In the parliamentary debate on the MAS Amendment Bill, Nominated MP Leong Mun Wai voiced his concern that this legislation may lead to monetarisation of government spending which is a path to ruination. I'm afraid Leong's reading of the bill and some of the points he raised, were incorrect.
First, a point of clarity for my readers who are not versed with 2 words inherent in government money matters - 'monetary' and 'fiscal'. Monetary policy or matter refers to activities that are directed toward influencing the quantity of money and credit in an economy. Whereas fiscal policy is all about government revenue (taxation, fees, etc) and spending. Monetary matters is the purview of MAS, the Ministry of Finance takes care of the fiscal. Open economies hold a sacrosanct view the independence of the central bank is of paramount importance. The exceptions are Singapore and totalitarian states. For Singapore, the leaders have long believed it is the discipline of governance that matters, and not something that is easily institutionalised away. Leong sees the Bill as paving the way for MAS to create money for government spending.
Since independence, Singapore has gone through a few monetary systems. We were in the Sterling Area with SGD pegged to British Sterling, then pegged to the Dollar under the Bretton Woods Agreement. With the collapse of Bretton Woods in the 1970s, the SGD was fixed to a basket of undisclosed foreign currencies.
The decades after World War II presented great economic lessons that Singapore's founding fathers took note. First, currencies pegged to metals or other major currencies invariably see massive depreciation when the country has prolonged trade deficits, such as happened to UK and US. Second was the economic theories propounded by John Maynard Keynes, which was very popular in the postbelum years. Keynesian theory had what Singapore founding fathers saw as a major flaw. It proposes total employment via government spending - that a state can spend its way to economic recovery. This doctrine of taking public debt or printing money for spending led to the economic demise of several newly decolonised states.
Against this background in 1985, the government had to make some key decisions. These were:
a. The SGD was allowed to float freely. In internatioal monetary dealings, countries are faced with a trilemma, or unholy trinity - (i) fixed exchange rate, (ii) capital mobility, (iii) sovereign monetary management. These 3 can never work at the same time due to the mathematics of unconvered interest rate parity condition. Countries can only go with 2 policy choices. Singapore abandoned the fixed exchange rate.
b. The exchange rate, instead of the interest rate, was to be used to manage inflation. It was the view that this is a more appropriate choice given Singapore's entreport economy.
c. SGD to be 100% or more covered by foreign currencies. (I believe this refers only to the notes and coins issued, not the entire money supply M2 which includes digital money).
d. Budget deficits will not be tolerated. Singapore thus avoids a pitfall that lie at the heart of money problems of other governments -- funding fiscal demands by monetising debt, ie central bank money creation. Singapore leaders stressed that demands for better public services can only be met by higher taxes and fees.
e. The MAS was established in 1971 but the Currency Board was allowed to remain. It was an oddity to have a central bank and a currency board system operating at the same time. This was simply the government's way of making a statement that MAS will not be printing money, an effort aimed at building confidence in SGD at the time when it was floated freely.
These watershed monetary and fiscal policy that crystallised was a cabinet decision in 1985. As narrated by Dr Goh Keng Swee the Dpy Prime Minister, and defacto chief economist of the country, all cabinet members had to write down the rational for their decisions. As it turned out, the decision was unanimous. These were fundamental principles to live by, which has never been abandoned, and which the MAS Amendment Bill will not circumvent.
Actually, there have been 2 changes. (a) the Currency Board was merged into the MAS in 2002. By then, SGD confidence had been established, so it was a non-event. The administrative function of printing notes and coins are now handled by MAS. It does not mean the printing of money to spend. (2) In recent times, the government has allowed municipalities to take on debt for infra development projects. This was to take advantage of Singapore's good credit rating and cheap money. I would have liked to see some discussions on this but there has been none in the public domain. Would be great if Leong can raise this in parliament so we can see some data, particularly with US inflation hitting 7% under the capable Biden admin, and a US$3T spending on the way, higher interest rates are imminent.
This blog is not intended as a refutation of Leong, whom I applaud for bringing his concerns up in parliament for debate. This is what MPs are supposed to do. The workings of MAS, monetary and fiscal matters, are often quite complex. The purpose here is to share my understanding of some of the issues, which happens to be at odds with Leong's views. Leong's basic points are in italics. The numbers are his.
