October 13, 2011
Parts of Thailand have experienced terrible flooding lately, and much of the country’s production shut down as a result. Thailand makes everything from tire factories to hard disk drives to rice… and given the slowdown in the economy, it couldn’t have come at a worse time.
Not to worry, though, the government has a plan to fix it. Let me explain:
Thailand’s central bank is sitting on roughly $212 billion in net foreign reserves right now. That’s up 37% from last year and nearly 80% from 2009. Curiously, it all starts with Ben Bernanke.
When Ben Bernanke conjures trillions of new dollars out of thin air for QEx, that money has to end up somewhere… usually the Treasury Department or banks. (you may recall that banks were able to swap their worthless toxic securities for Bernanke’s worthless dollars– a truly bizarre trade…)
As funds make their way into the banking system, money managers often deploy those new dollars overseas to developing markets where the expected rate of return is much higher than in developed economies.
Thailand is one of the largest economies in Asia and is capable of absorbing large capital flows. Neighboring Laos, for example, only has a $6 billion economy. You can’t move $10 billion into Laos without seriously moving the needle. Conversely, Thailand’s GDP is $247 billion, making it more suitable for large investments.
Even with the size of Thailand economy’s, though, the inflow of foreign funds has pressured the Thai baht. As Thailand is an export-oriented economy, nobody here wants a strong baht.
Thailand’s central bank has aggressively fought the baht’s appreciation. Taking a page from Bernanke’s playbook, the bank has suppressed interest rates below the rate of inflation while simultaneously creating billions of new currency units with which to buy all the new US dollars flowing into the country.
This is how the bank ended up with an 80% surge in foreign reserves from 2009– it simply printed new baht to purchase the newly printed dollars.
Thai people are not fooled by this trickery. Unlike brainwashed westerners who believe in their worthless paper, Thai people know that fiat money is a scam. Even the poorest Thais occasionally buy a few grams of gold with whatever savings they can scrap together on expectations of inflation.
They’ve turned out to be right; prices are rising. All of the new money ends up somewhere, and with interest rates below the rate of inflation, businesses, consumers, and banks all have an incentive to constantly redeploy funds.
The real estate sector has been the net beneficiary of this frenzy. Hell, everyone knows it’s a bubble… the government, the developers, and even all but the most dim-witted customers.
Developers are feverishly building as quickly as possible, sacrificing quality for speed, so that they can finish and collect the customer’s money before the bubble bursts. It’s like watching a live game of musical chairs.
Thailand now finds itself between a rock and a hard place. On one hand, the country is faced with rising inflation and a number of bubbles. On the other, it faces a declining economy. Orders from China, Europe, and the US have slowed, and the domestic economy isn’t developed enough to tighten the slack.
Production shutdowns from the recent flooding certainly haven’t helped.
The government’s solution? Print money and put it directly into people’s pockets by overpaying peasant rice farmers.
Under the government’s new plan, local farmers will receive the equivalent of roughly 40% more than the market price for rice. Anyone who slept through high school economics can tell you that price controls don’t work. This is the stuff that feeds inflation, creates shortages, and misallocates production resources.
Needless to say, there are global implications when one of the world’s biggest producers and exporters goes down the path of inflation.
This is exactly what happens when a government with access to cheap credit meets with an opportunity to launch a populist agenda. As President Obama’s former Chief of Staff Rahm Emanuel said, “You never want a serious crisis to go to waste.”
Thailand’s flooding is a crisis, no doubt. Populist-driven inflation will be an even greater economic crisis. Make no mistake, when inflation comes home to roost in North America, it will be exported from countries like Thailand.
This is an early sign that Mr. Bernanke is about to get some of those dollars back.