What Would Another Asian Crisis Mean for the U.S.?

One problem I have with satellite radio is that it makes me confront my own mortality every day. Let me explain. When a song comes on, I think, Oh, I remember that; it must have come out about five years ago. But when I look at the screen, the song is invariably from the 1990s or (in particularly bad cases) from the 1980s. Perhaps I’m not as young as I feel.

That said, a bit of perspective—which is a kinder word for age—is beneficial in the economics and investing game.

People who got into the business five years ago, for example, have seen nothing but a bull market in equities. Sure, they heard about the financial crisis, but they didn’t live it. Those who entered in 2002 were in the same position—until the crisis hit. By the same token, people who got into the business in 2007 and spent their formative years during the crisis may be “Depression babies” to some extent for the rest of their investing lives.

Looking back to the ’90s

Experience is valuable, and although history may not repeat itself, it does rhyme. In the 1980s, the idea of an Asian economic and manufacturing powerhouse destined to overtake the West—driven by superior cultural values, a more effective government, and very cheap capital—invoked Japan. Of course, Japan failed to fulfill its manifest destiny, and that description now applies very well to China.

It’s worth remembering that shift today, as economic and financial stresses between the various economic blocs mount. Slowing growth in the dominant Asian economic power, a strong dollar, low U.S. bond yields, and growing credit oversupply in weakening countries around the world conjure up memories of the late 1990s—specifically, the Asian financial crisis. When the bubble eventually popped, many Asian economies went into crisis, and expectations of a continued boom vanished.

Today’s China is, in many ways, bigger than all of the Asian countries combined in the late 1990s. A slowdown would have material effects: commodity prices would drop, furthering a trend we’re already seeing, and global growth would slow significantly, creating potential for worldwide panic. Another Asian crisis would not be good.

How would the U.S. fare?

First, let’s consider what happened to stock prices in the last Asian financial crisis, per the chart below.

You can see that we did experience a significant correction in 1998, with the crisis, but we quickly recovered and moved higher.

We can also look at what happened to U.S. economic growth, per the following chart.

From a growth perspective, there was a bit of a dip, but nothing serious, at least until the dot-com crash. The Asian crisis didn’t derail the U.S. at all.

Why did we come through with so little damage in 1998?

• First of all, like today, the economy was growing on its own, fueled by domestic demand.
• Second, because of the strong dollar, the U.S. was not exposed to currency risk—also like today.
• Third, the benefits of lower commodity prices and interest rates, like those of today, largely offset the real effects of turbulence elsewhere in the world.
• Fourth, the exposure of the U.S. economy to the rest of the world was relatively small as a proportion of the total economy—just like it is today.

My point isn’t to minimize the risks we may face from the rest of the world, but to look to history and see if we can learn anything. Sometimes the lessons are cautionary (see any of my posts on market valuations and the risk of a stock market bubble), but sometimes they offer reason for optimism, or at least less worry. This is one of those times.