Will the Hong Kong Dollar Collapse? Does It Matter?
Boston Globe, October 29, 1997
Houston Chronicle, October 29, 1997
Sacramento Bee, October 29, 1997
The stock market has a way of exaggerating the importance of events that precipitate its gyrations, and the past week's "correction"-- Wall Street's preferred jargon for the crash of '97-- is no exception. People who would never have encountered the Thai baht or the Malaysian ringgit in their travels now find themselves wondering how the collapse of these currencies could have set off a chain of events that caused an earthquake in the world's financial markets.
One side effect has been an increased volume of verbiage about how interdependent we all are in the "global economy." The implications are troubling: do we really have to worry whether the Hong Kong monetary authorities have enough reserves to fend off the ongoing speculative attack on their currency?
Some perspective is in order. First of all, the countries whose economies are in trouble right now are not exactly a major engine of US economic growth. Our exports to Indonesia, Malaysia, the Philippines, South Korea and Thailand combined are less than one percent of our national income. A fall off in demand in these markets is clearly not going to cause a recession in the United States.
As for old Dow Jones, his troubles are rooted in domestic rather than foreign machinations. Price to earnings ratios-- that is, the value of stocks relative to how much income they generate for their owners-- were at a record high. The market had doubled in less than two and a half years. It doesn't take a financial genius to see that this can't go on indefinitely.
In fact, a little arithmetic reveals that the stock market cannot even maintain its long-term past performance-- a 7 per cent real rate of return over the last 75 years. That's because the economy does not grow as fast as it used to, and profits are proportional to economic growth.
A lot of investors are headed for a very rude awakening on this score. A recent survey showed that the average investor expects to haul in a 34% annual rate of return over the next ten years. Good luck! They're a lot more likely to get that kind of return buying lottery tickets.
As long as we're putting things in perspective, the importance of the stock market is also greatly exaggerated. Most Americans don't hold any stocks at all, and holdings among the rest are highly concentrated. About 95% of all stocks held by individuals belong to just 5% of the population, with the majority of stocks held by just one half of one percent.
In the Asian countries facing serious economic crisis, a heavy price will be paid by those who can least afford it. In accordance with the tradition of the International Monetary Fund, it is the poor and working people who must reap what the speculators and financiers have sown. Popular resistance in Thailand-- in particular, to a regressive fuel tax increase-- has set back the implementation of the IMF's "rescue" package. But the IMF controls access to foreign credit, and Thailand is $73 billion dollars in debt, with $18 billion due this year. So the IMF will be driving a hard bargain.
For a preview of what the international loan sharks have in mind for Thailand and its neighbors, we need only look as far as Mexico. Nearly two years after the collapse of the peso, the Mexican stock market has rebounded (at least until last week). But real wages are still 40% less than they were 15 years ago, and millions of people have been pushed into poverty and unemployment. Foreign corporations are doing just fine, since their labor costs are lower than ever.
The crisis faced by the "Asian tigers" will probably convince the governments of these countries that the liberalization of trade and investment they have adopted in recent years has exposed them to unnecessary risks. No one will be surprised if they decide to pull back from this experiment or even reinstate some protection for their domestic economies.
Meanwhile, back in the US, we still consume about 88% of what we produce. We're the only country that doesn't have to care if speculators-- or anyone else-- sends the international value of our currency spiraling downward. That's because we're much less dependent on international trade than anyone else.
A lot of people in high places, right up to the Presidency, are working overtime to change this. They tend to exaggerate our dependence on the global economy at the same time that they are negotiating international agreements designed to make that exaggeration a reality. But there's no obvious reason for the majority of Americans to buy into that plan. Why would we want to increase our vulnerability to all the sources of instability in the international economy?