Anticipating The Asian Financial Crisis -II
August 29, 2013 2 Comments
Swaminathan S A Aiyar is always well worth listening to,This piece by him is superlative and well worth reading,Do pass it around.There are too many people pretending that everything is fine or will be so in the near future.Unless we accept that there is a problem and a serious one,we are unlikely to go looking for solutions.
Make no mistake, a second Asian Financial Crisis is on its way. This storm will not blow over soon. It originated in the US, when the Fed proposed to taper and end quantitative easing. The frightening thing is that this will happen in stages over the next 12-18 months, and each turn of the liquidity screw can cause a fresh financial storm. Nothing Chidambaram or Raghuram Rajan say can avert the storm.
Learning from the 1997-99 experience, all Asian countries (including India) have built up large forex reserves, reduced leverage compared with 1997, and shifted to floating exchange rates. This makes them far more resilient, so they should not collapse as in 1997-99. But they will suffer severe damage regardless. Depreciation raises the price of all items that can be exported or imported. Estimates differ, but a 10% depreciation probably sucks out 1-1.2% of purchasing power through inflation. At . 68 to the dollar, currency depreciation is around 25% since May, implying a loss of purchasing power of 2.5-3% of GDP. That is hugely recessionary. It will be reflected in much higher prices of petroleum products, fertilisers, most commodities, and knock-on transport and material costs. Read more of this post
The term “Dutch disease” originates from a crisis in the Netherlands in the 1960s that resulted from discoveries of vast natural gas deposits in the North Sea. The new found wealth caused the Dutch guilder to rise, making exports of all non-oil products less competitive on the world market.Today the term is used in the context of exchange rates,to refer to the negative consequences arising from large increases in a country’s foreign currency inflows including – foreign direct investment, foreign indirect investment,foreign aid etc in addition to the ill effects on non-resource industries a by the increase in wealth generated by the resource-based industries. 
wealthymatters 