Feb 13, 1998
Last July a currency crisis began in a relatively small country, Thailand, spread like wildfire through the so-called emerging economies of East Asia, and caused a profound regional financial crisis and the collapse of those countries' economies. This East Asian crisis is the third major financial crisis (the European currency crisis in 1992 and the Mexican peso crisis in 1994-5) in six years, as well as the most serious. It left Thailand, Indonesia, Malaysia, the Philippines and South Korea virtually bankrupt, saddled with an immense international debt, and millions of people thrown into misery and starvation.
It is far from certain that this crisis has finished running its course. But it has already shaken the second largest economy in the world, Japan, exacerbating its own huge financial problems. What further grave consequences this will have on the Japanese economy, as well as on the rest of the world economy, remains to be seen.
As far as its effects on the U.S. economy, the chief U.S. economic policy makers have issued seemingly contradictory statements. On the one hand, by their proposals, both Federal Reserve Board Chairman and U.S. Secretary of the Treasury Robert Rubin of course recognize the potential dangers emanating from the East Asian crisis. They are pushing Congress to immediately advance the International Monetary Fund (IMF) an extra 18 billion dollars, since the IMF's coffers were emptied underwriting the record 100 billion dollar bailout connected to the East Asian crisis. Obviously, Greenspan and Rubin intend that the IMF be armed with fresh money, whether to contain any possible future financial meltdowns emanating from the East Asia crisis or to deal with a completely new financial crisis somewhere else.
But on the other hand, in testimony before Congress, Greenspan and Rubin claim that the U.S. has little to fear. Said Greenspan in late January: "The U.S. economy has been exceptionally healthy, with robust gains in output, employment and income." Thus, the expected U.S. economic slowdown as a result of the economic problems from the crippled East Asian economies "would appear to be helpful at this juncture."
Treasury Secretary Rubin said the same thing at the end of January: the expected flood of inexpensive imports from Asia will help keep inflation in check in an economy of low unemployment, factories working at near capacity, etc.
Of course, soothing reassurances and self-congratulation are not worth very much. The last thing one could expect from these authorities is any hint of a warning of trouble on the horizon. None of them issued warnings before the East Asian crisis broke out. Here is what the IMF said about South Korea in its March 1997 annual survey, when the Korean economy was already tottering on bankruptcy: "Directors welcomed Korea's continued impressive macroeconomic performance and praised the authorities for their enviable record." This is what the IMF said about Thailand, at the very moment that country was on the edge of the financial abyss: "Directors strongly praised Thailand's remarkable economic performance and the authorities' consistent record of sound macroeconomic policies."
The U.S. government's analysis proved to be no more illuminating. In the 1997 Economic Report of the President, the Executive Branch's annual economic survey, written by the Council of Economic Advisors, there is an entire section entitled "The Success of East and Southeast Asia." As the subtitle suggests, Clinton's economic advisers issued only praise for how the economies of East and Southeast Asia were performing. This report appeared in February 1997, five months before the crisis in East and Southeast Asia broke into the open.
The financial crisis that hit Thailand, the Philippines, Indonesia, Malaysia and South Korea was not, by any means, home-grown. The germs of this Asian Contagion were incubated in the hot houses of the big financial capitals of the world, including in the U.S., as well as Tokyo, London, Paris and Frankfurt, with their hundreds of billions and trillions of dollars in speculative capital always on the prowl for higher rates of return.
In the 1990s, East Asia was the only region in the world outside the U.S. where there was said to be any kind of sustained economic growth. Foreign capital financed the growth of the mainly export-oriented industries of the region, and even more the financial holdings. More and more capital from all over the world, seeking higher rates of return, was attracted to this region.
From the beginning, speculation marked the economic development of these countries, which became more and more artificial. As increasing amounts of money flowed in, this speculation fed on itself, leading to rising markets in stocks and real estate.
Completely dependent both on international trade and finance, these small countries needed a currency that would meet the needs of the big international companies. These companies had to be assured that, when they put money into these countries, they could take their profits out whenever they wanted to; that meant they needed a stable currency so that their profits would not be eaten away because the currency suddenly was worth less.
