SPECULATION BUBBLE

ASIAN FINANCIAL CRISIS (1997) The Thai government guaranteed that holding
the exchange rate between the Thai baht and
the US dollar at 25 baht per dollar would
encourage trade with and investment from
the United States and other countries in order
to help Thailands economy grow The
government assured that this would work
since interest rates were lower in the US than
they were in Thailand.
Thai finance companies were encouraged by
the promise of the Thai government, thinking
that it will stimulate investment. However,
due to crony capitalism, international
investors became concerned about the health
of the Thai banks and the governments ability
to honor its exchange-rate pledge. This
resulted to the foreign investors immediate
pulling out of funds out of Thailand and
converting them back into dollars. This panic
made it difficult for Thailand to pay because as
the flow of funds out of Thailand increased,
the supply of dollar reserves was drawn down.
MEXICAN FINANCIAL CRISIS (1994) The signing of NAFTA and aggressive
promotion for investment in emerging
markets led lots of people, especially newbie
investors (e.g. grandmothers, authors, and
clergymen) to invest in Mexico. Investor
confidence was high despite the fact that the
recently-signed NAFTA was clearly unstable at
the moment.
Due to the assassination of presidential
candidate Donaldo Colosio which scared
investors on fears of political instability,
Mexico had to choose between international
financial responsibilities and domestic political
chaos as a priority. They chose domestic
issues as a priority then the Mexican peso fell
in value. Peso depreciation, domestic
inflation, and high interest rates plunged
Mexico into a short but deep recession.
ARGENTINE FINANCIAL CRISIS (2001) The Convertibility Plan of Domingo Cavallo,
former head of the Argentine Finance
Ministry) pegged the peso to US dollar at a
rate of 1:1. This policy was aimed at keeping
inflation under control, a problem that had
plagued the Argentine economy in the past.
Further, Cavallo liberalized the economy by
privatizing over 200 state-owned industries.
When the US dollar appreciated dramatically,
Argentina found their currency overvalued.
Due to cheap imports, many businesses closed
down because they could not compete with
low costs of foreign products. With the
selling-off of state-run industries to the
private market, thousands of Argentines were
left without work. Simultaneously, the
government went on a spending spree
financed by debt. When Argentina eventually
decided to abandon the fixed exchange rate, it
gave them domestic and political
consequences.