Asian Financial Crisis
The Asian Financial Crisis was a precursor to the Global Financial Crisis. However there were some fundamental differences. The critical one being that the Wall Street Money Men intentional created the Asian Financial Crisis by using financial tools to wage financial war on sovereign states that were trying to peg their currencies value against the value of other key currencies. That is the sovereign states were trying to provide a constant exchange rate between their own currency and their main trading partners. They had publicly held currency positions, and so they were effectively gambling against the currency traders with an open hand. The currency traders simply kept raising the stakes until they broke the sovereign states. In doing so they also broke the last links between the valuation of money and reality.
Even before it was floated the US Dollar was the most used currency in international trade. Once floated the US Dollar added a variable into any future transaction that included it. Major fluctuations in its value could make profitable transactions unprofitable, turning good business into bad business. This was particularly problematic for any business that was importing or exporting at high volume with low margins.
Subsequently the finance industry introduced a number of financial products designed to mitigate this risk away from importers and exporters. Essentially the financial institutions would charge the importer or exporter a fee to facilitate a fixed currency value, (often the current value), for a transaction amount at a future date. As most financial institutions providing this type of product have deposits in multiple currencies, they could simply transfer the nominated amount between the currencies within their own fund holdings to facilitate this service at no risk to themselves.
An alternative was to transfer the risk to another party, known as a hedge fund. The concept behind the hedge fund is similar to a bank in that it has funds in multiple currencies and by balancing these with the needs of clients it can also operate with little risk to itself. The key was to have clients with opposing positions taking the risk, while they charged a fee to both without holding any risk themselves.
Unfortunately, it did not stop here. Not happy with the money they were making from the transaction fees, the Money Men invented other tools that enabled them to leverage positions, that is use a small amount of money to make a commitment to a much larger exchange at a future date – known as derivatives. These were effectively high stakes bets, that relied on selling on the position to another party prior to the due date of the larger commitment. In 1995, one such trade went wrong and brought an end to Barings Bank, a respected financial institution founded England in 1762. At the centre of the storm was a rogue trader Nick Leeson based in the Singapore office, who had committed the Bank to a financial position in could not fulfil when it fell due.
The fall of the bank brought a lot of attention to these types of financial products and transactions and some changes to internal controls within financial institutions, however it did not fundamentally change the game. Currency fluctuations is inherently a zero sum game, for every loss there is an equal and opposite win, (minus the transaction fees). The general opinion was that the rogues had been brought under control and banking had regained its respectability. Just two years later, in 1997, South East Asia had a different sort of financial problem – the Asian Financial Crisis.
At the time the South East Asian economies were the envy of the world, known as the Asian tigers they were emulating the 1980’s version of Japan combining high tech with high growth and positive trade balances. They were lauded for the fact that they had created highly integrated economies across multiple national borders. This proved to be their Achilles-heal as it need stable currencies to operate effectively.
The South East Asian Governments were aware of this and provided the required stability by pegging their currencies to a nominal value of their key trading partners. The Money Men had found a low risk target against which to use their leveraged positions. They used their financial tools to wage financial war on sovereign states that were trying to peg their currencies value against the value of other key currencies. The Governments had publicly held currency positions, and so they were effectively gambling against the currency traders with an open hand. The currency traders simply kept raising the stakes until the broke the sovereign states. Triggering the Asian Financial Crisis and destroying real economic development and growth for the sole purpose of providing a financial windfall to the Money Men.
Recap
- Reward for effort – currency exchange rates are not related to reward for effort.
- Value is relative – the value of a floating value is entirely relative
- Trade requires difference in value – currency trade is one of the few trades that is intended to be of equal value, (less the transaction fee).
- Money is a catalyst – currency trade is the exchange of one catalyst for another
- Trade creates economic ecosystems – currency trade is a global ecosystem that is now more than 100 times larger than the global trade in real products and services
- Economic measurements are incomplete – the social and economic cost of the Asian Financial Crisis have never been accurately assessed, particularly when considering the lost opportunity cost.