First, a point of clarity for my readers who are not versed with 2 words inherent in government money matters - 'monetary' and 'fiscal'. Monetary policy or matter refers to activities that are directed toward influencing the quantity of money and credit in an economy. Whereas fiscal policy is all about government revenue (taxation, fees, etc) and spending. Monetary matters is the purview of MAS, the Ministry of Finance takes care of the fiscal. Open economies hold a sacrosanct view the independence of the central bank is of paramount importance. The exceptions are Singapore and totalitarian states. For Singapore, the leaders have long believed it is the discipline of governance that matters, and not something that is easily institutionalised away. Leong sees the Bill as paving the way for MAS to create money for government spending.
Since independence, Singapore has gone through a few monetary systems. We were in the Sterling Area with SGD pegged to British Sterling, then pegged to the Dollar under the Bretton Woods Agreement. With the collapse of Bretton Woods in the 1970s, the SGD was fixed to a basket of undisclosed foreign currencies.
The decades after World War II presented great economic lessons that Singapore's founding fathers took note. First, currencies pegged to metals or other major currencies invariably see massive depreciation when the country has prolonged trade deficits, such as happened to UK and US. Second was the economic theories propounded by John Maynard Keynes, which was very popular in the postbelum years. Keynesian theory had what Singapore founding fathers saw as a major flaw. It proposes total employment via government spending - that a state can spend its way to economic recovery. This doctrine of taking public debt or printing money for spending led to the economic demise of several newly decolonised states.
Against this background in 1985, the government had to make some key decisions. These were:
a. The SGD was allowed to float freely. In internatioal monetary dealings, countries are faced with a trilemma, or unholy trinity - (i) fixed exchange rate, (ii) capital mobility, (iii) sovereign monetary management. These 3 can never work at the same time due to the mathematics of unconvered interest rate parity condition. Countries can only go with 2 policy choices. Singapore abandoned the fixed exchange rate.
b. The exchange rate, instead of the interest rate, was to be used to manage inflation. It was the view that this is a more appropriate choice given Singapore's entreport economy.
c. SGD to be 100% or more covered by foreign currencies. (I believe this refers only to the notes and coins issued, not the entire money supply M2 which includes digital money).
d. Budget deficits will not be tolerated. Singapore thus avoids a pitfall that lie at the heart of money problems of other governments -- funding fiscal demands by monetising debt, ie central bank money creation. Singapore leaders stressed that demands for better public services can only be met by higher taxes and fees.
e. The MAS was established in 1971 but the Currency Board was allowed to remain. It was an oddity to have a central bank and a currency board system operating at the same time. This was simply the government's way of making a statement that MAS will not be printing money, an effort aimed at building confidence in SGD at the time when it was floated freely.
These watershed monetary and fiscal policy that crystallised was a cabinet decision in 1985. As narrated by Dr Goh Keng Swee the Dpy Prime Minister, and defacto chief economist of the country, all cabinet members had to write down the rational for their decisions. As it turned out, the decision was unanimous. These were fundamental principles to live by, which has never been abandoned, and which the MAS Amendment Bill will not circumvent.
Actually, there have been 2 changes. (a) the Currency Board was merged into the MAS in 2002. By then, SGD confidence had been established, so it was a non-event. The administrative function of printing notes and coins are now handled by MAS. It does not mean the printing of money to spend. (2) In recent times, the government has allowed municipalities to take on debt for infra development projects. This was to take advantage of Singapore's good credit rating and cheap money. I would have liked to see some discussions on this but there has been none in the public domain. Would be great if Leong can raise this in parliament so we can see some data, particularly with US inflation hitting 7% under the capable Biden admin, and a US$3T spending on the way, higher interest rates are imminent.
This blog is not intended as a refutation of Leong, whom I applaud for bringing his concerns up in parliament for debate. This is what MPs are supposed to do. The workings of MAS, monetary and fiscal matters, are often quite complex. The purpose here is to share my understanding of some of the issues, which happens to be at odds with Leong's views. Leong's basic points are in italics. The numbers are his.
"2. The reserves are actually accumulated through a mechanism which operates on a few key principles put in place in the 1980s by the late Dr Goh Keng Swee. The mechanism essentially uses our large pool of domestic savings to soak up the foreign money that flows into Singapore......".
