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Old 10-03-2008, 03:28 PM   #27
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Default Re: Project Cameloter in South Korea

The Korean Won is pegged to the dollar. A dollar collapse will no doubt significantly affect the Korean Won/Asian currencies but this scenario will not be much different than what happened to the Korean Won during the 1997 currency crisis in terms of short run effects. In 1997 Korea had a mere $35b in foreign reserves (mostly US) as a means to protect the Korean Won from a major currency devaluation. Obviously this was insufficient (as the Won depreciated from 650 KRW to 2000 KRW at its peak that year) and required a $20b bailout from the IMF subsequently to restore the KRW to the 1200 level.

Korea today has accumulated $230b in foreign reserves to protect its currency and is spending approximately $5-10b per month to provide local market liquidity in reaction to recent US credit/bank meltdown. If the House (US) passes the $700b bailout bill, then Korea's foreign reserves will be able to have a greater short term impact in terms of stabilizing its currency for the next 6-12 months. If the bill does not pass, the dollar could collapse as many now predict. In such a situation a de-pegging of the KRW to the US dollar would immediately cause Korea to lose the value of its $230b in foreign reserves and the country would be in a crisis similar to that in 1997--or until it pegs its currency to a basket of other currencies. Japan and China are in a similar situation and therefore the three countries are now meeting to discuss how to jointly respond to the US financial crisis. Of the three only China is de-pegged from the US dollar (since 2005). It may very well be that Korea switches to the Yuan/basket of currencies from the dollar depending on what transpires in the meeting/ in the US and in such a situation would lessen the damage from a dollar fallout.

My point is that Korea/Asia will certainly go through another financial crisis if the US dollar collapses. But Korea, like other Asian economies, is not in debt and would be in a position to find export solutions to save itself again regardless of how much foreign reserves it may lose due to a dollar collapse in the short run. I predict a massive increase in intra-Asian trade and this will be the basis of the economic recovery in the region (as I have said, if there is an economic recovery in the world it will be most likely be in Asia first).

As for the US and other debtor nations, the situation could very well be as bleak and dire as some are predicting (e.g. end up with third world status economically) and it may take decades for the country to recover.

I am not sure people here will need to worry all that much about "survival" for the basic necessities of life. Much more likely would be a situation where we may end up sending food/instant noodles and other non perishables Stateside to family and friends next year and beyond if this thing does really happen.
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