The 10-year cycle of financial crises
"The historical pattern of a 10-year rhythm of cyclical financial crises looms as a menacing storm cloud over the financial markets.
The 30% US market crash of 1987, in which investors lost 10% of 1987 GDP, was set off by the 1985 Plaza Accord to push down the Japanese yen with an aim of reducing the growing US trade deficit with Japan. The 1987 crash was followed 10 years later by the Asian financial crisis of July 2, 1997, with all Asian economies going broke, and some stock markets such as Thailand's losing 75% of their value, and Hong Kong having to raise its overnight deposit rate to 500%, trying to defend the fixed exchange rates of their currencies.
In South Korea, Daewoo Motors, facing bankruptcy, was forced to be taken over on the cheap by General Motors. In Indonesia, the Suharto government fell because of social instability arising from the financial crisis. A wave of deflation spread over all of Asia from which Japan, already in recession since 1987, has yet to fully recover two decades later. In the United States, the DJIA dropped 7.2% on October 27, 1997, and the New York Stock Exchange had to suspend trading briefly to break the free fall.
Now in 2007, a looming debt-driven financial crisis threatens to put an end to the decade-long liquidity boom that has been generated by the circular flow of trade deficits back into capital-account surpluses through the conduit of US dollar hegemony.
While the specific details of these recurring financial crises are not congruent, the fundamental causality is similar. Highly leveraged short-term borrowing of low-interest currencies was used to finance high-return long-term investments in high-interest currencies through "carry trade" and currency arbitrage, with projected future cash flow booked as current profit to push up share prices.
In all these cases, a point was reached where the scale tipped to reverse the irrational rise in asset prices beyond market fundamentals. Market analysts call such reversals "paradigm shifts". One such shift was a steady fall in the exchange value of the US dollar, the main reserve currency in international trade and finance, to cause a sudden market meltdown that quickly spread across national borders through contagion with selling in strong markets to try to save hopeless positions in distressed markets.
There are ominous signs that such a point is now again imminent, in fact overdue, in globalized markets around the world."
atimes.com |
