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Wednesday, July 4, 2007

Learning the Wrong Lessons from Your Mistakes...

The Asian 'Tiger' economies have long since recovered from the 'Asian Currency Crisis' of 1997 and they all swore they've learned their lessons.

" Since the late 1990s, Asian economies "have re-emerged to be among the fastest growing in the global economy,'' Zeti Akhtar Aziz, governor of Bank Negara Malaysia, said in Manila. "Our steadfast reform and restructuring effort have rewarded us with strengthened macroeconomic fundamentals and sound and stable financial systems.'' "

A combination of economic growth and policy reform have led to the accumulation of massive currency reserves.

" Ten years after the start of the Asian crisis, the region's $3 trillion-plus of foreign-exchange reserves are having two noticeable effects. One, scaring away the speculators who attacked the region's currencies in 1997. Two, giving Asia enormous financial influence around the globe. "

Believing themselves safe, the revitalized 'Tigers' have failed to understand the consequences of their actions.

" The dynamic has taken on a powerful inertia. Central banks can't easily dump their reserves; markets would react by driving asset values lower, leaving governments with massive losses. If they stop stockpiling reserves, their currencies will surge. "

The solution? Take more risk!

" Having gotten themselves into an untenable situation, governments are looking for ways to use the money more productively. That's leading to the creation of more so-called sovereign wealth funds, government-owned investment entities. Their assets will grow to $27.7 trillion by 2022 from about $2.5 trillion today, Morgan Stanley predicts. "

More fuel for the asset price inflation bubble, and just as the current economic cycle is starting to look a little vulnerable...

" Today, untold numbers of hedge funds are trolling the globe for profits, and taking on huge leverage to do it. The boom in private-equity firms is another new wrinkle, as are sovereign wealth funds. Add to the mix countless investors borrowing cheaply in yen and investing in higher-yielding markets and you have a multifaceted recipe for shaky markets. "

What happens when the inevitable de-leveraging begins?

" The irony is that the tool Asia hoped would protect it from market turmoil -- foreign-exchange reserves -- may be sowing the seeds of bigger problems. "

Source: New Bubble Appears as Asian Tigers Roar Again (