Jim wrote: > hey, cool! we can see if Irving Fisher's debt-deflation theory of > depressions works.I hope it doesn't.
Dear Jim, Can what is below may be related with that theory as well? I would appreciate your comments, as well as the comments of others. Sabri Oncu +++++++++++++ Warning signs Oct 25th 2001 >From The Economist print edition Asia's slump could once again strain the region's financial system The economic news from East Asia gets worse by the day. Singapore is suffering its worst recession for almost 40 years: real GDP fell by 5.6% in the year to the third quarter. Taiwan, Malaysia, Hong Kong, Thailand and the Philippines are already in or close to recession. How vulnerable is Asia to another financial crisis? In 1997 pegged exchange rates, high foreign-currency borrowing and weak bank supervision left many Asian financial systems horribly vulnerable to a sharp fall in exports and capital outflows. Most of the region's economies now have flexible exchange rates, current-account surpluses, large foreign reserves and sounder banking systems—all of which suggests that another crisis is unlikely. But a new report by Sun-Bae Kim at Goldman Sachs in Hong Kong reaches a more sobering conclusion: not only is Asia suffering a more severe economic shock than it did before the crisis of 1997-98, but its financial system is, overall, no stronger than it was then. One gauge of the size of the economic shock hitting the financial system is the slowdown in the rate of growth of nominal GDP. This is a proxy for the capacity of the economy to generate cash flow, from which debts must be serviced. Most economies have seen a much sharper fall in nominal growth over the past year than leading up to the 1997 crisis (see chart). In Malaysia, the year-on-year rate of nominal GDP growth has fallen from 20% in early 2000 to minus 2% in the second quarter of this year. How bad this cash-flow shock is depends upon the level of private-sector debt, and upon how many of the outstanding loans are already non-performing. In East Asia as a whole, private-sector debt is smaller in relation to GDP than in 1997, but non-performing loans now amount to 15% of GDP, up from 11% before the 1997 crisis. If the economic shock is bigger, do financial systems have thicker buffers than in 1997? They certainly look healthier today on various measures of liquidity. In 1997 foreign lenders triggered a liquidity crunch by refusing to roll over loans. Today, the foreign borrowing of the financial system amounts to 30% of foreign-exchange reserves, down from 70% in 1997. On various measures of solvency, however, many Asian financial systems look wobbly. The average capital-adequacy ratio of the banks is slightly lower than at the end of 1996. Ratios of government debt to GDP are much higher today than in 1997, leaving governments less able to bail out banking systems again. Public-sector debt has risen from an average of 28% of GDP at the end of 1996 to 45% of GDP today. The worrying conclusion is that although Asia's financial system is less vulnerable to a sudden liquidity crisis, there is a risk of a deeper, more drawn-out deflation, exacerbated by domestic debt—similar to that in Japan. China alone looks better placed than in 1997: the economic shock currently hitting China is milder than in the lead-up to the previous crisis, when deflation was more severe. Nor does its financial system look significantly more exposed (thanks largely to a currency that is only partially convertible). Goldman Sachs reckons that the most vulnerable financial systems are in Malaysia, Taiwan, Thailand and Indonesia.