The large pool of domestic savings is in the CPF which are invested in non-tradeable SSGS (Special Singapore Govt Securities). The government in turn placed these funds with GIC to invest. It has nothing to do with capital inflows.
"5. However, this Bill opens up the possibility of the Government accumulating foreign reserves through simply getting MAS to print Singapore dollars....""11. ..... The MAS can utilise the government deposits or increase the supply of Singapore dollars to accumulate foreign reserves."
"12. ..... Accordingly, the accumulation of reserves is limited by the amount of excess savings we have.""14. ..... If the Government wishes to continue accumulating foreign reserves, MAS will have to print new Singapore dollars, since there are no government deposits to pay for it.
In its forex market intervention when MAS purchases foreign currencies, it does so by simply crediting counterparty bank's SGD Reserve a/c at MAS in exchange for the foreign currency. That is, MAS simply digitally 'prints' the SGD to pay for the foreign currencies. Technically, MAS has unlimited capacity to buy foreign currencies. It has been printing SGD to purchase foreign currencies all along. Government deposits play no roles in MAS forex market intervention. The amendment bill changes nothing.
The increase in the supply of SGD printed causes inflation. The SGD is mopped up by issuance of MAS Bills. The sales of these are settled by MAS debiting banks' Reserve a/cs. By this way, MAS sterilises the SGD printed.
"15 & 16. .... in 2020 and 2021....sudden surge in foreign money inflow. This in turn has caused the accelerated rise in property prices from 2020 till today. .... foreign reserve increases .... amounting to $180 billion ...... far exceeding the targeted OFR limit of $325 billion, so the excess is due to be transferred to GIC."
There is a mistaken notion by almost everyone, that foreign money comes into Singapore to buy equities, properties, our export products, etc caused pressure on the exchange rate; Singapore is so prosperous, economy so great, foreign capital keeps pouring in, MAS mops up the foreign currency to prevent the SGD appreciation, thus ending up with the huge excess in OFR. This is true to a certain extent, but the reality is real commerce-based capital inflows contribute to only a small portion of forex volume. Forex is a massive market that overshadows all other financial markets combined. Commerce-based trades form only 10% of the volume. Overwhelming volume is from speculation and hedging activities. As Singapore internationalises the SGD, its volume rises. Currently SGD is trading way above its belt. It ranks 13th highest traded currency in the world. In 2019 Singapore was the 3rd biggest forex market in the world and the daily volume of SGD traded was a massive US$57b. As for the huge SGD180b increase in OFR in 2020/2021 (which blogger Critical Spectator erroneously extolled was part of the SGD230b gain in wealth by Singapore during the pandemic), I have not done any data analytics, but I venture an educated guess a huge factor is attributable to the crazy upswing in valuation of cryptocurrencies. Just take this in - the SGD/BTC (bitcoin) ranks as the 10th highest fiat/crypto pair in volume traded.
"17. However, under the present rule, the foreign reserves cannot be transferred from MAS to GIC if the foreign reserves were not paid for by government deposits. The Government and MAS, the central bank, are independent entities operationally and the Government cannot take assets away from MAS without paying for it."
There are 2 points to clarify here. Firstly, it is not a case of MAS transferring OFR to GIC, as media has described. It is MOF transferring national reserves (budget surplus and proceeds from land sales) to GIC. MAS was merely liquidating from its excess OFR to fund the deposit withdrawal by MOF. Secondly, government deposits with MAS consists of national reserves not yet transferred to GIC plus its fiscal collections (current year taxes, fees, fines, etc). To state the obvious, portions of the deposits cannot be transferred as they are meant for fiscal purposes.
The government surplus built up is not sufficient to allow MAS to totally liquidate their excess OFR.
"19. This Bill thus opens up the possibility for the Government to pressure MAS to print more Singapore dollars to accumulate foreign reserves and then buy them over from MAS with RMGS. Needless to say, this runs the danger of a collapse in monetary and fiscal policy discipline, leading to hyperinflation."
Yes the RMGS (Reserve Management Govt Securities) is a debt instrument that allows MAS to use its OFR to buy so the MOF can then transfer the foreign currencies to GIC for long term investment. There is no need to wait till MOF has accumulated enough national reserves in its deposits at MAS. So again note the right terminology. MAS liquidates its OFR to buy RMGS. Its not a case of MAS transferring OFR to GIC.
