Glamor Economics

Chapter 126

Chapter 16, Section 6 Super destructive "financial nuclear bomb" - hot money

In the early 20s, when the economies of Western developed countries were in recession, the economies of Southeast Asian countries experienced miraculous growth.When Asia was in the frenzy and excitement of the bubble economy, it did not realize the loopholes in its own economic system, but Soros has already noticed it.

Soros' assistant Jones was stationed in Hong Kong, China at the time, but spent most of his time non-stop visiting neighboring Southeast Asian countries, looking for breakthroughs and preparing operational plans for the Soros Foundation's massive offensive. "We flew around the area that year, and we met directly with developers, and also communicated with banks and even local reporters." He found that the entire property market had already had a lot of bubbles, and some developers had difficulty paying interest, "But banks It’s better to help developers find a lot of U.S. dollar loans.”

The accumulation of asset bubbles, the continuous influx of foreign capital, the high short-term foreign debts of banks, and the support of developers are barely supported but have begun to falter. "After we put these signals together, we spent a long time studying carefully. What kind of situation will happen? How will the situation develop?" The result of the research is that this situation is difficult to maintain. Jones then suggested to Soros that selling Empty baht. "For this battle, we prepared six months in advance and gradually built up short positions." He added, "6 years ago, central bank officials in the Asian region were not as open as they are now, and we have also communicated with them , but they don’t think so.”

"We started to act in early 1997." In January, Soros Fund and other international hedge funds began to attack the long-coveted Southeast Asian financial market. At the beginning, they sold the Thai baht aggressively, and the Thai baht exchange rate plummeted.Facing the menacing attack of hedge funds, the Bank of Thailand intervened in the market and used about 1 billion U.S. dollars to absorb Thai baht. On the one hand, local banks were prohibited from lending Thai baht to offshore speculators, and on the other hand, interest rates were greatly increased. keep it steady.

In May, a large amount of funds flowed out of Thailand, and Thailand began to control capital. In June, hedge funds once again launched a fatal attack on the Thai baht, and the Bank of Thailand had to back off because the only US$5 billion in foreign exchange reserves was exhausted at this time. On June 6, the Thai Prime Minister assured the outside world on TV: "The Thai baht will not depreciate, and we will let those speculators lose their money." But two days later, the Bank of Thailand was forced to announce that it would abandon the fixed exchange rate system and implement a floating exchange rate system.The Thai baht fell 300% that day, and then the governor of the Bank of Thailand, Luncha?Malaga announced his resignation. On August 6, the Bank of Thailand decided to close 30 financial institutions, and the Thai baht collapsed.

During this period, hedge funds also launched an attack on the Philippine peso, Malaysian ringgit and Indonesian rupiah, and finally lost all Southeast Asian currencies including the Singapore dollar.Factories closed down, banks went bankrupt, prices rose, and so on.

Soros saw the speculative behavior in the Southeast Asian capital market, so he decided to attack the Thai baht first, and then swept the capital markets of the entire Southeast Asian countries, scraping away tens of billions of dollars of wealth in one fell swoop, and making these countries economic growth for decades. For nothing.All Asians remembered this terrible day and this hateful name, and people began to call him "financial predator". In the minds of some Asians, Soros was a heinous and morally corrupt guy.Malaysian Prime Minister Mahathir said: The economic system that took us 40 years to build was suddenly brought down by this idiot with a lot of money.This idiot with a lot of money is George?Soros.

Hot money, also known as hot money or speculative short-term capital, is short-term speculative funds that flow rapidly in the international financial market in pursuit of the highest return with the lowest risk.The speculative movement of international short-term funds is mainly to avoid political risks and pursue the interests of exchange rate changes, important commodity price changes or international securities price changes, while hot money is a speculative behavior that pursues the interests of exchange rate changes.When speculators expect the price of a certain currency to fall, they sell the forward foreign exchange of the currency, hoping that after the expiration in the future, they can buy a lower spot foreign exchange to earn the benefit of the exchange rate difference.This is purely a speculative behavior of buying and selling short, so it is different from arbitrage.In the foreign exchange market, since such speculative funds are often converted from currencies with a tendency to depreciate into currencies with a tendency to appreciate, this increases the instability of the foreign exchange market. Volatility or the imposition of foreign exchange controls can prevent the flow of such speculative funds.

The inflow of hot money will cause a country's capital account surplus, a surge in foreign exchange reserves, a sharp appreciation of the local currency, excess liquidity, and a turbulent asset market, while the outflow of hot money will cause a country's capital flight (deficit in the capital account), a sharp drop in foreign exchange reserves, and a sharp increase in the local currency. The catastrophic consequences of devaluation, liquidity crunch, and bursting of asset price bubbles.In particular, a sudden reversal in the direction of hot money flows will usually become a financial nuclear bomb that blows up the economic systems of emerging market countries.

[links to related words]

International capital flow refers to the transfer of capital between international countries, or the one-way, two-way or multi-way flow of capital between different countries or regions, including loans, aid, export, import, investment, increase in debt, creditor's rights Acquisition, interest income and expenditure, buyer's credit, seller's credit, foreign exchange trading, securities issuance and circulation, etc.

The fundamental reason for international capital flow is that the expected rate of return of capital in various countries is different (unbalanced development of the world economy), and the profit-seeking nature of capital drives it to flow from one country to another.There are three basic factors affecting international capital flows: yield rate; exchange rate forecast; risk, including political risk, economic risk and business risk.

International capital flows can be divided into medium and long-term capital flows (more than 1 year) and short-term capital flows (1 year or less) according to their maturity.

Short-term international capital flow refers to the inflow and outflow of capital with a term of one year or less or immediate payment.Such international capital flows generally rely on credit instruments, such as short-term government bonds, commercial paper, bank acceptances, bank demand deposit certificates, and large negotiable time deposit certificates.

(End of this chapter)