How Thailand's crisis became the World's Crisis

I recently began listening to an unabridged version of The Lexus and The Olive Tree and I must say that after about ten minutes of listening to the book, I’m quite disconcerted over the increasing connectedness of countries and their ability to affect each other. Allow me to illustrate this by paraphrasing the book’s opening story.

In 1998 the Thai government had been keeping the currency, Boht, valued at one US dollar. Banks and investment first in Thailand therefore were borrowing money from US banks for their ventures since US banks were much more stable. In August of 1998 the Thai government, for whatever reason, decided to no longer tie the values of the two currencies and the Boht fell to 30 Boht for 1 US dollar. The Thai banks now had to come up with a lot more money to pay back their loans to the US banks. A short time later, 56 of Thailand’s 58 major banks closed down. Over 20 thousand white collar workers in Thailand lost their jobs. Foreign investors began removing their money from developing Southeast Asian countries such as Thailand, South Korea, and others. This would have only caused an asian recession except for the ties to Russia.

Russia was in quite a bad place in 1998. Most of the products domestically produced were actually negative valued goods. As the book explains it, “this means that a Russian made tractor was actually worth less when it was made. It would have been more valuable to the Russian government if it was made into scrap or never made at all.” The few successful firms in Russia were dodging taxes. Therefore Russia had two major sources of income: selling oil and other raw materials and selling government bonds. The bulk of their raw materials had been input into Southeast Asian countries which took the raw product and converted it into Tvs, radios, and other finished products they exported to other countries. As they went into recession they bought less and less raw product from Russia. In order to entice people to invest in their government bonds, Russia had been offering ridiculous interest rates of nearly 50%. Thus American banks were borrowing money from other American banks at 5% interest, investing it in Russian bonds, and making a fortune. That is to say, they were making a fortune until Russia decided to default on their bonds. Basically, they told all the investors they were SOL.

This moved the problem over the America where the banks which had borrowed money at 5% expecting a 50% return now had to pay back that money with 0% return. They began to sell the bonds they had in good countries to pay off their debts. This transmitted the problem to countries like Brazil which had done nothing wrong, but suddenly saw people dropping the stocks and bonds in their country. Desperate for investment, they began to offer crazy interest rates too.

Investors, hungry for a safe investment, began to invest wildly in the US, driving interest rates low. This caused banks to panic, fearing that Americans would pay off their home loans early, cutting off an important source of income for them. Meanwhile, oil prices were dropping, bad news for Middle Eastern countries.

That is about the place where I stopped listening to the book, but I was amazed at what had occurred. A seeminly innocuous decision by the Thai government caused a cascade which ended up affecting the entire world.

I’m not yet ready to offer up a real opinion about this globalization. On the one hand, it’s getting worse and worse every day, with countries becoming very entangled in each other’s affairs. However, is there a way to put up controls and safety nets? Or would these controls do more harm than good? It wouldn’t be the first time something like that occurred. For example, tarriffs, which protect domestic goods from cheaper foreign goods, end up hurting the country trying to export its goods. In the early history of the US, these tactics led to economic wars that, in the long run, only hurt all players involved, including the country imposing the tarriffs.

As I continue to listen to the book, I will be able to offer up a more informed opinion. If the book continues to be as exciting as these first few pages were, I may be blogging about it quite a bit more.

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