Sunday, October 7, 2007

CPF not a cheap source of funds??

I read with great interests in our Minister's rebuttal on why CPF is not a cheap source of funds. Their reasoning is that CPF has no need to buy up the bonds, and people in the open market will always fill up that vacuum. I believe he is not economics trained?

Interest rates depends all on demand and supply. Lending $1,000, and lending $1,000,000,000 is very different. If I lend someone $1,000 for 1 week, I might not charge interest rate if I know this person will definitely pay me back, and I don't lose much interest for 1 week. However, if I need to lend $1,000,000,000, this changes alot. I would demand an interest because this amount is huge, and the risk starts to become higher. Even then, I might not even loan that amount.

Fast forward to the bonds issued by the government, yes. You can always issue the bonds at 2.8%, to be locked in for 10 years. Question is, will any fool buy the bonds where some banks will give you the same interest rate for far lesser amount?? Granted, its risk free, but banks have a much shorter lock-in period than bonds. In order to attract the investors, you would have to increase your interest rates. Therefore, you have the right to issue the bonds at 2.9% for 10 years, but don't expect the take-up rate to be high.

Come on... 2.8% for bonds stretch for 10 years?? Do you know that inflation hit 2.9% in August in just 1 year alone?? GST increased from 3% to 5% in 2003, and 5% to 7% in 2007. Which fool will lock-in their money and see their purchasing power being eroded away with that measly interest rates on the bond??

Not a cheap source of funds?? You're kidding me.

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