Understanding Inflation (Part 2)

As a financial advisor, my watch on inflation is not only on CPI, but also on the strength of currency (i.e. Sing dollar). This is because the “mother of all inflation” is the devaluation of currency. As explained in my earlier blog, the Sing dollar is backed by 100% foreign reserves and gold. If for whatever reason, the government decides to spend away its foreign reserves to finance popular policies or to enrich a few individuals, then very soon the value of Sing dollar will slide dramatically.

Let me illustrate how you can “feel” the impact of inflation as a result of weak currency. Imagine your current income is in Malaysian Ringgit, and your living expenses in Sing dollar. Or, book a tour to Tokyo and live there for 3 weeks with Sing dollars. Can you feel the pain?

There is a school of economic thought that supports devaluation of currency to increase the competitiveness of export. I don’t discount the merit of such thoughts, but I have my reservation. In recent times, countries (like Argentina and Mexico) who adopted this strategy actually devalue themselves into poverty. Worse, it takes double the effort to reverse the strategy, and some countries never recover. (It requires a very strong political will to do this. If a country do not have sufficient "value" to the world, then it will simply disappear.)

Therefore, for a small country like Singapore, what’s the retirement planning implication? My view is that, if we are looking at a 20 years or so time frame, it is prudent to diversify the portfolio into a few strong currencies. One can do that by having a foreign currency-based annuity, or professional managed funds. If for whatever reason, the based currency got into trouble, then at least there is some back up. This is the main reason that many Indonesians are fond of parking their money in Singapore in Sing or US dollars.