The Crisis Repeats... Albeit with Contra Distinct Characteristics
A while ago in foretime, our Asian counterparts dealt with a crisis similar to the one US is wrestling to deal with today. The crisis was purported the 'Asian Financial Crisis' that plagued the Asian economies in 1997. The crisis was characteristically similar, yet fundamentally different that the one we are faced with today. Yet laced with innumerable similarities makes it an interesting revelation to note that, "History does repeat itself".
Let us see how. The Asian financial crisis affected South East Asia in particular and was the fallout of a mismanaged debt policy. At that juncture, interest rates were exorbitant, in order to lure foreign investors to invest their surpluses. This influx of cash led to high growth rates which led to a nation wide investment in fixed capital assets without a corresponding growth in factor productivity.
This exuberance was followed by its inevitable downfall when the US economy began to raise interest rates making it a relatively attractive investment destination. This raised the US greenback against Asian currencies. By this time the Asian states were burdened with large amounts of external credit driving up asset prices to unsustainable levels, only to be followed by a collapse led by defaults on debt obligations.
We often propound," learn from your mistakes". Asia countries, now guarded from their experience hold large current account surpluses and foreign exchange reserves. Asia now services the current account deficits of the west. Moreover what is most congruent to the situation at hand is the fact that the inflows have been unjustifiably directed towards unproductive mortgage back securities and CDO's that are packaged forms of unyielding sub prime loans.
Such a situation could bear the underlying risk of shrinking global liquidity. Signs are already visible from the fact that interest rates are rising, leaving its impact on the hedge funds evoking margin calls resulting from defaults on sub prime loans. It is also lending its impact on the LBO market, and across all financial stock markets as well.
However, its is implying that History would indeed repeat itself in its entirety? Possibly not. The US economy is far too resilient to be shaken and encapsulated by these vagaries. It has successfully dealt with concomitant circumstances such as the savings and loan crisis way back in the 1980's as well. Nevertheless, the current situation cannot be evaded without a significant impact.