However Leong got a few things wrong here. The RMGS is a monetary tool, not a fiscal tool. The issuance and redemption is determined by MAS. RMGS is foreign currency denominated and non-tradeable. MAS is simply replacing one asset with another in its books -- from OFR to RMGS. MAS subscribes for the RMGS with its foreign currencies. MOF cannot spend the foreign currency proceeds, but transfers them to GIC for investment.
Basically the government maintains 2 sets of books. The Consolidated Fund records fiscal transactions, and a Security Fund records debt instrument transactions. RMGS transactions are recorded in the Security Fund, with the assets within a sinking fund. There is clarity and no monetising the fiscal, ie no MAS money printing to fund government expenditure.
"5. ..... However, this Bill opens up the possibility of the Government accumulating foreign reserves through simply getting MAS to print Singapore dollars. This is effected through Clause 2 of this Bill which deletes and substitutes section 23(6) of the MAS Act to allow the MAS to subscribe to the Reserve Management Government Securities (RMGS) although section 23(5) states that MAS shall not directly subscribe for any securities issued by the Government or any public authority. Hence this is a major change in the conduct of our monetary policy. In layman’s terms, while MAS cannot do quantitative easing in the past, it can potentially do so if this Bill is passed. So we have to bear that in mind."
Again, I think Leong got it wrong. Government issuance of bonds and T-bills is not about borrowing for spending. These securities are issued to establish a SGD yield curve. A yield curve is a fundamental barometer in an open economy to benchmark cost of debt as well as computation of economic expectations. Section 23(5) that forbids MAS from directly subscribing to govt bonds and T-bills is not meant to prevent central bank monetising government spending. It is meant to dispel market fear of government price fixing in the auction of government securities.
Section 23 (6) now allows MAS to subscribe directly for the issuance of RMGS. These are non-tradeable foreign currency denominated instruments the purpose of which is purely as a mechanism for MAS to liquidate OFR and for the government to transfer the currency proceeds to GIC to invest. The question of price fixing or monetising government spending never arises.
MAS manages credit in the market by the Liquidity Ratio that banks must comply. Increasing the ratio causes banks to tighten credit in the market, reducing it causes credit relaxation, thus more SGD liquidity. MAS has never utilised quantitative easing or tapering by buying or selling government securities like the Fed in US. In any case, RMGS is non-marketable and also foreign currency denominated, thus the issue is moot.
"21. Question 1: We appreciate the two sets of safeguards that the Minister for Finance has explained but how do you explain the fiscal operations in 2020/2021 where one one hand the Government is accumulating about $180 billion of new reserves with RMGS and on the other hand, spending $53 billion on the Covid-19, should this be defined as monetising of government spending too?"
Finance Minister Heng Swee Keat explained in 2020 S$18.9b came from current reserves, and S$22B from loans which were thus 'fiscally neutral'. The S$18.9b were helicopter drops, written off as government expenses and came from MOF deposits at MAS, the portion of deposits from national reserves not yet transferred to GIC. I'm guessing another S$11b in 2021 were similarly treated. The S$22b related to loan programme package for corporates. MAS provides a credit line to participating banks that they can draw on to fund loans to their qualifying customers. When banks draw on the MAS line, the central bank simply credit the banks' Reserve accounts. In other words, MAS resorted to printing money. I blogged about this in The Answer to "Where Is Singapore Government Borrowing S$22B Loan From?" in Jun 2020. Printing SGD is MAS monetary function, and in this case, it is a lender of last resort responsibility. It was not monetising government spending, hence Heng 's "fiscal neutral" term.
The danger of central bank printing money, whether it is for government spending or not, is in the multiplier effect of fractional banking which can lead to a higher supply of money in the economy, thus causing inflation. This was definitely the case with MAS printing money for the Covid corporate loan support programme which I blogged in Jul 2020 "Government does not want you to know MAS is printing money for Covid-19 aid package" . There was indeed a marked spike in the SGD money supply in qtr 4 of 2020.
The rest of Leong's speech touched on national reserves which I do not cover here. I shall however, end with a cliffhanger. My next related blog I boldly claim to know the real reason why the government refuses to disclose the complete national reserves held by GIC. Stay tuned.
