THE BEST WAY TO UNDERSTAND THE GLOBAL FINANCIAL SYSTEM 173
might actually take a year. But a year is not that long a period
of time. It’s certainly not too soon to start thinking about it and
start getting prepared.
What happened in 1997–1998 was that US interest rates
were going up. A lot of people had borrowed dollars and in-
vested in markets like Thailand. There were lots of projects —
golf courses, hotels, a lot of real estate, Oriental projects, tours,
projects, certain Thai corporate names — but not just Thailand
but all over South Asia as well. You may remember the story of
the Asian tigers. Some of those countries — Thailand was one
of them — had pegged their local currency to the dollar.
If you were a dollar investor and you bought the Thai baht
and made investments in the country, the government was
promising you that the baht would still be worth the same
amount of dollars.
So investors said: “That’s pretty good; it takes away my
exchange risk, I’ve got all this upside, I can borrow cheap
money, put it to work in a faster growing market, take out my
exchange risk, and make a lot of money.”
That was an earlier version of what we call the carry trade
today. What happened was as U.S. rates started to go up, there
was capital flight. Investors wanted to get their money out of
Thailand. Meanwhile, Thailand was trying to defend the baht.
That meant that Thailand sold dollars from their reserves
and bought baht in order to maintain the peg. It was pretty
apparent at a certain point that the Thai Central Bank couldn’t
keep doing that. The demand for getting dollars out of Thailand
was so great it began to overwhelm their reserves.
Finally, Thailand broke the link to the dollar. Then, they
devalued their currency, which meant that investors could still
get dollars but fewer of them for each baht. That started a
panic and everybody wanted to get out of Thailand.
The crisis didn’t stay in Thailand, however. All of a sud-
den, investors looked around and they saw other countries in