‘You simple and thoughtless ones, understand prudence; you self-confident fools, be of an understanding heart. (Proverbs 8:5)
The US Fed Reserve has recently embarked on a non-standard (unconventional) monetary policy to tackle slow economic growth and high unemployment rate. It has decided to make public of its stand on future target interest rate. It has earlier told the world that it will leave the overnight rates at exceptional low level till mid-2013. Now it has decided to extend such stand to late 2014. Nobody knows whether such monetary policy will work or not as there is no empirical evidences to support it. So Fed is taking a huge gamble on its credibility.
The Fed desperately wants the banks to take risk to lend more to the private individuals and the firms. Despite the huge supply of money pumped into the system, apparently the banks still prefer to leave much money idling with the Fed to earn the pathetic risk-free interest. By pushing down the longer term interest rates, the Fed also tries to discourage the banks to borrow short- term funds for investing in long-term government bonds to make profit. The downside of such policy is that cheap money flows out of US into emerging markets as money goes where it can make money. Properties and commodities are the main beneficiaries as they are easier to churn, and in and out quickly.
In Singapore, it is ridiculous to see property agencies’ websites compute mortgage loan for 30 years based on 1.1%. They are trying to tell the prospective home buyers that if their buy a property at $1.2m and borrowed $960K (80%), the monthly repayment is only $3100. Is it realistic to expect interest rate to stay at 1.1% for the next 30 years of your life? Interest rate just have to double to 2.2 %( even at this level is still very low by historical standard) to see the disastrous impact on the monthly repayment sum. At some point in time, the world has to reward the savers to save.
The US Fed Reserve has recently embarked on a non-standard (unconventional) monetary policy to tackle slow economic growth and high unemployment rate. It has decided to make public of its stand on future target interest rate. It has earlier told the world that it will leave the overnight rates at exceptional low level till mid-2013. Now it has decided to extend such stand to late 2014. Nobody knows whether such monetary policy will work or not as there is no empirical evidences to support it. So Fed is taking a huge gamble on its credibility.
The Fed desperately wants the banks to take risk to lend more to the private individuals and the firms. Despite the huge supply of money pumped into the system, apparently the banks still prefer to leave much money idling with the Fed to earn the pathetic risk-free interest. By pushing down the longer term interest rates, the Fed also tries to discourage the banks to borrow short- term funds for investing in long-term government bonds to make profit. The downside of such policy is that cheap money flows out of US into emerging markets as money goes where it can make money. Properties and commodities are the main beneficiaries as they are easier to churn, and in and out quickly.
In Singapore, it is ridiculous to see property agencies’ websites compute mortgage loan for 30 years based on 1.1%. They are trying to tell the prospective home buyers that if their buy a property at $1.2m and borrowed $960K (80%), the monthly repayment is only $3100. Is it realistic to expect interest rate to stay at 1.1% for the next 30 years of your life? Interest rate just have to double to 2.2 %( even at this level is still very low by historical standard) to see the disastrous impact on the monthly repayment sum. At some point in time, the world has to reward the savers to save.
No comments:
Post a Comment