The Global Gilded Age of 1973-2001 begins to crash with the Asian economic meltdown of 1997-98
Chronic debt was one of the main factors that gave the Second Gilded Age of 1973-2001 an atmosphere of chronic crisis and instability and repeated defaults on debts. In 1994-95, Mexico was in crisis again and needed another $40 billion from the IMF, which it received in return for yet another Structural Adjustment Program. This so-called “tequila effect” spread rapidly to Argentina and proved to be a dress rehearsal for the Asian crisis two years later. Essentially, the “market’s loss of confidence started a vicious circle of financial and economic collapse” that resembled the Great Depression of the 1930s. Congress was not eager to bail out Mexico, either, but the Clinton administration used its emergency powers to rush stabilization funds there. In Asia, it began when the real estate bubble burst in Thailand. Clinton, in fact, pulled out all the stops to prevent Mexico from collapsing, including an $18 billion loan from the IMF, “the largest IMF rescuer operation ever mounted in the world.” There would be many more to come in the next few years.[1]
Thailand’s foreign debt went from $8.3 billion in 1980 to $45.8 billion in 1993 while in the same year; Argentina was paying 46% of its export earnings in interest. Indonesia’s debt increased from $20.9 billion in 1980 to $89.5 billion in 1993-- 60% of its GDP. In 1997, debt in Africa was 63% of GNP, and 34% in Latin America and Asia.[2] According to Krugman, the elimination of capital controls in Asia flooded the region with speculative money that build up to an inevitable crash, and thus “the summer of 1997 was the high-water mark for the New World Order.” Although this liberalization increased instability everywhere in the Third World, “it did open up vast new markets for Wall Street.” Hedge funds, such as the Quantum Fund of George Soros, were famous for gambling on devaluations, and Soros had made $1 billion in 1992 betting on the decline of the British pound. Unlike Britain, small Third World economies cannot stand up to such pressures for long, and Paul Krugman thought that the speculative attacks on Asian currencies were “quite possibly the largest market conspiracy of all time.” Only China, where “you still needed a government license to change yuan into dollars”, and Malaysia which re-imposed capital controls, escaped the full brunt of speculative attacks in the crisis. In Malaysia, one reason that Anwar Ibrahim was later jailed was because of his Western-style liberalism and support for the IMF program, and joining Wall Street and the U.S. Treasury in condemning capital controls. When Japan, and China proposed an Asian Monetary Fund in place of the IMF, these institutions also did everything possible to block it, which for Joseph Stiglitz was yet more proof that the Treasury and IMF were “serving the interests of global finance.”[3]
Panic spread from Asia to Russia in 1998, leading to rapid flight of speculative capital and mafia money that left the country on the verge of bankruptcy and default. So severe was the crisis by then that, “for few weeks it looked as if Russia’s collapse would drag down the whole world.” No one knew what would happen to Russia’s nuclear arsenal at that point, and Alan Greenspan averted meltdown in the U.S. only by slashing interest rates in the fall of 1998. He turned out to be far more flexible and pragmatic than the IMF, which continued to insist on low inflation and high interest rates during the most severe crash since 1929.[4]
Once again, the IMF came under heavy criticism for its mishandling of the crash. Its total for the Asian bailaout was $95 billion, which went mostly for meant “billions and billions for corporate welafre, but not the more modest millions for ordinary citizens.” Although “we surely do not expect that a recession will be met, Hebert Hoover style”, with high interest rates and cutbacks in spending, this is what the IMF recommended in 1997-98, and it made the crisis worse. In the general collapse, however, it ensured that creditors were bailed out much more than they would have been under true laissez faire conditions, and so while the Asian countries were put under austerity measures and Indonesia suffered economic collapse, billions went “to pay back foreign creditors, even when the debt was private.”[5]
Not surprisingly, many people suspected a conspiracy by the IMF and Western banks and governments to destroy the Russian economy and the mercantilist Asian states, to demonstrate that “there is no alternative to Anglo-American capitalism anywhere in the world.” John Gray, at least, found it ironic that many commentators in the U.S. who had once been “lauding Asian capitalism as an example that Western countries could well imitate” were suddenly praising free markets again—no matter that liberalization of capital flows had done so much to undermine these same economies.In 1998, U.S. firms invested $8 billion in bankrupt Asian firms, despite the fact that it produced a nationalist backlash in a region that still remembered and feared Western colonialism.[6]
[1]Greider, One World, Ready or Not, 44; Krugman, Depression Economics, 87-88
[2] Goldstein, 608
[3] Krugman, Depression Economics, 2, 87-88, 101, 120-27; Stiglitz, 112, 123-24, 206-07
[4] Krugman, Depression Economics, 130-35, 156-57; Stiglitz, 149
[5] Krugman, Depression Economics, 103; Stiglitz, 95, 209
[6] Gray, False Dawn, 269
