The 10th anniversary of the “Lehman shock” is dominating headlines around the globe. But the lessons we should be internalizing are from Asia a decade earlier.
Though Asia’s crisis began in Thailand in July 1997, its true magnitude was revealed the following year. Suharto’s spectacular downfall in Indonesia in May 1998, amid violent uprisings, was the most graphic outcome. Massive protests from South Korea to Malaysia rocked the region, too. Yet it was the way Asia’s contagion ricocheted around the globe, driving Russia into default, that stands out 20 years later.
This dark period is relevant again as the floor disappears for currencies from Jakarta to Manila to New Delhi. There’s more than a whiff of 1997-1998 confusion in the air. Governments are grappling anew with speculators, runaway current-account deficits and capital outflows.
No, Asia isn’t about to crash again. What’s different today, though, is that the biggest risks are emanating from the nation that helped save Asia two decades ago: the US.
Not the bailouts. In fact, the harsh policies the US Treasury and International Monetary Fund demanded back then may have deepened the crisis. As economist Jeffrey Sachs put it in late 1997: the western elites yelled the financial equivalent of “Fire!” in panicky markets.
It was American consumers who saved Asia. In September 1998, then-Federal Reserve Chairman called the US an “oasis of prosperity,” something officials in Bangkok, Jakarta and Seoul will attest. Thanks to Donald Trump’s trade war, though, the US is now deploying weapons of mass economic destruction.
Fast-forward to 2018, and US President Trump is slapping giant taxes on imports. He’s actively trying to devastate Asia’s main growth engine, China. He’s doing his worst to undermine fragile recoveries in Japan and Korea, while pushing Indonesia, the Philippines and other open economies back to the brink.
The fallout from these retrograde policies is a bigger risk to global growth than Wall Street excesses. In other words, the events of 1997 and 1998 should be getting more attention than the 2008 subprime crisis.
The Lehman shock was caused by deregulation run amok and leveraging tactics that even Wall Street alchemists didn’t understand. Asia’s reckoning was caused by too much debt – both public and private – and policies aimed more at short-run growth than long-term stability. Countries and companies simply ran out of cash to service crushing debt loads.
This mismatch will sound familiar to students of Trumponomics. It’s an unapologetic return to the trickle-down fantasies of the past. But Trump is upping the ante. His delusional view that excessive debt doesn’t matter is belied by assumptions Washington can borrow ever more trillions of dollars from Asia, which he’s destabilizing with huge import levies. What if Asia stopped financing Washington excesses?
Nouriel Roubini is one of the few economists who can make a credible claim to foreseeing both the Asian and Lehman crises. What worries him about today is the absence of tools to recover from the next crash. Despite the lessons of 1997-1998 and 2008, the world’s debt burden has exploded to almost $250 trillion.
On the one hand, interest rates in the US, Japan and Europe are at, or not far from, zero. On the other, Roubini notes, “the space for fiscal stimulus is already limited by massive public debt.” In December, Trump’s Republican Party pumped $1.5 trillion of fiscal stimulus into an economy already firing on all cylinders.
Imagine if China, Japan, the UK or Saudi Arabia suddenly stopped buying US Treasuries. Shockwaves would slam stock markets and drive global borrowing costs sharply higher. If that happened, the Fed has little monetary ammunition to deploy. Trump, meantime, is pushing America’s debt burden past the $20 trillion mark.
No, the US isn’t Thailand or Indonesia. Printing the world’s reserve currency makes America special. How else can you explain Washington maintaining AAA ratings as Trumponomics pushes the balance sheet into the neighborhood of a pre-1997 Asian tiger?
Titanically large debts are manageable until they’re not. This clear and present danger makes obsessing over Wall Street’s reckoning a sideshow. The lessons from Asia a decade before are the ones the economic elite need to be studying.