Let’s just say the risk is not about whether it will Cool inflation, but rather whether it will totally put out the fire and Freeze the property market in Singapore. Inflation is influenced by the following equation.  {MV = PQ} = (by Irving Fisher, 1911) Where • M is the total dollars in a Nation’s money supply (generally the M3 or M2) • V is the number of times per year each dollar is spent (Velocity of money) • P is the avg. price of all the goods and services sold during the year. • Q is the quantity of Assets, goods and services sold during the year. When M2 or M3 increase, where V and Quantity stays the same, then P increase. The rate of P’s increase is inflation. Right now, we are seeing M2 or M3 increasing faster than GDP in many nations, while prices are fairly stable at ~5.4% (in 2011) in Singapore and production (Quantity) is rather stable, this means that V, the velocity of money has yet to pick up. In other words, people are not yet spending. Once Velocity of money V picks up, in order to control price rise, Quantity will have to pick up dramatically as well. Not all quantity can be ramped up quickly enough. [M2 or M3 increase] x [V] = [P] x [Q] So by taking out Foreign M2, M3 as well as M2 in Singapore attributed to foreign ownership by imposing a 10% Additional buyer stamp duty, Singapore has effectively reduced the M2, M3 money supply from the property market. In short, this policy may somewhat reduce inflation attributed from Housing. However it may not stop these money from being channeled to other parts of the economy, especially commercial properties.

USA M2 Money Supply

(Source: Wikipedia)

European M2 Money Supply

Australian M2 Money Supply

Singapore’s M2 Money Supply

S$ MILLION END OF PERIOD M2 2010 Nov 401,429.3 Dec 403,078.2 2011 Jan 406,246.8 Feb 406,280.0 Mar 413,255.5 Apr 422,475.6 May 422,716.1 Jun 423,516.7 Jul 431,311.5 Aug 431,253.4 Sep 434,818.4 Oct 439,817.4 Nov P 442,144.4 AS you can see, M2 from Dec 2010 up till Nov 2011, has grown by 10%, this exceeds the GPD growth figures. As there are ample funds in Singapore, interest rates can stay low, due to low velocity of money, once there is signs of up-trend, then we expect markets to rally very quickly and these money will be drawn down. And cost of funds will consequently go up.

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