Tan Kin Lian's Blog: Economic growth and asset prices

Thursday, June 03, 2010

Economic growth and asset prices

Some economies were able to achieve rapid growth over an extended period. During the initial years, they adopted economic policies that proved to be attractive for inward foreign investments. This created jobs and lead to a productive economy.

The next stage of the economic development was funded by the rapid rise in property prices. As these assets appreciated in value, the owners felt that they had become wealthy. The governments were also able to use the appreciated values of their assets to take more borrowings to fund national development and other spending. Some of these spendings become wasteful and were not economical justifiable.

After a few decades of inflated asset values, these economies will have to face their reality. Asset bubbles allow more debts and borrowings and do not really create productive wealth. There has to be a payback time.

We have seen the bursting of the asset bubbles in Japan in the 1990s and the continuing pain for two decades. We are now seeing this situation in the USA and Europe. Singapore is also funded on this type of asset bubbles. The high property prices have to be paid through many years of future hard work.

It is sad that in an asset bubble, the earlier owners (including foreign funds) creamed off the big profits and leave the burden of higher asset prices to be paid for by future generations.

Tan Kin Lian

7 comments:

Anonymous said...: Agreed. The global economies have not recovered. What you are seeing now is the extension of further cheap credit (now funded by government) which helps to prolong the life of the bubble. It is like the tusnami, the second wave will be larger. It is not new - 1930s despression and the Japan depression for 20 years - have similar second wave patterns. Beware, the Greece crisis is like "the canary in the economic mind shaft". All developed world governments are technically bankrupt and are printing monies to keep their banks alive. The decline in asset prices will be much heavier than the one before.; June 03, 2010 8:50 AM
Anonymous said...: The problem is there are a lot of howlian Y-Gen that funds their current life style with tomorrow's salary.
Even insurance companies are perpetrating this trend. The so called life style products touted illusionary, feel good to cover up the rotten core.Even the social enterprise is doing it. It shows the social enterprise is bankrupt that it has to resort to hallucinating the consumers into beleiving that their products can deliver the illusionary goals.
The plain vanilla products of old which gave value for money are not sustainable that companies are switching to cheating the public by rubbish and rotten products like whole life , limited payment wholelife, endwoment and cashbacks.
These products should be banned for they bring nothing but burden and disasters.The only people who benefit from them are the insurance agents and the companies.
So much of an individuals resources
go to 'fund' them and yet not getting the decent return and yet they are still being sold , pushed to the unwary and trusting consumers.
FISCA can do something to educate the public why these products are a drain on their hard earned resources.The coming seminar should address these issues abd save the public from being impoverished by unscrupulous insurance agents and the unconscientious companies.; June 03, 2010 9:28 AM
STG said...: to further the point made above, almost all the major central banks have cut their interest rates to near zero levels, apart from ECB 1%, and that means limited options and less flexibilities for the central banks to react to any economic downturn.

SG is not insulated to the fluctuations in the world economy. EU remains the top export destination for SG, followed by US and China.

Can the weakening demand in EU be offsetted by the rise in US and China?
Are the US and China, or rest of the world, being exempted from any repercussions in EU and can their demand for our exports continue to grow?; June 03, 2010 10:22 AM
Retired said...: All Governements are in debt and all are printing $$. That is a fact.

Therefore, all Gov realise the consequences and that consequence is too horrible to face.

So, what then?

Simply carry on!.. after all, do you see and experience hardships?
Do you eat enough? Do you sleep with air-con?
Sure, riots in the streets of Athens, .. do you see starving people?.. they all look well fed and healthy.
Look at property prices in Singapore, Sydney, London, Beijing, Hong Kong.. up? or down?

Do you see the dow jones going down lower than 50%? Do you see the ST index lower to 500?
Not likely.. its a party that cannot end and MUST NOT END.

ALL WILL TRY VERY VERY HARD TO CARRY ON AND PRINT $$ as long as the next 20 years... because the consequence is too horrible to face. It destroys all the beliefs of democracy and capitalism which 99.9% of the entire world has embraced.

Meanwhile what to do?

Enjoy the party, travel, eat, experience life.. no point in buying gold to save hedge against losses.. you cannot eat it and you cannot carry it to heaven.

Enjoy the party.. there is nothing you & I can do anything about it.
Not a single soul ( that includes all the M&Ms here ); June 03, 2010 11:07 AM
JSLEE said...: I think if general household income of citizens increase, asset price increase is justified. However, Sales of assets esp. properties that involves leverage should not be treated like a commodity exposed to speculation. The cost of leverage or borrowing should be adjusted accordingly to market trends.
New forward looking initiatives have to be planned to justify the price increase, ie. what the individual or country can offer...sustainable new resources,jobs,innovation,industries producing real goods & services.; June 03, 2010 11:39 AM
Anonymous said...: why are the property price going higher and higher now? the rich are buying more than 1 house for their future generation! so even if the economy is really bad next time, their children will still have a good gouse !!!; June 04, 2010 10:28 AM
Anonymous said...: @retire...11.07am
did you get your fact right?
is Singapore in debt?
all the government of the world in debt?; June 05, 2010 6:47 PM