In 1997, the SE Asian Tigers all faced severe economic stresses, partially triggered by a primarily foreign capital-funded massive real estate bubble in Thailand. Today the EXACT same thing is happening as untempered foreign investment into Thailand’s real estate market has created not a “soaring” real estate market as economists always incorrectly explain them, but massive real estate market distortions better known as a bubble. And just as the world learned nothing from huge stock market crashes in 2008 as Central Banks have used the exact same tactics from back then to duplicate the re-inflation of massive US and European stock market bubbles today, it seems Asia is having a massive problem learning from the tragedy of 1997 as well. Back then, banking and economic shills explained the massive withdrawal of foreign capital that triggered the onset of the 1997 Asian financial crisis as “unforeseeable”, again a bunch of academic rubbish to anyone that understands how bankers engineer low-interest Central Bank policies to specifically transfer wealth from the millions of customers to the few that are part of the criminal banking class through their bait and switch tactics in capital markets.
The deliberate banking creation and existence of such a scenario in Thailand’s real estate markets today is painfully obvious to anyone that has ever studied the 1997 Asian financial crisis, yet it is the “elephant in the room” that no one is willingly to openly discuss in Asia at this time. Furthermore, it is obvious from the enormous $500 million+ windfalls kept by Wall Street CEOs of collapsed firms Merrill Lynch and Lehman Brothers in 2008, that those that create such massive asset price distortions (the banking class) are the ones that benefit most from its creation and are best informed via inside information to avoid the collapse. Consequently, when massively pumped-up and distorted asset prices collapse, it is of no consequence to the bankers that created them (other than in magnitude of profits) as they always front-run markets, exit them well before their own personal accounts would be destroyed, and short these markets on the way down based upon their inside information. Crises, in fact, are wonderful opportunities for the banking class to transfer wealth from the have-nots to themselves, as has continued to happen since 2008. In fact, international bankers will always view every asset collapse and consequent crisis as a massive opportunity to control a nation’s debt and kill the ongoing viability of local businesses at the expense of their own “crisis profiteering”. Thus given that we have even larger capital bubbles now than we did in 2008, bankers are salivating over the wealth transfer prospects now at hand. The IMF’s plan to control the debt of the SE Asian countries after the 1997 crisis was on display for all to see when they swooped in with their “bailouts”, which were nothing more than thinly veiled contracts with all kinds of restrictive conditions and impositions on the debt that hurt the working class of the nations they “bailed out” while it simultaneously opened up previously closed markets to rapacious multi-national corporations eager to gain a foothold in newly and rapidly growing emerging markets.
As I stated above, one of the key conditions, if not THE key condition, of the 1997 Asian financial crisis was the unchecked massive foreign capital inflows into the SE Asian Tigers in the 1990s that created easy liquidity responsible for the massive distortions of real estate market prices. In fact many Thai real estate developers borrowed capital in the form of unhedged USD-denominated loans during that time, lured by the cheap cost of borrowing US dollars. Today, I hear the same thing that was stated pre-1997 crisis all the time from financial advisers in Thailand: “there can be no crisis because there currently is so much easy liquidity!” That is not only a foolish, but an ignorant statement. Why do you think Thailand has so much liquidity in 2013? And why do you think Hong Kong and Chinese real estate markets are currently experiencing similar bubble properties today that manifest themselves in hyperinflated properties, such as the Shanghai housing market, a market that rose 12% higher (to 26,527 yuan/square meter) during the past month of October alone? Could the answer have anything to do with the fact that the Bank of England, the ECB, the Bank of Japan and the US Federal Reserve have all created trillions upon trillions upon trillions of dollars, euros, yen and pounds out of thin air, all available at dirt-cheap interest rates, and jammed it into the global financial system to keep the global Ponzi banking system alive?
What happens if that liquidity suddenly disappears again as it did in 1997?
What conditions could possibly create a rapid evaporation of the current easy liquidity?
What safeguards has the government taken to guard against a rapid exit of liquidity and are these safeguards adequate?
The above questions are all ones that need to be adequately studied and answered, and that’s what we will do within the scope of this article.
