The Asian financial crisis of 1997-98 began with currency speculators dumping the overvalued Thai baht that eventually led to its devaluation. Sensing that other Asian economies were also weak, speculators targeted them as well which led to the crisis spreading to Malaysia, Indonesia, the Philipines and South Korea.
What do you think are the main causes of this crisis? Are there factors that are critical in any explanation and which may indicate that a crisis is imminent?
Answer:
The reason of the fall of the Thai Baht and other currencies can easily by using the simple rules of economics. Due to fixed exchange rate, the value of exchange rate of Thai Baht wasn’t allowed to change according to the market conditions. This lead to a condition where the currency became stronger than it should be. For example, the GDP, growth rate, inflation rate, and balance of payment were signaling that the value of currency is higher than it should be. As a result, speculators who had Thai Baht started selling the money they had because it had reached its peak. Due to this, there was a sudden increase in supply of Thai Baht in the currency market. A basic economy rule is whenever the supply of anything increases; its price usually goes down. Since the government was controlling the exchange rate, and was not allowing it to fall down, there was a lot of speculation selling in the market. All of this lead to the crises getting steeper and eventually Thai Baht did fall and the impact of the fall was greater than if the markets should have been allowed to operate on the principles of demand and supply. (Colombo, 2013)
The role of speculators is also imminent in the crisis. If the money was held for a longer period, then these crises would have been delayed. In fact it was more the action of the speculators that caused the market to crash rather than Thai Bahts being overvalued. This teaches us that panic selling and buying in the market is far more dangerous than any other factors in the case of market crashes.
References
Colombo, J. (2013). Thailand's Bubble Economy Is Heading For A 1997-Style Crash. Forbes. Retrieved 24 November 2014, from http://www.forbes.com/sites/jessecolombo/2013/11/04/thailands-bubble-economy-is-heading-for-a-1997-style-crash/
