On Thailand's Financial Markets Bloodbath

One of the fundamental risks in today’s world is the rising tide of protectionism. As in the case of Thailand which prospered under more liberal settings in the past, the recent imposition of capital controls to limit foreign money movements and rein the Baht’s appreciation, I think is grounded on a faulty premise. Where money is not treated well, the natural reaction would be an exodus.

Mainstream economists whose analysis influence policymakers are wont to believe that rising currencies curb exports. While such is a textbook dogma, the reality is different. Rising currencies of many Asian countries for several years hasn’t curtailed exports, so as with many Latin American and European countries. What you have is a global phenomenon of rising currencies and rising volume of exports, the probable reasons of which I may write about soon. In short, policymakers have been barking at the wrong tree. Exchange rates are usually made by policymakers as scapegoats for their inefficiencies. This is the same premise adopted by US politicians in pressuring China to appreciate its yuan to appease some sectors of its society. As always, political grandstanding equals the law of unintended consequences.

It was an ASEAN contagion as a general response to Thailand’s fiat as of yesterday. The premise is that what occurred in Thailand could be a model for other Asian emerging markets. However, I think such worries are overrated. Maybe the markets, having climbed to a vast degree, are seeking for reasons to correct, which could be a sign of exhaustion.

P.S. Following the dramatic bloodbath, the Thai Government has made a ludicrous U-Turn, according to CNN

"The Thai government performed an abrupt U-turn on Tuesday after the stock market suffered its worst fall in 16 years as foreign investors pulled the plug in response to drastic measures to rein in the baht.

"Hours after the central bank rebuffed a plea from a stunned stock market chief to withdraw them, Finance Minister Pridiyathorn Devakula announced equity investments would be excluded from the restrictions, starting Wednesday.

Well, that's what to expect from governments.