Wednesday, October 17, 2012

Mechanics of US Federal Reserve Quantitative Easing as financial warfare

MAS to maintain monetary policy
Updated 08:45 AM Oct 12, 2012

SINGAPORE - The Monetary Authority of Singapore (MAS) unexpectedly kept monetary policy on hold this morning, saying it will continue letting the Singapore dollar appreciate at its current pace as inflation remained a worry.

Insights share by EDMW forum member, sleepyhealer how a strengthening SGD will dampened exports, leading to contraction in the economy

Singapore government not thinking.

By allowing the currency to continue to appreciate, it means that our export will be more expensive than before while our import will be cheaper. We are net exporter in nature not net importer. So when it means that it is more expensive, other people will source for cheaper alternatives. This drives down the demand for growth for the companies.

When the demand for the export drops, net profit after tax dropped and it means that in order to retain the same profit, the companies either have to bank on the fact that they will retain the same demand now as they raise price or cut cost. When they cut cost, labour cost will be one of those that they seek to be cutting as it should made up the main bulk of the flexible cost component. They could also be cutting their supply import as they foresee a slower demand on their goods.

When it happens, it will further drop in demand as the domestic will not likely to demand for more given that more consumers are jobless or had a reduced income or companies reduced their demand of raw materials.

Also that when no one want export, you will find your currency facing depreciation as you now have abundance supply of money. You will likely to reduce the money supply to keep up with the appreciation policies.

When money supply shrink, interest will go up when business borrow money. (Opportunity cost) which result in higher expenses due to higher finance interest.

Those that is on margin financing will find themselves having to top up additional assets to continue their funding limit. I think call pledged assets or something cannot remember.

Eventually some companies will go bust as a result and the whole thing will spiral out of control.

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