To meet the needs of foreign capital, to facilitate the flow of capital in and profits out of these countries, all their currencies were linked or pegged to the U.S. dollar, the currency used in most international trade and financial dealings. To make sure that this peg maintained its credibility, the governments ran balanced budgets. To further discourage currency devaluations, they built up relatively large reserves of foreign currency.
For a time, these financial arrangements, that were based on a pyramid scheme of debt built upon debt, seemed to work. At the basis of this pyramid was an incredible influx of short-term credit. By the 1990s, the so-called emerging economies of East Asia were flooded with short-term, highly speculative loans. Everyone doing business in this region took advantage of these loans, including U.S. companies like Dell Computer, AT&T, the Limited, Merrill Lynch, etc. Billions more in yen and dollars were loaned to local East Asian banks and finance companies which in turn tacked on a few percentage points and reloaned the money mainly to local speculators in real estate and stocks. According to IMF estimates, by 1996 these short term loans denominated in foreign currencies totaled hundreds of billions of dollars.
As long as capital continued to flow in to these countries, as long as more credit was issued and more debt taken on, it seemed like the prosperity could last forever. But there were objective limits to how much speculative capital and debt that these small countries could absorb. For the speculators, the main problem was to guess at what point the market would reach the peak before they sold out and locked in their profits, before the markets began to fall.
The enormous influx of speculative capital led to tremendous imbalances. The money supplies in these relatively small countries had grown to completely dwarf production and the real economy, in effect, diluting the value of the currency. As this influx in speculative capital continued, the individual Asian currencies' peg to the dollar became more and more untenable.
This problem was exacerbated by the fact that since 1995, the U.S. dollar was appreciating in relation to other major currencies, especially the Japanese yen. Their peg to the dollar was actually pulling the value of the national currencies of the East Asian economies up, when the reality was that they should have been losing value. This currency appreciation then had the perverse effect of attracting even more speculative capital, while making their exports more expensive on the world market, leading to a slowing of growth in their exports. And that meant that their foreign reserves began to drain.
The first signs that this upward spiral had ended appeared in January 1997 when a major South Korean chaebol, or conglomerate, declared bankruptcy with losses of over six billion dollars. It soon became clear that this was only the tip of the iceberg. South Korea, the largest and most industrialized of the Asian Tigers, was beginning to skirt with recession. Other chaebols and their major Korean lenders were facing insolvency.
With Korean products more expensive on the world market, Korean manufacturers were losing market share. This heightened competition was aggravated by the fact that Asia's largest market for their exports, Japan, continued to languish at near recession levels, exerting a downward pressure on more and more of the Asian economies. Another indication of mounting problems was that Korea actually began to run a trade deficit with the U.S.
By early spring, warehouses and ports began to fill up with unsold goods, not just in Korea but in other East and Southeast Asian countries. Throughout East Asia, to move the goods, companies began to slash their prices, even sometimes selling at a loss.
The big international "investors," who had rushed to inject their money, and who had gotten the lion's share of the profits out of these increasingly artificial economies, were also the first to perceive the dangers. The actions they took both to protect their "investments" and increase their profits precipitated the crisis.
Some speculators began to sell their holdings. This began the process that led to the collapse of the pyramid. The rest followed suit, not only making devaluation a certainty, but also making the devaluation brutal and sharp, that is, most harmful to the functioning of the economy.
The first currency to come under fire was the Thai baht. The Thai government used up all its currency reserves defending the baht, only to be forced to let it float. This decision was made on July 2, and it marked the official beginning of the crisis. One by one, other Asian currencies came under pressure. The governments used up their reserves in order to try to defend them, only to have the peg to the dollar broken anyway. Needless to say, all the money that these governments spent defending their currencies wound up in the coffers of the big international speculators, the banks and major industrial companies.
The devaluations caused by this speculation then set off a chain reaction: the short term loans that had been lent to the East Asian banks had to be repaid in dollars or yen. This had not been a problem so long as the peg between the local currency and the dollar was in place. But once the local currencies were devalued, paying off the loans became exorbitantly expensive. So, for example, if a currency was devalued by half in relation to the dollar, it took twice as much money to pay the interest on the loan. Borrowers defaulted in droves on the loans that they had taken out from the local banks. The local banks then could not repay what they had borrowed from their big international creditors.
