Swamped by High Seas of Money 1

It seems like an eternity ago, but the Obama Depression did not come entirely out of the blue.  Fifteen years ago, there was a financial crisis in Asia that, for a time, looked like it might wreak havoc the world around.

It didn't; the 1997 Asian financial crisis messed up Southeast Asia for a couple of years but the rest of the world continued partying like it was 1999.  By 1999, even the affected countries were well into solid recoveries and joined the fun of the New Millennium along with the rest of us.

The root causes of the 1997 crash were quite different from what we're experiencing now.  There is still a startling lesson to be learned, and in a most unexpected place.

Drowning in Tides of Cash

The roots of the 1997 crash reached back quite a few years into what was known as the Washington Consensus.  Recall that, at the time, the Southeast Asian nations were mostly classed as "developing" countries if not Third World.  They didn't have the infrastructure of roads, highways, ports, electrical generation and transmission and all the other expensive investments needed to conduct First World business.

Nor did they have the money or expertise to get them.  They had, in effect, a chicken-and-egg problem: you can't do First World business without at least some aspects of First World infrastructure, but without decent infrastructure, not much First World business is going to move in and few entrepreneurs can grow their firms to First World status.

These countries needed outside help and investment.  Of course, rich-country investors have dabbled in developing nations for a long time, with some notable successes.  The Washington Consensus was a fairly specific list of market-oriented policies that, the global Great and Good believed, would allow a poor country to have a shot at making it into the rich world.

In many ways, the Washington Consensus was correct and commonsensical.  Most of the prescriptions involved relatively free markets, elimination of oppressive regulations, secure property rights, and free trade.

There was one particularly controversial requirement, though: liberalization of inward foreign direct investment.  What this means is that, to grow, countries had to be willing to accept money from foreign investors.

This might not sound like a big deal; wasn't the whole point to grow using rich folks' money?  The problem is that nations have a long and deep history about getting nervous when foreigners own important assets.  Even in the United States, it is illegal for foreign people or companies to own a controlling interest in any American airline.  Considering the disastrous losses of the U.S. airline industry, this rule is probably the only reason there are any American-owned airlines anymore.

In the rest of the world, more countries than not had rules banning foreign ownership of anything strategic or of great economic importance.  The trouble is, it was just that category of Important Things that developing countries needed foreign investment in.  The rules had to change.

Change they did.  In came the money from giant Western banks happy to invest in new roads, ports, power plants, airports, and whatnot.  Everything seemed to be going swimmingly: the rich investors were reaping returns they could not easily find in the already-developed world, and the developing nations were in fact developing and getting essential infrastructure they hadn't had before.

Reality Strikes Back

Then came 1997, and a lesson in the downside of open capital controls.  One of the complexities of foreign currency exchange, which is far beyond the scope of this article, is that there needs to be an overall balance of payments to maintain stability.  If I pay dollars to buy Japanese goods, the Japanese have to use those dollars to buy something American in exchange or just sit on them.

Obviously, the poor countries were in no position to do either, given that the whole point was to draw dollars and euros into the country for the purposes of costly development.  The money would indeed eventually be returned, plus interest, and overall trade would increase as the new infrastructure led to business deals of all sorts; but not right away.

This created a balance-of-payments problem.  The traditional solution is for the local currency's value to change against the dollar to make up the difference.  Unfortunately, many poor countries had had bad experiences with hyperinflation over the previous decades; to prevent that problem, they'd "pegged", or fixed, the value of their currencies against First World money.

But the balance-of-trade pressure became overwhelming.  What triggered the 1997 crash was Thailand's abrupt ending of its "peg" to the U.S. dollar.  The value of the Thai baht immediately collapsed; on paper, the value of all those outside investments also collapsed because they were denominated in Bhat.  Nervous investors bailed, dumping their shares for whatever they could get and bringing the money home as fast as possible.  In the whiplash of opposing cashflows, governments fell, unemployment skyrocketed, and normal business transactions all but seized up.  This is like a run on the bank, but on a national scale.

The lesson was that massive movements of money can cause serious problems on the ground, even if the fundamentals are sound and even if the money was necessary and useful for important needed investments, as was mostly the case.  Just having far more money sloshing back and forth than a smallish economy is used to can capsize it, much as ocean waves can topple an otherwise-sound small rowboat where an ocean liner would not even notice them.

What does this have to teach us here in America?  Not much for our trade and overall economy, which may be far from sound but which are certainly very large.

No, the comparison and warning is with our elections - and here we need to explain ourselves with great care, lest we sound like the Occupy Wall Street crowd.  We'll continue in the second half of this article.