[Pippoles]

The Forgotten Crisis And What Every Financial Pundit Didn't Learn From It



Imagine there was a financial crisis that involved similar circumstances to the one we are dealing with right now and we knew how it ended. There would be no inflation vs deflation debate because we would have the answer right in front of us. .........Well guess what....There was one and we know how it ended. For some reason though, every econo-financial pundit, no matter what school of thought they are from, have forgotten about it. Wether it is Gonzalo Lira, Peter Schiff, Jim Rogers, FOFOA, Max Keiser, Martin Armstrong, Karl Denninger, Mish the idiot, or the vast misinformed crew of keynesians that spew their nonsense all over the financial world, not one of them has ever mentioned the Asian Financial crisis. If they have then please let me know. Peter Schiff mentioned it on his radio show recently but I emailed him about it recently so that doesn't count.


The causes of the Asian financial crisis are many and disputed. At the time of the mid-1990s, Thailand, Indonesia and South Korea(440 million people, excluding China and Japan) had large current account deficits.cough..cough..US.. anyway, Many economists believe that the Asian crisis was created by market psychology and policies that distorted incentives within the lender–borrower relationship.(ala China US) The resulting large quantities of credit that became available generated a highly leveraged economic climate, and pushed up asset prices, mainly real estate, to an unsustainable level. These asset prices eventually began to collapse, causing individuals and companies to default on debt obligations. The resulting panic among lenders led to a large withdrawal of credit from the crisis countries, causing a credit crunch and further bankruptcies. In addition, as foreign investors attempted to withdraw their money, the exchange market was flooded with the currencies of the crisis countries, putting depreciative pressure on their exchange rates. To prevent currency values collapsing, these countries' governments raised domestic interest rates to exceedingly high levels (to help diminish flight of capital by making lending more attractive to investors) and to intervene in the exchange market, buying up any excess domestic currency at the fixed exchange rate with foreign reserves. (Indonesia had foreign exchange reserves of more than $20 billion)
Neither of these policy responses could be sustained for long. Very high interest rates, which can be extremely damaging to an economy that is healthy, wreaked further havoc on economies in an already fragile state, while the central banks were hemorrhaging foreign reserves, of which they had finite amounts. When it became clear that the tide of capital fleeing these countries was not to be stopped, the authorities ceased defending their fixed exchange rates and allowed their currencies to float. The resulting depreciated value of those currencies meant that foreign currency-denominated liabilities grew substantially in domestic currency terms, causing more bankruptcies and further deepening the crisis.




So what happened to the currencies ? Did the "debt deflation" within the respective economies cause their currencies to rise ? Because as the deflationists say...."there will be less currency in circulation as debt defaults" Lets see.....


Thai Baht. The Baht fell swiftly and lost more than half of its value. The Baht reached its lowest point of 56 units to the US dollar in January 1998.



Indonesian Rupiah .Before the crisis, the exchange rate between the Rupiah and the dollar was roughly 2,600 rupiah to 1 USD.The rate plunged to over 11,000 rupiah to 1 USD on 9 January 1998, with spot rates over 14,000 during January 23–26. I mentioned that Indonesia had forex reserves of 20 billion dollars in 1997. At the 1997 gold price of $300 an oz, that is equal to 1890 tonnes of gold. Just for fun, at today's price of $1750, it would be 3,308,378 tonnes of gold or $116,635,680,000. The USA has around 50 billion in forex reserves in 2011. At today's price that's 810 tons of gold.




South Korea. The South Korean Won weakened to more than 1,700 per dollar from around 800.


The Philippines. The peso dropped from 26 pesos per dollar at the start of the crisis to 54 pesos in early August, 2001.


Malaysia. The ringgit had lost 50% of its value, falling from above 2.50 to under 4.57 on (Jan 23, 1998) to the dollar.


Singapore. There was a gradual 20% depreciation of the Singapore dollar.


China. Unlike investments of many of the Southeast Asian nations, almost all of China's foreign investment took the form of factories on the ground rather than securities, which insulated the country from rapid capital flight. Funny that.....How many factories does the US dollar have to insulate it from capital flight ?


Japan. The Japanese Yen fell to 147 as mass selling began, but Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back. Funny that too.....How much foreign reserves does the US have to defend the dollar ? Just under 50 billion actually. About $100 per person. Just for some perspective, Switzerland today has $40,000 per person in foreign reserves. And the consensus is that the dollar is the best of the fiat currencies today hahaha. That's a topic for a whole other post though.


Comparing the United States and the dollar bloc to Zimbabwe is just plain wrong at best and stupid at worst, yet that is what everyone seems to bring up.The Asian financial crisis is the proper comparison.

Thailand, Indonesia and South Korea(440 million people) had large current account deficits.-Check
Market psychology and policies that distorted incentives within the lender–borrower relationship.-Check
a highly leveraged economic climate, and pushed up asset prices to an unsustainable level. These asset prices eventually began to collapse, causing individuals and companies to default on debt obligations. -Check

The resulting panic among lenders led to a large withdrawal of credit from the crisis countries. -Treasuries/US Debt/JGB's have rallied so no. This has not happened yet but it will. That is the essence of loss of confidence.

As foreign investors attempted to withdraw their money, the exchange market was flooded with the currencies of the crisis countries, putting depreciative pressure on their exchange rates. -This has not happened yet either but it will. It is also the essence of loss of confidence.

To prevent currency values collapsing, these countries' governments raised domestic interest rates to exceedingly high levels (to help diminish flight of capital by making lending more attractive to investors). -This ain't going to happen. As I said in my first post "Is the Euro System the next Monetary Order ?", the system is too far gone for capital to be re-attracted to government bonds as a store of value.

When it became clear that the tide of capital fleeing these countries was not to be stopped, the authorities ceased defending their fixed exchange rates and allowed their currencies to float.- Coming soon but in this case, the ultimate wealth reserve asset will be allowed to float, gold. The COMEX futures market will default and the London Bullion Market Association will implode, no different then the London Gold Pool imploded when France withdrew which ended Bretton Woods 1.

So in conclusion, who in the right mind can possibly think that there will be a sustained rally in the US dollar as their economy is implodes ? Also, was it mentioned once that any of these Asian countries where printing currency that resulted in these huge devaluations ? No.


As past crisis history has shown , capital flight out of US dollar denominated debt and treasuries is the the only logical conclusion to this crisis

[wmzeto]

Yeah.. but THIS time, there won't be the dollar to "flee" to... if you're not buying PM's, you're just reshuffling the chairs until the music stops.

Comparing the United States and the dollar bloc to Zimbabwe is just plain wrong at best and stupid at worst, yet that is what everyone seems to bring up.The Asian financial crisis is the proper comparison. I'm not so sure about that... Zimbabwe might be the PERFECT comparison by the time this thing has run its course!