Thursday, September 18, 2008

Life in a Banana Republic

Without a reduction of costs and an improvement of trade performance we will just end up being a third-rate economy- a banana republic. Paul Keating as Treasurer of Australia

To paraphrase the Republican Candidate for Vice President, "What's the difference between the US economy and that of a Banana Republic?"


OK, the difference is more than just gloss, which makes things worse. Having a currency which (currently) serves as the main global reserve insulates the US from suffering the same fate as Thailand in 1997, or at least it used to. Now, it seems, the insulation may only have served to let imbalances fester longer, which doesn't bode well.

The one-day, 10% decline in the US$ vs Gold yesterday isn't as severe as the Thai Baht's 18% decline on July 2, 1997, but it is greater than any one day decline in the Malaysian Ringgit during the Asian Crisis. The S. Korean Won posted a 14% one day decline late in 1997 (and another 13% decline within a month). Brazil's currency lost 12% early in 1999.

None of these examples of currency mis-management compares to the collapse of the Russian Ruble which lost 22%, 11%, 20%, and 11% over 4 consecutive days in August of 1998. The Ruble went on to lose 60% in one day in September of 1998. Let's hope the saying "the bigger they are, the harder they fall" isn't always applicable.

Yesterday's dollar collapse should serve as a reminder that such events aren't confined to banana republics.

I'll expand on this theme after my walk with a focus on the effects of such currency crises for debtor nations (like the US).