Rough Trade - currency traders and the economic crisis in Asia

Washington Monthly, June, 1999 by Nick Thompson

The trouble with such a policy comes when currency traders perceive that the government will no longer be able to defend the currency, either because of economic weakness or because the government is running out of reserves. From this moment on, there are far more sellers of the currency than there are buyers, and it takes either exorbitant interest rates or more and more dollar reserves from the central bank to maintain the price. Moreover, currency traders who have entered into the market early can push the collapse forward by making public statements about its imminence, giving interviews to The Wall Street Journal and intensifying the strong influence that perception has upon price. The scenario runs circles around itself with momentum building until, boom! the currency can drop into oblivion just because every trader thinks that every other trader will soon start unloading.

In the instance of Thailand, there is certainly a case to be made that a collapse was in order. Yet there is a more persuasive argument that the punishment exceeded the crime and that the political and economic problems that contributed to the meltdown were augmented by the ruthlessness of global capitalism.

There were two main problems in Thailand that led to the sudden collapse. First, Chavalit Yongchaiyud, the prime minister of Thailand at the time, had become intoxicated by his country's growth over the past generation. Wherever he ruled, the economy boomed, and gradually Chavalit developed unlimited faith in his own abilities. Because money means more in Thai politics than even in the United States, he became more and more indebted to Thai businessmen (all of whom were bound to take a bath with devaluation). As the currency weakened and sporadic attacks revealed his policy's weakness, Chavalit held on and believed that he could will the currency to stay strong, as Canute did the waves. Currency traders, however, kept pounding, and, like a high pressure hose firing on soft clay, they gradually wore everything away until the baht collapsed.

Second, Chavalit's obstinate position did not encounter adequate opposition because the underlying economic problems in Thailand were almost precisely the opposite of the ones that had caused the collapse in Mexico a few years before, and analysts had not immediately grasped the weaknesses. In Mexico, the problem was overconsumption. Billions of dollars had flowed in and been spent on expensive cars and luxury goods. In Thailand, billions of dollars had come in and been invested, and then more had been invested, and then even more had been invested and lent out. This was hardly a problem in standard macroeconomic terms and it wasn't until increased prices and indebtedness had reached crisis proportions that people took notice. Only in July of 1996, one year before the devaluation and well into the cycle, did the IMF first argue that Thailand needed to devalue.

Still, the collapse didn't have to be as brutal or as sudden as it was. The Thai economy was growing at six percent a year, inflation was running at a mere four percent, there was a constitutional reform movement brewing, and even declining indicators were simply coming down from the stratosphere. More importantly, the chinks that had been found in Thailand's economic armor did not justify the panic that quickly hammered the rest of Asia and, almost instantly after the Thai devaluation, sent the high-pressure hose spraying wildly around, overshooting and destabilizing the region. Thailand's currency dropped 40 percent of its value in three weeks and Indonesia's has dropped 80 percent in the past year and a half. This cycle has been repeated in other countries over and over in the past year, and not only could the changes not possibly be justified simply by economic and political changes, they also haven't led to rational political reforms as a currency trader might hope. They happened so fast that people started demanding blood. Indonesia and Russia are approaching anarchy, Malaysia is moving toward totalitarianism, and the Thai system has been thrown into such chaos that fundamental reforms are next to impossible.