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Jake Van Der Kamp

'They also pay little attention to the traumatic experience of the Asian financial crisis of 1997-98 and the natural inclination to build up ammunition, in the form of foreign currency reserves, ever since.'

Joseph Yam Chi-kwong

Speech, November 15

THE 'THEY' IN this context means people such as yours truly who say it is lunacy for Asian central bankers to build up gargantuan foreign reserves in the United States when the money could be better used at home.

Our monetary overlord's excuse for doing it is the common one among these central bankers - we were badly hurt in 1997 when currency speculators hit us and the only way we can stop it from happening again is to have big foreign reserves.

But let us look a little more closely at what happened. Pre-1997, the central banks of several Asian countries, most notably Thailand and Indonesia, rigged their currencies against the US dollar at unsupportable levels - unsupportable because the performance of their economies clearly showed that those levels were too strong.

Foreign investors noticed it and began selling these currencies. Eventually the pressure caused these currencies to collapse, sparking off the Asian financial crisis of 1997.

Now, it is certainly true that the collapse could have been forestalled (for a period) if Asian central banks had had more foreign reserves at the time. They would not then so quickly have run out of US dollars to give these foreigners in exchange for their local currency positions.

But take note that this only holds true because these foreigners were betting on these currencies going weaker. If they had instead been betting on them getting stronger, then Asian central bankers would instead have needed big holdings of local currency to fend off the speculators and keep their currencies tied to the US dollar.

We now come to the present. Central bank policy in Asia is a fickle thing and for several years now its emphasis has been the polar opposite of what it was pre-1997.

When the US dollar began to weaken against other world currencies in early 2002, Asian central bankers did not seek to take advantage of it by letting their own currencies strengthen against the US dollar. Instead, they bent their efforts to following the US dollar down. They are still doing so today.

So, Mr Yam, here is the obvious question. If it is big holdings of local currency that they need to stop their currencies from strengthening, why do they instead continue to build up foreign currency reserves? Isn't this tantamount to building up the wrong sort of ammunition?

You, however, know as well as I do why they are doing it. It is because they do not dare to sell any of these foreign reserves. If they do so, it will push their currencies to stronger levels. They are not building up ammunition. They are just running for cover.

So why all this prattle from you about them having good reason for shovelling ever more of their money into dollars? It is nonsense and you know it is.

What is more, you also know why it is financially and economically an unhealthy thing for them to do and to prove that you know it, here are a few more excerpts from that same speech you made.

'... all of the Asian economies have probably lent more individually to the United States than they have collectively to other Asian economies.

'Whether we like it or not, we now find ourselves in the unenviable position of holding a substantial part of our savings in the financial liabilities of an economy that does not save, fearing that a diversification of a small part of such holdings might lead to a sharp fall in the value of the rest, thus shooting ourselves in the foot.

'We also find ourselves somewhat stuck with recycling a large part of our savings through the developed markets back into the region in a much more volatile form, occasionally creating havoc in our monetary and financial systems.'

Joe, you puzzle me. You provide us excellent reasons for why Asia should not have such big foreign reserves and then you give us a nonsensical upside down argument, the one that leads today's column, for why it should. Please turn yourself head up again when you run our money.



Joe's reserves theory is a head spinner and that's not speculation