During 1990-1996, in the period that immediately preceded the SE Asian economic meltdown, capital inflows in Thailand increased more than seven fold from just 5 years prior to a stunning 10.3% of GDP. The vast majority, or 7.6% of the 10.3% of capital inflows, resulted from offshore borrowing by banks and private corporations, making the 1997 crisis primarily one instigated by a combination of greed for rapid profits and terribly lax banking regulations. The remaining capital inflows outside of offshore loans consisted of portfolio capital inflows (1.6% of GDP) and foreign direct investment (1.1% of GDP). In any event, since a sudden stoppage of foreign capital inflows into Thailand triggered the 1997 crisis, we must ask ourselves what could possibly trigger the same event in today’s financial environment? Since massive currency devaluation (otherwise dressed up in flowery terms by bankers as “quantitative easing”) undertaken by every Western Central Bank in the world has been responsible for huge capital inflows into Thailand at the current time, and most people that truly understand the dilemma of Western Central Banks (i.e. not academic-trained economists like Paul Krugman) understand that the West cannot turn off these broken faucets of monetary leakage for fear of collapsing their bond markets, most believe that Thailand is at no risk for a repeat of 1997. But is this assessment accurate?
To get the bottom of this question, we must first investigate what happened in and around 1990 that caused such a drastic shift in capital inflows as a percent of GDP in Thailand? To begin, the already stated relaxation of financial regulations in 1991 drastically altered the behavior of capital inflows to Thailand from 1987-1991 bank-sourced capital inflows that averaged 6.5% of all capital inflow to a whopping 50.4% of all capital inflows during the 5 years after deregulations. The reason offshore bank loans as a source of financing in Thailand soared after deregulation was simple economics. US prime rates and LIBOR rates were typically multiples lower than Thai bank interest rates. If you look at the chart below, you can see that this problem of cheap offshore financing has persisted in recent years, and as it did during the build-up to the 1997 crisis, low offshore interest rates are once again contributing to the same massive, bubbly capital inflows that caused the Thai real estate crash in 1997.
As was the case in 1996, when the IMF predicted Thailand’s economy would recover in 1997, we are seeing the same pattern of errors by the IMF again in SE Asia (or perhaps just deliberate misdirection), as the IMF has just predicted Thailand’s growth to remain steady from 2012 at 7.8% in 2013 and just about the same at 7.7% in 2014 (Source: World Economic Outlook, 9 July 2013). Deloitte Research, Deloitte Services LP, is right on board with the IMF in predicting stability in economic growth despite huge capital bubbles in Thailand, stating in their 2013 outlook for Thailand: “Economic stability is not a concern, at least in the short term, and growth is likely to be self-sustaining,” though Deloitte was at least insightful enough to qualify their statement with “at least in the short-term”. (Source: Asia Pacific Economic Outlook, May 2013)
However, I believe that by H2 of 2014, if not earlier, the Thai Real Estate market will begin to show some real serious stresses from all the wasteful destructiveness of Western Central Banking monetary policy. During the first four months of 2013, total investment value in Thailand amounted to 510 billion baht, a whopping bubble-like increase of 80% yoy (Source: Thailand Board of Investment). By May, 2013, capital inflows into Thailand had reached USD$5.86 trillion (Bt176.37 trillion), triple the USD$1.85 trillion (Bt55.648 trillion) of inflows during the 2007-2008 US economic crisis (at the current exchange rates).
Since 2012 Q3, capital inflows have averaged US$4 billion (Bt120.32 billion), double the US$2 billion (Bt60.16 billion) average of the last five years. Thus, as I’ve discussed above, the enormous capital inflows into Thailand in recent years have caused bubble prices in the RE market and dwarf the capital inflows into Thailand that preceded the 1997 crisis. Thus, a sudden stoppage of inflows would have devastating effects on the Thai economy. So since Western (and Japanese) banking institutions are doing nothing to stop the capital inflows into Thailand with their near zero interest rate policies, lets see what the Thai government has done to prevent these enormous inflows from suddenly reversing direction as it did in 1997, causing the Thai baht to plunge to a record 50 baht per dollar (continued)...
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About the author: JS Kim is the Managing Director of SmartKnowledgeU, a fiercely independent investment consulting & research firm that investigates the excesses of Wall Street to protect the wealth of Main Street and seeks to uncover the best ways to invest in gold and silver.