But by 1995 the dollar was largely unchanged versus its low of three years earlier and proved ultra-competitive against the rest of the world's floating currencies. From its nadir in 1987, the US trade deficit contracted from $151bn to just $31bn four years later as exports jumped 65%. With its rate of price descent having abated, the dollar eventually reversed course; between the summers of 1995 and 1997 it would appreciate 12% per annum vs. European currencies. Scary things were about to happen.
Source: Bloomberg
By 1997, as a consequence of the currency appreciation, monetary policy was tightening across the Far East. Yet, according to the thought process responsible for setting Asian asset prices, such a threat was barely perceptible (it rarely is). By this point, the Tigers' economic achievements had taken on almost mythical proportions. Credit growth, when allied with the super-competitive dollar peg, had proven a further powerful economic stimulant and hot money flowed in from overseas investors eager to share in the domestic prosperity.
The private sector in Asia lapped it up, fatefully adopting a pro-cyclical debt load denominated almost exclusively in dollars. Between 1993 and 1996 in the four largest ASEAN economies, foreign debt-to-GDP ratios rose from 100% to 167% (see Bismarck's warning to nineteenth century Japan, below). Monetary inflation was in full effect and, using South Korea as an example, broad money supply (M3) surged, consistently registering yearon-year growth rates of between 20% and 35% during the boom. The Tiger economies, in the words of Adam Smith, were enjoying one of those moments when, "the greater many demand capital for foolish ventures such as property speculation and banks act as if honour bound to supply them with all the capital they demand."2
As we all found out, this wicked brew had to end. By 1998 the IMF had been called in, Asian currencies were devalued and foreign debts restructured. In other words, drastic remedies were sought to escape the vice-like grip of the now much stronger dollar.