With the withdrawal of foreign capital, speculative markets, like the stock and real estate markets, crashed. (The Thai stock market, for example, went from a capitalization of 133 billion dollars at its height in 1993 to about 22 billion dollars at the end of 1997.) In this way, a currency crisis gave way to a banking crisis and stock market crash, and it spread from one country to the next.
How did the bankers in Tokyo and New York react to this crisis? Like a herd of cattle, their stampede to lend turned into a stampede to unload. Within a matter of a few months, they did a complete U-turn. They refused to renew the hundreds of billions of dollars in short term loans. This cut the flow of capital to Asia to zero, and credit dried up. Manufacturers no longer could get their usual financing to continue production.
Businesses began to close their doors. The contagion deepened and spread.
For international finance, East Asia had proven a great source of profits. Once the crisis that international finance itself had set in motion hit, the next phase of the operation was begun: the bailout. Ostensibly this bailout was meant to help the ruined and crisis-riddled economies. But, in fact, the main goal of the bailout was always to pull international finance's irons from the fire.
This bailout was engineered by the IMF, working in conjunction with the treasuries of the big industrial countries. The IMF opened up lines of credit, worth tens of billions of dollars, first to Thailand, then the Philippines, Malayasia, and Indonesia as their financial systems crashed. These governments could draw on the IMF loans only under the strict supervision and regulation of the IMF which made sure that the money went to repay the foreign creditors. Through the bailout, the big international lending institutions were made whole. The bad loans, however, were made a part of the national debt of these Asian countries. The local populations, that is, the working class and poor were left holding the bag.
The U.S. government remained to the side of the bailout effort in its early stages. After all, U.S. banks were less exposed than either the Japanese or even the Europeans. According to IMF estimates, U.S. banks had "only" 46.4 billion dollars in short term loans out to the developing economies of East Asia, compared to Japan's 260 billion dollars and Western Europe's 318 billion dollars.
By late October, the crisis had hit Hong Kong, the financial center for East and Southeast Asia. The Hong Kong dollar, which also is linked to the U.S. dollar, came under pressure. To defend its currency, the Hong Kong government hiked interest rates again and again. Hong Kong's stock market crashed, leading to a brief panic in stock markets around the world. The big institutional investors were responsible for most of the sell-off in the U.S., reflecting their fears that the East Asian contagion could no longer be contained. When South Korea's currency crisis broke out in early November, pushing its financial system to the point of ruin, the world stock markets went through further heavy fluctuations.
At that point, the U.S. government took over the management of the financial crisis in Asia. In the frantic months that followed, this effort was coordinated out of the White House Situation Room as U.S. officials, along with their counterparts in Europe and Asia and the IMF put together the bailout. With the 57 billion dollar bailout of Korea, the U.S. cobbled together three different lines of credit. First, the IMF, World Bank and the Bank of Asian Development provided lines of credit worth 35 billion dollars. A second line of credit of 22 billion dollars was provided by seven countries, led by the U.S., and also including Canada, Japan, France, Germany, Great Britain and Australia. Third, the U.S. and other international banks negotiated their own separate agreement with the Korean banks and government for another 25 billion dollars in short-term debts. These negotiations were led by the bankers at Citibank, J.P. Morgan and Chase Manhattan, veterans of previous crises dating back to the Latin American debt crisis of the 1980s and the Mexican currency crisis of 1995. In the settlement that was reached at the end of January, the South Korean government agreed to the terms of the U.S. bankers: the international banks agreed to turn the short term loans into longer term loans, in return, the Korean government was forced to guarantee the loans. And the Korean banks agreed to pay the stiff late payment penalty fees and higher interest rates on the loans.
At the same time, the U.S. government led the effort to whip the Asian leaders into line, when necessary. When Suharto of Indonesia balked at the terms of the bailout he had previously agreed to, he received a phone call from Clinton. In short order he was visited by two top IMF officials, Director Michel Camdessus and First Deputy Managing Director Stanley Fischer, as well as by U.S. Assistant Secretary of the Treasury Lawrence Summers and Secretary of Defense William F. Cohen. In a series of meetings over two days, they pressed conditions on the Indonesian leader, conditions that had been put together in a White House meeting presided over by Clinton, with Rubin and Summers, and a range of State Department and National Security officials in attendance. After IMF and U.S. officials left Jakarta, Suharto received phone calls from leaders around the world, politely telling him he had no choice.
