An analysis of Singapore’s Money Supply

The statistics downloaded HERE, shows something interesting on Singapore’s money supply. In Singapore, MAS does not deliberately control money supply because monetary policy focuses on managing Singapore’s currency with respect to a basket of undisclosed foreign currencies. However, to manage the exchange rates, manipulation of the Singapore currency money supply is required. For example, to weaken the local currency, an increase in money supply should do the trick. On the other hand, if the desire is to strengthen the local currency, a decrease in money supply should do the trick. But of course in real life that is not so easy because controlling the currency automatically makes us dependent on other countries’ inflation rate.

Take for instance, if the forex rate is fixed, an inflationary pressure in other country will make their goods and services more expensive to import. Thus our imported goods and services are more expensive and hence will affect our own inflation. If these imported goods are raw materials which need to be reexported as finished goods, an increased in price of imported raw materials automatically translate to a higher price for exported goods (all things remain equal) and thus make our export uncompetitive. On the other hand, our local currencies is also subjected to demand and supply from others. So if there is a high demand for our local currencies, our currency will strengthen (assuming MAS does not do anything). If the currency becomes too strong for comfort, the regulator must increase money supply (aka print money) to prevent the currency for strengthening too much.

It is well known that MAS permit the local currency to appreciate over a long term basis to keep the inflation in check. To strengthen the currency, it needs to reduce the money supply (so that supply is less than demand). However, if there is a greater demand for the currency this can cause the currency to increase more significantly. The table below extracted from the database shows that our money supply has risen almost on a yearly basis except for year 2001 to 2002. Since our money supply has risen while the monetary policy is to allow the local currency to appreciate on a long-term basis, we can infer that our Singapore currency has a very high demand and so high that MAS need to print money just to prevent the currency from appreciating too much. The almost yearly increase in money supply also explain why our interest rates are always so low. As long as there is high growth in money supply, our interest will always be very low.

By the way, regulators don’t really print money. For a detail read, you can read my article here on how money is actually created.

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