Academic journal article ABA Banking Journal

How Much Will Asia Affect the U.S. Economy?

Academic journal article ABA Banking Journal

How Much Will Asia Affect the U.S. Economy?

Article excerpt

Even before the recent Asian currency meltdown, U.S. economic growth was slowing. Now, Asian economic problems will likely have a significant effect on the U.S. economy in 1998. Here's what happened, in brief.

Asians traditionally have a high rate of saving. Additionally, foreign capital has continually poured into Southeast Asia in response to the booming economies and potential for growth. Unfortunately, market forces were not allowed to efficiently allocate these resources; instead, politicians forced financial institutions to make so called "policy loans." Taking advantage of the fixed exchange rates and lower interest rates abroad, large amounts of dollar-denominated debt were incurred and money went into building excess capacity and into property speculation. Lax bank supervision added to bad loans.

Eventually, the dam burst and foreign investors fled. Central banks hiked interest rates to slow the currency slide. Rising import prices led to even higher interest rates. Property values plunged. Share prices were battered.

This economic turmoil in Southeast Asia could not have come at a worse time for Japan, which was already suffering from a poor economy and banking problems. japan has strong ties with the Southeast Asian countries and has invested heavily in fixed investments. Japanese banks own the lion's share of foreign loans in Southeast Asia. Investors are fleeing Japan; share prices and the value of the yen have tumbled. As the yen falls, the other Southeast Asian currencies must depreciate to remain competitive.

In December we saw South Korea become caught up in this spiral. Korea is the eleventh largest economy in the world. Because of its size, a weaker Korean economy s contributing to a large deflationary effect on the world economy, including japan and the United States.

The deterioration of economic conditions in Asia will hurt us through a number of channels. By far the biggest impact on the U.S. economy will come from the currency depreciation in Asia. Since July 1, the value of the dollar has appreciated 70.1 % against the Thai baht, 31% against the Korean won and 12.6% against the Japanese yen. An econometric model simulation shows that the price effect from the currency swings will increase our trade deficit by $10 to $15 billion per year. The income effect coming from the belt tightening in Asia could add another $10 billion to the trade deficit. …

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