INFLATION OR STIMULATION?

http://www.conradalvinlim.com/2012/05/may-day-food-for-thought-1-may-2012/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ConradAlvinLim+%28The+Pattern+Trader%29

INFLATION OR STIMULATION?

Someone asked me why thoughtless lavish spending encourages inflation when it helps to stimulate the economy …

In one small example, buying an apartment you can’t afford then defaulting on the downpayment means that your thoughtless spending just helped to raise the price of properties unrealistically and returning the apartment doesn’t bring the price down. Instead, the developer can now sell that same apartment for a second time but at a higher premium. Your reckless greed just contributed to inflating property prices for the next buyer who really needs a home but cannot afford it now.

I don’t call that stimulating the economy. I call it selfish idiocy and poor financial management at other people’s expense.

In another small example, spending money on things you waste also sends inflation up. Buying more food than you can eat translates into wastage and disposal of wastage costs money. It also encourages the retailer to supply more and thus increases his spending to increase his inventory. Whatever the retailer can’t sell translates into wastage and lost revenue which means he will have to mark up to cover his losses. Such mark ups often stay up and don’t come down and the ripple effect goes backwards through the supply chain.

I don’t call that stimulating the economy. I call it selfish wasteful consumption with no regard for others who can’t afford the consequences of your gluttony.

In one last small example, buying a car you don’t need fuels the need to import more petroleum which in turn (in its own supply chain) raises the price of fuel. More cars also means more congestion which translates into higher ERP rates. Parking rates also increase and these rate hikes never come down.

To meet the needs of the demand by those who can’t afford it, car suppliers ship in more cars in anticipation of a high take up rate. When their cars can’t move, they can’t lower the price of the car as they have to factor in shipping costs, exchange rates and storage expenses. Cost of maintaining the unsold cars also help keep prices up.

Now do we even need to explore the consequences of the price of the COE?

I don’t call that stimulating the economy. I call it face pride and ego in spending money you don’t have for something you don’t really need only to impress those who don’t really care because someone else is always gong to have a bigger, better, faster and more expensive car than you. If you really need an expensive car to impress someone, then that someone is really not worth the sacrifice.

Then someone asked what we can do to make things better.

There is a lot that we can all do as a collective effort to control and even bring down inflation.

We can stop spending lavishly with money we don’t have! This goes back to the thoughtlessness I was referring to in my last posting “Weekend Food For Though 28 April 2012; ‘Just How Do Singaporeans Live?’“.

Lots of people here are heavily leveraged on their credit cards and spending beyond their means with no real solution to paying off all their debts. Others are over-leveraged on loans based on their current income capability instead of realistically looking at their long-term affordability even factoring in bad times.

We’re spending money we don’t have on things we don’t really need. We’re entertaining ourselves and making ourselves happy today without care for tomorrow. All this unnecessary lavish spending only encourages inflation.

There is a fine line between stimulating the economy with necessary spending and fueling inflation with wastage and unnecessary spending. This is called Consumer Sentiment. There are so many other reports that track consumer’s habits to tell us the state of consumer affairs; consumer spending versus consumer income, discretionary spending, consumer credit, inventory reports, services PMI, etc. All these reports are weighed and measured to give us other data like CPI and PPI and other PMI reports.

When you spend, you contribute to these statistics which obviously translate into stimulation or inflation. Singapore is no longer in need of stimulation. It is bloated and inflated with a credit bubble. When this bubble pops, it will be messy, very messy and a lot of people are going to get burnt. It happened in 2008, 2001, 1997, 1987, 1874 and many other times in history all around the world. Our problem is that it is happening more frequently now than any other time in post-war history.

The last time we had such a tight accumulation of bubbles and pops was in the early 1900s. It ended with the great equalization that was WWII. Before that and moving backwards in time, it was Roosevelt’s recession in 1937 then the Great Depression in 1929 then the Panic of 1907 and the Panic of 1893. We’re are probably on the precipice of another great catalyst for equalization.

Spend when you need to. Spend on what you can really afford. Spend on what you truly need. Otherwise, stop spending especially when you can’t afford to and don’t need to. Every contribution helps.

Remember that when you spend to impress, those whom you’ve impressed will not be there to bail you out when the good times end. So why bother?