In this way, U.S. imperialism provided the leadership to impose the imperialist order on the underdeveloped countries.
At the same time, the U.S. moved to take advantage of the crisis to further U.S. corporate penetration of Asia, in terms of both investment and trade.
U.S. companies already have more direct investments abroad than the companies of any other country. U.S. companies abroad, for example, bring in one billion dollars per day more than their nearest rival, those of Japan. However, traditionally, the U.S. has concentrated most of its foreign direct investments in Europe and North and South America. Only in the last 10 years, with the growth of the Asian "tiger" economies, have U.S. companies begun to pour much direct investment into East Asia.
Once the crisis hit, the U.S. government used it to gain more of a position for U.S. companies in markets held by its Japanese or European rivals, or in markets like Korea, which had a whole series of regulations, tariffs, etc., which limited foreign ownership and trade. Market pressure and desperation for cash have also allowed U.S. companies to gain relatively easier entry to new markets in competition with its Japanese or European rivals. With currencies devalued as much as 80% in relation to the dollar, businesses are being offered up at fire sale prices. General Motors has already come to an agreement to buy a part of Daewoo. And Ford, which already owns a part of Kia Motors, is considering increasing its stake. Of course, there are also drawbacks and risks to these deals, since to buy up a business can also mean to take over sometimes crushing debt loads.
Said Jeffrey Garten, Dean of the Yale School of Management and a former under secretary in the Treasury Department, "Most of these countries are going through a deep and dark tunnel. But in the end there is going to be a significantly different Asia, and it will be an Asia in which American firms have achieved much deeper penetration and much greater access. You would have seen a lot of this anyway over the next decade or so. But it is going to happen at an order of magnitude and with a degree of speed that nobody could have conceived of just six months ago."
Perhaps. Certainly U.S. imperialism, as the strongest in the world, is in a better position to take advantage of these crises than anyone else.
But at what cost to the rest of humanity?
Mexico went through an almost identical currency and financial crisis two years ago. Its subsequent bailout is now being held out as the example of the "success" that imperialism wants for East Asia. Yes, the Mexican financial system, which had collapsed, did recover – somewhat. The big institutional investors were certainly repaid in full. But it was on the backs of the laboring masses. Since the crisis, unemployment in Mexico shot up and the minimum wage has been cut almost in half. As a result, social problems have multiplied, starting with a growing crime wave, increasing drug trafficking, etc. Mexican society is sinking into chaos.
This is the "solution" that is now in store for the countries of East Asia. The East Asian "miracles" are now being added to the list of 75 countries, containing more than half the world's population, that owe over two trillion dollars in international debt and are already under IMF-dictated austerity programs.
For the working class, peasantry and poor, the consequences are already devastating. In Korea, the most industrialized of these countries, the working class is facing waves of layoffs, along with increasing inflation. In the much poorer country of Indonesia, the working class is facing outright starvation. Even before the main austerity measures are implemented, the number of hunger riots is increasing.
At the same time, the highly repressive regimes, which had used the so-called growing economies to justify their existence, today are preparing to do their duty by imposing law and order through massacres, while living conditions decline precipitously.
Today, in the U.S., government officials like Greenspan and Rubin try to reassure investors that the financial system is stabilized. They may even succeed in containing the crash of the Asian economies, even though they are themselves far from certain about this. The IMF bailout may prevent a regional financial meltdown from developing into a general financial collapse. Of course, it must be added that even this assumption is far from certain. It is still too early to tell.
But even assuming that the IMF-led bailouts did succeed in arresting the spread of the crisis, this accomplishment short circuits the necessary workings of capitalism. Capitalism is not planned. It is anarchic. Crises are capitalism's way to clear out the imbalances and contradictions that have built up. Of course, these crises themselves are enormous catastrophes for all humanity. Out of the 1929 stock market crash came the Great Depression, which then led to World War II.
