The global financial crisis of 1825 foreshadowed the problems of emerging markets today

Superb piece by Gwynn Guilford.

He revisits the economic situation in 1820s and how it fuelled the global bubble then leading to an eventual crash:

Indeed, nearly two centuries later, not a lot has changed. In his review of the 1825 disaster and the dozens more that followed, Pettis draws an important distinction between two types of global financial crises.

On one hand are those that hit in the middle of a globalization cycle, when international financial centers are still in the process of whipping up liquidity. These types of financial crises can certainly be disruptive and dramatic—think the 1994 Mexican Tequila crisis and the Asian financial crisis of 1997. But they’re seldom catastrophic. Thanks to the steady global demand for big debt issues, financing strains tend to be temporary and markets recover swiftly.

Then there are those that break out at the end of a globalization cycle, exemplified on a tiny scale by the events of the 1820s. Triggered by a sudden scarcity of capital, these long-term liquidity contractions are the ones that wind up devastating local economies for years to come, crippling global growth in the process.

The current moment looks more like the latter: the twilight of an era of easy money and frenzied financial globalization. Already Argentina is already in financial shambles, with Turkey hot on its heels. Will the crisis spread from there? Maybe not: The slow-building threat of US tightening has given emerging-market leaders plenty of time to build reserves, limit reliance of dollar-denominated sovereign debt, and rein in budget deficits.

But if the lessons of history are anything to go by, the deeper their ties to global financial centers, the less control smaller countries have over their own monetary systems—which means there may be more shakeups ahead.

Lot more in the piece..

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: