The Start of a New Asian Financial Crisis?

May 29, 2008

One of my predictions for 2008 regarding the global economy was that another currency devaluation war would erupt in Asia, as intensifying competition for the export markets of Europe and the U.S. leads Asian nations to turn to currency devaluation to gain an upper hand on their Asian rivals.  This wasn’t on anyone’s radar back in November of last year but, with an understanding of what a high population density does to per capita consumption, it seemed clear to me that this would be inevitable as Asian nations became ever more dependent on exports to sustain their bloated work forces.  Now it appears to be starting:

… Some observers are even pointing to a potential currency crisis, given Vietnam’s growing current account deficit, weakening fiscal position and limited foreign exchange reserves, on top of 25 percent annual inflation, the second-worst in Asia.

Some of Asia’s largest economies are also grappling with the same risks. Although none look as vulnerable as Vietnam, some are set for their sternest test since the Asian financial crisis of 1997.

The article goes on to blame the price of oil for increasing trade deficits in Vietnam, the Philipines and other Asian nations.  But another way of looking at their trade deficits is to focus not on their imports of oil but on their exports – their inability to sustain exports at a high enough level to fund their oil purchases.  By the way, why is that a trade deficit is a bad thing for every economy in the world except the U.S.?  When the U.S. complains of its trade deficit, Asian nations are the first to deride us for not seeing the imaginary benefits of free trade with them and to admonish us for any thoughts of a return to protectionist tariffs.

This is something that bears watching.  Currency devaluation among Asian nations would be proof positive that we can’t rely on currency valuation as a means of reversing a trade deficit that is rooted in a gross discrepancy in population density between the U.S. and these nations, and has nothing whatsoever to do with currency evaluation.  I’ll keep you posted with further developments on this.