The Currency Exchange Markets

I have not tested this! This is merely a theoretical exercise, whose applicability to the economic world is completely questionable.
Currency exchange markets [this does not include legislated equivalences such as the Hong Kong dollar relative to the U.S. dollar] have an unusual trait: assuming "sufficient liquidity", they are always at "near real-time" equilbrium. Assuming there is a reasonable supply of currency, "sufficient liquidity" is enforced by computers as currency traders; the computers will try to rectify all triangle-trades. [For band-type regimes, this heuristically should apply "near the middle" of the band.]

This is a qualitative difference from the 1930's Great Depression: the trading triangles are now "rigid" rather than "floppy". I haven't thought out whether this should amplify or mitigate the effects.

However, considering the provocation to violence in Indonesia (ethnic Moslem vs. ethnic Chinese, ethnic Christian, or police stations; particularly since Ramadan 1998) and South Korea (labor unions directly clashing with military and/or police; particularly since January 1999), I would speculate that the net effect of "rigidizing" the currency triangles is to amplify the effects.

Those of you who actually know the technical terminology, please excuse the informal way I write this up. My background is very limited. (I'm a mathematician and programmer, not an economist!) If my Lord Jesus Christ has granted me an accurate self-knowledge of my knowledge, I should have near-total recall for the fundamentals covered in the following courses at K-State: Intro to Microeconomics [F89], Intro to Macroeconomics[S90], or Intermediate Microeconomics[F90]. I should fade out very quickly after that.
Intercurrency trade

I will define intercurrency trade as the export of a good or service from one currency area to another. There are two cases: price in buyer's currency, or price in supplier's currency. In any case, the buyer's currency must be different than the currency the supplier needs for its bank accounts and ultimate bookkeeping. Now, let's apply this to the infamous Japan trade surplus with the U.S.A. and the corresponding (exact-negative) trade deficit of the U.S.A. with Japan. This has two components: We assume that both goods and services from Japan, in the U.S.A., are priced in U.S. dollars. We also assume that both goods and services, from the U.S.A., in Japan, are priced in Japanese yen.

Let's assume that the BoJ gets its target rate (as of somewhen in May 1999) of 120 yen/U.S. dollar, and that this is relatively stable. Let's furthermore fantasize that the trade surplus with the U.S. is, say, 1.0 trillion yen/month. Supposing the exchanges are open 24 hours/day, let's pretend that we're in a 31-day month, so the trade surplus for a given day is about 48 billion yen. [Both "trillion" and "billion" are American: 12 and 9 zeros, respectively.] [We will also do a what-if the trade surplus was 1.5 trillion yen/month. These figures are from the March 1999 trade surplus figures reported in May 1999. The what-if has a trade surplus of about 72 billion yen for the day in question.]

Now, realize that this figure is resulting from:

But the exchange rate is resulting from College Algebra exercises: VERIFY THESE CLAIMS! I pulled my example trade surplus numbers from a report in the May section of the Crash page.
Intercurrency loans

I will define an intercurrency loan as a loan that must be paid back in a different currency than the local currency. These were instrumental in starting the Crash in June/July 1997.

Observe that when an intercurrency loan is disbursed, it creates an automatic supply of the lender's currency (which generally is diffused over days or months).

The problem is when an intercurrency loan is repaid. Intercurrency loan repayments create an automatic demand for the lender's currency. [Now, we see why it is often illegal to price imports in the exporter's currency...] If automatic demand for the lender's currency exceeds automatic supply (from the trade surplus and other sources), there is a risk that the borrower's currency will have a 'desperation boost' in supply. This 'desperation boost', if not matched by a supply boost in the lender's currency, will result in a shortfall of actual demand of the lender's currency relative to automatic demand. Mass loan defaults follow.

Malaysia had the unusual situation that a major Malaysian oil company did its accounting in U.S. dollars. This allowed Malaysia to defend its ringgit with the oil company's income stream, rather than Malaysia's central bank reserves. This was critical in Malaysia's preliminary defense against the Crash, buying time for Marathir to construct the Malaysian Firewall.

This is obviously a key factor in the collapse of the Thai baht, the Indonesian rupiah, and the South Korean won. At the start of each of these currency collapses, the percentage of intercurrency [international] loans due in six months, out of the total, was 56%-57%. The Phillipines, whose currency did not collapse, but did waver, had a maximum percentage of intercurrency loans due in six months of 55%. Apparently, 54% did not cause symptoms.

Note that none of the four countries, above, is openly documented as having circumstances like Malaysia's. Also note that we seem to be dealing with a "threshold effect"; qualitatively, the cliff is somewhere between 54% and 56%, and the edge is near 55%.

George Fisher has pointed out to me that there is a historical analogy of the British trading houses [1600's?] to the current situation. "... so, there is nothing new under the sun." [Summary of Ecclesiastes 1:1..11, and the last part of Ecclesiastes 1:9, NASB]

While I do not yet [May 25, 1999] see a potential set of circumstances that could lead to mass bank runs, etc. in the U.S.A. yet [this did happen in the Great Depression], I am seriously concerned about any kind of implausible (but possible) circumstances that could disrupt the banking system. Why do I go into all this? Because a serious banking system disruption in any area of the U.S.A., from whatever improbable and/or implausible direction, is a direct threat to the survival of everyone in the area. (I'm talking about not being able to take a trip from Kansas City to Topeka to shop.) This is extreme, implausible -- and has very serious consequences. It definitely would invoke a "state of emergency". site map
Opinions, comments, criticism, etc.? Let me know about it.

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