In a sense, the leaders of the capitalist world drew the lessons of how the Great Depression developed. And since the beginning of the present crisis, which began in the 1970s, the governments intervened massively, by all sorts of means to help the capitalists deal with the crisis and maintain their profits.
However, so much money has been taken out of production and injected into the financial sector that the financial sector has grown completely out of any proportion to the real economy. In the process, the financial sector fosters crises of its own, which are in the end another form of the crisis of production.
Today, people like Greenspan or Rubin claim that they are partisans of a free market, the inherent benefits of the market and liberalization. But they are the first ones to propose to use the forces of the government to intervene in the workings of the market as soon as problems crop up. Such international institutions as the IMF and World Bank have become the lender of last resort. They back up the national states, of which, the U.S. is, by far, the most powerful.
Bailouts, as big as they are, are only a part of the money that the governments have injected into the economy. What the governments do to overcome one crisis from speculation only encourages more speculative behavior because they socialize the risks and pay the losses. And speculative activity is not just limited to people like George Soros or the mutual funds. Banks, insurance companies and even companies involved in industry, trade, and distribution have no choice but to devote increasing amounts of their capital to speculation with their own separate departments specializing in this. To the point that many major industrial companies derive more profit from speculation than production.
This ever increasing bubble of money itself becomes more and more disruptive to the workings of the economy. Everything begins to revolve around keeping the bubble from collapsing. The financial world bounces from one meltdown to another: the Latin debt crisis, the U.S. savings and loan crisis, the European monetary crisis, the Mexican debt crisis, the Asian Contagion. Each crisis is bigger and more dangerous.
These successive financial crises have not, up till now, led to a general collapse of the economy. But they certainly have had a big impact on the real economy, resulting in a relative stagnation of production. And the financial crisis in Mexico a couple of years ago and the current one in East Asia have led to crises in the real economy itself.
Thus, the method to attenuate crises itself becomes the engine of new crises.
Despite the way the government officials couch their phrases about "bailing out nations," their policies are not socially or economically neutral. For their policies just heap one form of plunder onto another of those poor countries. Currency speculators literally plundered the central banks of the Asian countries hit by the crisis. The plunder now continues, with IMF loans taken to reimburse other speculators, which then requires more interest payments. The population pays and pays again for the profits of the speculators.
The social consequences for this plunder are catastrophic. In the countries of East Asia, the IMF, in the name of the major international banks, imposed policies guaranteed to push those economies into economic depressions. The population is facing mass layoffs coupled with hyperinflation. Those left working are forced to support more family members, on wages that are worth next to nothing, a few pennies a day. Those are starvation wages.
To keep order, repression is being ratcheted up by all the forces of the army and police, as well as death squads and private armies of big landlords and capitalists. To divert peoples' anger and desperation, the government resorts to scapegoats – ethnic minorities or migrant workers tossed from country to country.
Tens of millions of people are being put through all of this, because of a mere hiccup in the financial system. Certainly, such a destructive system cannot survive forever.
In no way is the U.S. economy immune from the consequences of this crisis. The U.S. economy is linked in an infinite number of ways to the world economy.
For example, given the U.S. economy's relative strength and stability compared to the rest of the world, the U.S. financial system has developed into a haven for speculative money from all over the world, including Japan. The U.S. economy rests on hundreds of billions of dollars from Japan, running from major real estate holdings (Japanese companies are among the biggest landlords in such West Coast cities as Los Angeles and San Francisco) to industrial companies. Also, an important percentage of U.S. government bonds is held by Japanese capitalists. Thus, Japan helps to fund the U.S. national debt. Besides that, much of the foreign money currently flowing into the U.S. stock and bond markets is Japanese, which helps explain why the U.S. dollar continues to appreciate in relation to the yen.
This links the U.S. economy and financial system to the very Japanese financial system whose own crisis was exacerbated with the fall in East Asia. Japan's banks are among the largest in the world; the extent of their bad debts is estimated to approach a trillion dollars. If the Japanese financial system begins to crumble under the weight of these bad loans, or from another severe external financial shock like that of the last crisis, the impact would be felt throughout the world, including, the United States itself.
In this way, a crisis in a small country half way around the world could set off a chain reaction that could shake the entire world economy to its core, including the U.S.