Hong Kong & Singapore – forever “bubbly”?

Scott Sumner links to The Economist:

Over time Hong Kong has adapted to some of the peg’s constraints. Its exchange rate may be rigid, but its other prices and wages are remarkably flexible. During the financial crisis, even senior civil servants took a pay cut. This flexibility allows the economy to adjust quickly to cyclical ups and downs without the help of an independent monetary policy.

Prices, particularly for property, do sometimes take on a life of their own. But a more flexible exchange rate is not enough by itself to prevent asset-price booms: Singapore’s house prices have also soared despite its strengthening currency. And in some cases the currency itself can be the asset that takes off. The Swiss franc, for example, strengthened dramatically during the euro crisis, prompting its central bank to intervene. As nearby countries like India and Indonesia fret about capital outflows and plunging currencies, the stability offered by Hong Kong’s peg looks as good on its 30th birthday as it ever has.

Scott asks:

Can we learn anything from these examples?  I’d say nothing definitive, but they do add a couple data points to several interesting questions:

1.  Are the New Keynesians right that wage flexibility makes depressions worse?

2.  Are the Austrians right that easy money leads to asset prices bubbles.

My view before reading the article was no and no.  After reading the article I hold the same view, but with an epsilon more confidence.

The charts paint a picture that both NK´s and Austrians, for different reasons, would find ‘disturbing’!


As for the ‘high inflation’: Last year HK had 3.8%, this year it´s up to 4.2% (to September). Singapore had 4.7% inflation last year and is down to less than 2% this year.

One thought on “Hong Kong & Singapore – forever “bubbly”?

  1. There is something about urban housing prices in prosperous nations that seem to defy anybody’s economic models or interpretations…in nations with increasing disposable incomes, and increasing urban density, in-city housing goes crazy…this happens in NYC, London, Tokyo, Hong Kong etc etc etc.

    It may be a function of urban economics and land values…the center of a city always becomes more valuable…denser, more trade opportunities…you want a retail outlet in the fields outside the city or in the urban core? And if you won and work in that store, you want to commute for two hours a day or live nearby?

    I am not sure we can look to monetary policy to explain this..nor do I believe it is a bubble, as this has been underway in Los Angeles and parts of NYC for a generation now, or maybe more….and globally too.

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