ronald Reagan’s then proposed supply-side tax cut policy often advocated based on the dynamic scoring principle). Empirically the benefits especially economic growth arising from tax cut is fairly limited and proven short lived but the downside is possibly heightened price level in the longer run. Due to the 2017 tax cuts policy, the full-blown price level impact might be felt significantly from 2022 onwards.
Turning away from the US, what are the potential ramifications on our (beloved) Little Red Dot and the possible measures that can be undertaken to mitigate the downsides and navigate through this potentially turbulent period? First of all, our monetary policy differs significantly from the rest in that our central bank (MAS) manages via our exchange rate. Our main monetary policy tool namely the Singapore Dollar Nominal Effective Exchange Rate Band (SGD NEER Band) was implemented in 1981 by our then DPM Goh Keng Swee, given the extremely open nature of our economy, its miniscule size relative to the world, utter lack of any natural resources and its strategic geographical location. Singapore has limited capacity and thus needs to import most of what it needs for its domestic consumption, value-add production and exports. The mandate of a central bank often centres around price stability, sustainable economic growth and full employment. For that, in the past 4 decades, our exchange rate based monetary policy has achieved far beyond what we could imagine and we should be extremely thankful and grateful for the superb foundation and system that our old guards such as MM Lee, DPM GKS, DPM Toh Chin Chye, FM Hon Sui Sen, Foreign Minister Rajaratnam, Law Minister E W Barker, Social Affairs Minister Othman Wok, National Development Minister Lim Kim San, Labour Minister Ong Pang Boon, etc etc had done and laid down for the future generations (including ours).
To fully understand the implications of our unique exchange rate-based monetary policy, we need to understand a basic concept in international finance known as the trilemma or impossible trinity .
To be continued in Part 2 – 3
Leo 81
Disclaimer: Please do your own research. The comment/ writing above consists mainly of personal opinion or interpretation &/ or to be and must be used by any party for informational purposes only. Any party should take financial advice from professionals in respective fields or do their independent research and verify any information found here for the purpose of investment decision or otherwise.
@ Leo81
>> Our main monetary policy tool namely the Singapore Dollar Nominal Effective Exchange Rate Band (SGD NEER Band) was implemented in 1981 by our then DPM Goh Keng Swee <<
Actually, there was a team of people. A few of them are still alive.
>> The mandate of a central bank often centres around price stability, sustainable economic growth and full employment. For that, in the past 4 decades, our exchange rate based monetary policy has achieved far beyond what we could imagine and we should be extremely thankful and grateful for the superb foundation and system that our old guards [...] <<
There used to be the words "non-inflationary" before the the words "economic growth" on earlier versions of the MAS website. "Non inflationary" is now non existent.
$NEER is a great policy tool! It means the govt doesn't need to borrow and monetise. Because the SGD is essentially a "sound money", having the backing of real assets, during global monetary inflation currency regimes, there's a danger that the SGD will become too strong relative to other currencies and thus make Singapore uncompetitive.
$NEER allows MAS to maintain the SGD in a range which will keep the foreign capital flows coming in, and also ensuring that Singapore remains competitive in production and export.
Bonds are "The Ultimate Truth" in markets. Interest rates---real, nominal, relative and future ultimately determine economic and financial outcomes over time. Money has a cost, time-value. And credit is capital but leveraged, and that "lever" has a cost.
>> we need to understand a basic concept in international finance known as the trilemma or impossible trinity . <<
Heads up readers...Pay attention to this man.
Good job, Leo 81 👏🏻👍🏻🥂🍻👏🏻
Hopefully some people will gain from your work, and better their understanding of the macro world, and maybe even start investing wisely instead of gambling.
Cheers!
$NEER is one of the Foundations of Fortress Singapore
@ Matilah 6.47pm
Matilah: >>>Actually, there was a team of people. A few of them are still alive.<<<
Leo 81: Obviously, there were teams of people behind. And they can never be thanked sufficiently. The late DPM Goh Keng Swee and his teams at the Finance Ministry as well as MAS had done a fabulous job and laid down invaluable foundation for the future generations.
Similarly, when people credit China’s paramount leader Deng Xiao Ping for enacting the open door policy way back in 1978, obviously there were (huge) teams behind him too.
Hope this answer makes you happy … ��
Matilah: >>>Heads up readers...Pay attention to this man. <<<
Leo 81: Please DON’T! Follow this ‘advice’ of Matilah at your own peril/ risk!
Matilah: >>>Good job, Leo 81 ����������������
Hopefully some people will gain from your work, and better their understanding of the macro world, and maybe even start investing wisely instead of gambling.<<<
Leo 81: OMG, MATILAH! You have just created “HYPER-INFLATION” --- Over-rating "BUBBLE!” Just like any bubble or hyper-inflation, it will burst eventually or crash back to earth!
@ Leo 81
I like bubbles. People make a lot of money in bubbles. 🚀 🤓
You don't have to go long in markets. You can go short, i.e. you can make a tonne of money in times of "animalistic panic". I am short the S&P 500, and taking a small hit at the moment (it's costing me). That's the way it is.🤷🏻♂️
You are right, people should make up their own mind and take on or reject risk as a matter of personal choice.
Anyway Leo, I'm not "over rating" you. I'm merely stating an observation and my one-man's opinion
I suggested that people pay attention to you, to get more understanding with macro---which is now driving everything, like chaos. (I like chaos---in a broad sense, volatility is THE ONLY "asset class").
However, the choice to take on risk, is their decision alone. If I implied otherwise, I wish to withdraw any notion of that.
We live in a "free market of ideas". Ideas matter. Cheers!
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