Whistling in the Dark

William Krehm

The very depth of the sigh of relief in The Wall Street Journal (20/12, "Thailand Actions Unlikely to Spur Global Shake-up" by James Hookway) leaves some doubt about how well-grounded the occasion for it might be.

"The record decline in Thailand’s stock market on Tuesday makes it the latest casualty of global investors’ aggressive pursuit of returns world wide." In fewer words: Deregulation and Globalization.

"However, few people expect the trouble to spread, highlighting fundamental changes in Asian economies since the financial crisis that swept the region a decade ago. The Thai market’s 15% drop on Tuesday, its worst showing ever, was prompted by a drastic government move to clamp down on booming foreign investment. Before the drop, Thai markets had been up 2% for the year. The scale of the plunge sent a shudder through other emerging markets, with prices falling 2-3% in India, Indonesia, Hungary and elsewhere.

The cross-border nervousness was triggered partly by memories of the Asian financial crisis a decade ago, sparked by trouble in Thailand. Back then the circumstances were markedly different. Asian nations faced weakening currencies, not strengthening ones, and were burdened by mountains of debt. Today, in most cases, that debt has either been paid down or converted into longer maturities, and thus isn’t a threat. What’s more, Asian economies are now robust, fueled by years of expansion and strong global consumption of commodities and manufactured goods, particularly by ever larger China, one of Asia’s biggest customers."

Taking some of these logical stretches, one by one:

1. "Asian nations faced weakening currencies. Now strengthening ones." It is precisely the strengthening currencies that nations living by their exports are trying to avoid. That is what China has resisted by buying American securities to keep its export boom from pushing up the yuan and pricing its exports – by which it lives or dies – out of the world market. It finally pushed its currency by a token 6%. That and Washington’s wasting world clout because of the deepening mess in Iraq and Afghanistan helped keep the Americans in a compromising mood vis-à-vis China, whose vote it needs on the UN Security Council against Iran’s nuclear ambitions. But even that near-token increase in the yuan puts added doubts on Thailand’s prospects as subcontractor for China and its exports.

2. "That debt has either been paid down or converted into longer maturities." As interest rates are rising once more due in part to the deteriorating average quality of US housing and other debt, and in part to the fact that there are so many wars being fought or in the offing, "long maturities" at yesteryear’s interest rates drop in value, and create major solvency problems that tend to push interest rates up further because of the growing risk. No serious cause for consolation there then.

3. The offending version of what used to be called the "Tobin Tax" could be likened to the statutory reserves that were repealed in countries like Canada and New Zealand and emasculated beyond recognition in the US, the European Union and most other places. It was repealed in Thailand only in the case of money being brought into the country for investing in stock. That headed for bond markets remains intact with 30% deposited without accruing interest, and forfeiting 10% as tax if withdrawn with having been invested. That could not have been improved if the goal were to overheat an already feverish market.

4. The WSJ had observed: "In Thailand increased foreign demand for local stocks and bonds has lifted its currency, the baht, higher against the dollar. The Thai central bank feared the ever-stronger baht would hurt exports and chose a dramatic response. Then the government quickly reversed the restrictions on stocks." That would provide open untaxed access to speculative money that ideally would move in and out of Thailand for a quick profit. That implied investment in stocks, and such money which has ever greater power internationally has been exempted. What remains taxed is money headed for bonds which along with the currency will suffer from the free access and departure that foreign money has in stocks.

Obviously, the Thai government under pressure from the financial powers that have supreme power internationally, was not able to think matters out calmly. As clearly must have been the case with the WSJ writer. He, however, after having allayed doubts and fears about the stability of the system that may or may not have come from above, did go on to explore the new topography more carefully.

"Thailand’s ill-starred regulatory effort on Tuesday may be a sign of growing stresses in a global economy marked by large imbalances. The US runs large trade deficits with the rest of the world; in particular, Asia. At the same time, low interest rates worldwide have prompted investors – in particular fast-moving hedge funds – to seek out incrementally higher returns in risky markets, such as Thai stocks.

"Thailand sought to contain some of the pressures on its economy by letting the currency strengthen. But a rising currency can hurt exports, and Thailand is losing ground competitively in China, where currency is much less flexible.

"The baht did weaken slightly after the moves. The currency was trading at 35.92 baht to the dollar at the close of Asian trading, down 1.6%. Thailand’s policy reversal is an embarrassing miscue for the new military-installed government, which could shake confidence in its management of the economy. The zig-zag and subsequent sell-off wiped more than $20 billion of value from the stock market."

William Krehm

-- from Economic Reform, January 2007