Friday, October 5, 2007

MM Lee: Stagflation Can Still Make Comeback

Source : The Business Times, October 5, 2007

He cautions against too much euphoria in the current state of the economy

Stagflation - that combination of low growth and high inflation that plagued the world in the 1970s and early 1980s - can still make a comeback as the sub-prime mortgages problem unravels and inflation rears its ugly head, Minister Mentor Lee Kuan Yew warned last night.

Noting that inflation is already up, he said: 'And because inflation is high, there is little room for the US Federal Reserve to further lower interest rates without risking higher inflation. And inflation will mean a repeat of the problems of inflation and low growth rates, the stagflation of the 1970s and early 1980s.'

Prices in stock markets around the world would plunge, which in turn would bring lower spending and declining economies, Mr Lee said at a forum hosted by the Nanyang Technological University Students' Union.

Sounding a cautionary note against 'too much euphoria' in the current state of the economy, he told students at the forum that he wanted to give 'the dark side' of the current picture of sunny growth outlook and soaring stock prices.

'Stock markets are now hitting record highs - these are excessive and not supported by fundamentals,' Mr Lee said. 'The underlying problem has not gone away. The sub-prime mortgages problem is still not cleaned up. These were high-risk loans to people who did not have the means to repay.'

He noted that other nagging worries have also surfaced: commodity prices are rising - oil, gold, corn, wheat, iron, coal, all commodities.

'If the US consumer, suffering from reduced house values, loses his appetite for consumption, there will be a downturn in the US economy,' Mr Lee said. 'That will affect the export-driven economies of China and the rest of East Asia. We all depend on exports to America.'

There are also serious political problems like Iraq and Iran with economic fallouts of a steep spike in oil prices, he pointed out.

'So remember that while the broader region looks promising, there are problems in the immediate region,' Mr Lee said.

Myanmar, which is cracking down on demonstrations led by monks, looks troublesome, he noted. Thailand has yet to recover its bounce in the economy.

Singapore, Mr Lee stressed, remains in the heart of Southeast Asia which from time to time suddenly becomes unstable.

'Asean leaders realise that if we have volatile and unstable neighbours, they will destabilise the whole region,' he said. 'Hence the common reaction from Asean leaders, foreign ministers, presidents and prime ministers of sorrow and revulsion, that Myanmar's generals had again used armed forces against monks and civilians demonstrating peacefully because they are suffering from deprivation because of their poor economic conditions.'

Indicating that Singaporeans cannot afford to be complacent, Mr Lee said they must continue to distinguish themselves by better standards of governance.

'Our future depends on Singaporeans realising that we always have to be different and must have better governance than our neighbours to survive the competition of their wealth of natural resources, their larger territories and larger populations,' he said.

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