Documents menu

Asian panic set to travel

By Terence Corcoran, Toronto Globe and Mail
Saturday 10 January 1998

...it is the people of Indonesia who are being forced by the IMF to pay the cost, a process Canadian currency specialist Albert Friedberg calls "socializing the losses."

In Korea, the government was not running a big deficit. It was the private sector that had all the debt. Now the IMF is... saying the government is going to have to guarantee the debt of the private companies in order to obtain more financing. ...the taxpayers of Korea will be paying now for losses on bad investments made by Citibank and Chase.

It is these networks, and the banks that supported them, that were major beneficiaries of the decade-long boom in Indonesia. But it is the people of Indonesia who are being forced by the IMF to pay the cost, a process Canadian currency specialist Albert Friedberg calls "socializing the losses." The same distribution of losses among all taxpayers is taking place in South Korea and the other Asian countries where the IMF, backed by the United States, is moving in with programs that can only exacerbate the Asian economic crisis.

Mr. Friedberg heads Friedberg Mercantile Group of Toronto and writes unconventional commentaries on currencies that appear in the company's monthly newsletter. From Mr. Friedberg's free-market perspective, grounded in Austrian School economic theory, the Asian crisis has its origins in overexpansion of credit by the U.S. Federal Reserve that will, in time, come back to haunt the U.S. economy.

How are losses being socialized?

"In the end, the IMF is pushing these countries to socialize the losses, where the losses to be taken are really the losses of 30 corporations," Mr. Friedberg said in an interview yesterday. "Suddenly, now the whole country is going to be shouldering those losses. Aside from a few things that the IMF did that are good -- things like opening up markets, supporting deregulation and transparency -- the rest of what they're doing is incorrect. They're pushing the countries into a tremendous contraction. In Korea, the government was not running a big deficit. It was the private sector that had all the debt. Now the IMF is coming in and saying the government is going to have to guarantee the debt of the private companies in order to obtain more financing. In effect, the taxpayers of Korea will be paying now for losses on bad investments made by Citibank and Chase. The intelligent thing to have done would be to say to the banks: 'You lent the money to these Korean private companies. If they can't pay, they can't pay. They declare bankruptcy, you lose money.' "

Would Asian currencies be stronger without the IMF plan?

"If the IMF had let the companies declare bankruptcy and let Chase and Citibank worry about that, then the currencies would not have gone down as much as they have -- by far. The reason you have a sense of panic is because there's a feeling that you have to cover the value of that foreign debt, even if you're broke. These companies are broke. Why are they buying dollars to pay back debt? You would have had much less pressure on the foreign exchange market than you have at the moment. The pressure is to buy back the dollars, and so everybody's panicking. So the Indonesia rupiah yesterday went below 11,000 rupiah to the U.S. dollar, which is a decline of 50 per cent in three days."

How did the Federal Reserve cause this?

"The U.S. central bank restarted the credit expansion process (in early 1990s) all too successfully. They got a huge increase in consumer credit, they aided an enormous increase in speculation in credit markets and securities markets. And they exported credit abroad, with U.S. banks becoming big lenders of money to all kinds of emerging countries, and investors became convinced the growth rate in these countries was much better than it was in the United States. Unfortunately, this credit expansion did not create inflation -- I say unfortunately, because price inflation might have stopped the credit expansion in its tracks."

But if there's no price inflation, why worry?

"Here's where we have to separate the definitions of inflation. Inflation is not just a rise in prices. It's a state of affairs that says credit is too easy. Easy credit will inevitably lead to rising prices, but over a longer period of time. But easy credit surely leads to a process of excess credit creation where people borrow money to go into all kinds of speculative ventures. These credit cycles are really the causes of trade depressions. So you're right - - there's no price inflation, and some people are even worried about price deflation. We don't believe that's possible with the rate of monetary expansion we have now. But what we could get -- and this is the real danger -- is debt deflation."

What's the effect of debt deflation?

"If the central bank stopped injecting credit, you get a situation where creditors start to demand repayment from debtors who can't pay. Debt deflation can cause a depression."

So what's next?

"The crisis will widen. It will travel from Asia to Russia, Greece, Brazil. Eventually it will come back to the United States. It will not be a repeat of the 1970s, because the monetary expansion isn't as great. But the liquidity is in the system and we believe the United States is going to go into a very large trade deficit in the next few years. Then the U.S. dollar will come under pressure and you will start getting price inflation. The whole world is resting on the United States' shoulders right now, because the U.S. economy is still strong, and everybody needs the United States to be strong because everybody else is going to try to export their way out of their problems."