Here’s an opinion which revisits the issue of low interest rates using Timothy Ho’s article (CPF-HDB scheme – Separating myth from reality) which claims that 2.5% Ordinary Account interest rate is not lousy. He writes:
No bank anywhere in the world will pay a 2.5% interest rate for money that can be used anytime on demand. If you want that, it’s a saving account you need. And the interest you will get would be below 1%. Because the truth is your money in the bank (or CPF account) is extremely liquid. The other party cannot confidently use your money for long-term investments without the full assurance that you will not withdraw a chunk of your money tomorrow. Any banking undergraduate can explain the concept of liquidity to you……….”
In our case, the “other party” is CPF, and Timothy Ho has made a schoolboy error to assume CPF is like a bank or any other party, an assumption that is insidiously lodged in the minds of most people. This is the same assumption the Government uses to justify low rates. However, CPF invests our funds, not individually per account but like any asset holding entity, in aggregate of all monies at its disposal. Unlike investment funds, the monies that flow into CPF is compulsory and is an assurance that CPF can “confidently use the money for long-term investments” despite the concept of liquidity that Timothy Ho has asserted. Check the CPF balances across all account types which include all withdrawals over the past 6 years.
CPF may not have assurance that each member “may not withdraw a chunk of your money tomorrow” but in aggregate, as the table shows CPF do have the assurance that the net inflows are intrinsic because of compulsion by law. The concept of liquidity is a significant risk for financial institutions and it arises from the possibility that cash withdrawals can happen faster than the institution is able to sell its assets to meet the withdrawal. But this does not apply to CPF because it has intrinsic net inflows. In any case, the Special Singapore Government Securities (SSGS) that CPF invest in also by legal compulsion are simply to reflect an obligation of the Government to CPF. This obligation increases or decreases according to the aggregate balance of CPF without CPF having to buy or sell these artificial securities.
Next, the Liquidity Hypothesis, which Timothy Ho conveniently forgot to inform readers when he mentioned the liquidity concept, dictates that the longer one waits to get back one’s principal, the higher the interest rate one should receive. The compulsion and intrinsic net inflows of its balances meant that CPF can invest for a very long time, probably into perpetuity. Should CPF be happy that the Government pays 2.5% OA rates when long-term government bond yields are over 3%? Even so, long-term government bond yields are artificial. If 75% of outstanding government debt is held captive by CPF, then the market yield of the real bonds is artificially suppressed, especially in the face of persistent budget surplus. Moreover, the MAS exchange rate policy, which aims for an appreciation of the S$ to control inflation, has enabled the S$ has to gain 20% against our main trading partners in the last 7 years but yet inflation has averaged 3.7% and short term interest rates well below 1%. Surely, this is an anomaly to have sub-inflation interest rates when inflation is high and growth is strong!!! The exchange rate cannot prevent high real estate and COE prices from fuelling inflation. On the contrary, it has imported low interest rates from the West despite Singapore having none of the West’s problems of slow growth, high unemployment and threat of deflation.
When Minister, Mrs Josephine Teo announced that 2.5% is fair according to the market, Singaporeans should know the market is arranged to produce the desired outcome of low interest rates. In simpler words, the rate is rigged. Readers should also understand that abnormally low interest rate is a high octane fuel that drives real estate prices and provide the cheap financing for Singapore companies to make overseas acquisitions. It is also a transfer of wealth from individuals to the corporate sector.
Timothy Ho seems to have swallowed the Government-created alternate reality hook, line and sinker. The writer does not fault him for his youthful exuberance coupled with a bit of arrogance, but rather advises that a “chunky” dose of skepticism is essential in matters of investment less he gets eaten alive.
PS: For readers who like to comment that CPF rates should be linked to Temasek investment returns, this will be one of the subjects of another CPF article. Akan Datang.
Chris K