pam on Nostr: When it comes to global finance, countries often suffer when currencies clash with ...
When it comes to global finance, countries often suffer when currencies clash with political instability and economic uncertainty. In the traditional economic system that has currency dominance or trade hegemony, when gov’ts struggle to defend currency pegs or manage foreign debts & investments, economies become fragile. A part of my interest is understanding at a deeper level how Bitcoin could play a role in creating a more equitable global financial system.
In 1994, Mexico’s interest rate ballooned to nearly 100%. This was during the Tequila Crisis of 1994-1995, when Mexico's peso was pegged to the USD and was overvalued.
The country’s economy was heavily dependent on foreign capital and was destabilized by the rising political unrest, especially after the assassination of Colosio (who vowed to eliminate corruption from all sectors and was often likened to JFK).
In order to remain pegged, Mexico had to buy pesos on the open market whenever speculative pressures arose - but their foreign currency reserve was depleting.
So they issued short term bonds (Tesobonos) to attract foreign investment, and these values reflected the huge amount of debts Mexico had.
Foreign investors were getting nervous about repayment, so the Mexican government devalued the Peso by 15% from 2.9 pesos to 3.4 Pesos to a dollar.
When it comes to devaluation, for foreign investors it should seem like Mexican assets are cheaper in terms of USD, and would produce higher returns once the economy stabilises so the Mexican govt was banking on a positive boost. But instead the devaluation signaled desperation and uncertainty about the government's ability to manage the crisis, causing a dramatic free fall of selling Peso in the open market. Peso lost 50% of its value within a few weeks.
To attract investors back, the central bank drastically increased interest rates up to 80% - 100% . Borrowers, businesses and consumers, struggled to repay loans (as they had to pay 2x). Thousands of businesses went bankrupt and millions lost their jobs.
Mexico went into severe recession with GDP contracting by 6.2%. Bill Clinton and the IMF sent a ~$40B loan to bailout Mexico. Today the exchange rate is at 20 Pesos to 1 US dollar.
A high exchange rate like this makes it more expensive to buy in USD - hence making import harder, while increasing demand in exports for Mexico. This was something Mexico wasn't ready for and couldn't handle.
But the reverse also holds true. I remember watching a documentary on China that came under scrutiny for "currency manipulation" , devaluing its Renminbi to boost exports to the US and reduce imports (which fosters internal circulation).
While China gained massive trade advantages, many small businesses lost out, especially in SEA and globally. Devaluing currency or artificial currency was part of China’s economic strategy in the 90s and 2000s. It was also once pegged to the US from ‘94 - ‘05 but it has been a floating currency since and its ties with BRICS encourages more trades in RMB.
The Mexican Peso crisis might sound very similar to the 1997 Asian Financial Crisis.
I remember George Soros was a key figure in making speculative attacks that SEA’s strong trade will collapse - we never will know if it's due to him that everyone pulled out or he was right, but the Thai baht, pegged to the USD, could not withstand these speculative pressures. The gov’t lacked sufficient foreign reserves and had high foreign debt, which led to the decision to float the baht, resulting in its massive devaluation. And then the collapse spread like dominoes.
I also remember reading about the impact of the rise of interest rates by the US federal reserve which also played a key role in the 1997 Asian Financial crisis.
As U.S. interest rates increased, foreign investors pulled out their capital from emerging markets like Thailand in hopes for returns in the U.S. This capital outflow created a vacuum, fueling speculative attacks on these countries' currencies. Defending currency pegs became increasingly expensive because of the higher interest rates. It was a loss-loss situation. Indonesia and the Philippines were also affected.
Asian tigers - Korea and Malaysia were impacted with the loss of foreign investment, but Malaysia was originally not pegged. Maddy made the call to peg it to prevent further loss, as its reserve currency was in abundance (few things Maddy did right)
When we go through all this global trade chaos and historical economic shocks, can Bitcoin make a difference in the future?
In countries where currencies are manipulated or subject to gov’t instability, Bitcoin could serve as a hedge, independent of local gov’t or central bank policies. Given the growing acceptance and accessibility worldwide, businesses can continually operate within the global trade environment despite currency devaluation or capital controls.
Small businesses globally will not succumb to unfair competitions like China's currency devaluation strategy to boost export resulting in loss of business to trade hegemony, if importers and exporters use Bitcoin for cross-border payments, layer 2 through lightning.
Ultimately, Bitcoin could help provide the economic restart that countries need when they are in a limbo, shifting the power back to the people and away from governments that manipulate currencies for political gain.
In 1994, Mexico’s interest rate ballooned to nearly 100%. This was during the Tequila Crisis of 1994-1995, when Mexico's peso was pegged to the USD and was overvalued.
The country’s economy was heavily dependent on foreign capital and was destabilized by the rising political unrest, especially after the assassination of Colosio (who vowed to eliminate corruption from all sectors and was often likened to JFK).
In order to remain pegged, Mexico had to buy pesos on the open market whenever speculative pressures arose - but their foreign currency reserve was depleting.
So they issued short term bonds (Tesobonos) to attract foreign investment, and these values reflected the huge amount of debts Mexico had.
Foreign investors were getting nervous about repayment, so the Mexican government devalued the Peso by 15% from 2.9 pesos to 3.4 Pesos to a dollar.
When it comes to devaluation, for foreign investors it should seem like Mexican assets are cheaper in terms of USD, and would produce higher returns once the economy stabilises so the Mexican govt was banking on a positive boost. But instead the devaluation signaled desperation and uncertainty about the government's ability to manage the crisis, causing a dramatic free fall of selling Peso in the open market. Peso lost 50% of its value within a few weeks.
To attract investors back, the central bank drastically increased interest rates up to 80% - 100% . Borrowers, businesses and consumers, struggled to repay loans (as they had to pay 2x). Thousands of businesses went bankrupt and millions lost their jobs.
Mexico went into severe recession with GDP contracting by 6.2%. Bill Clinton and the IMF sent a ~$40B loan to bailout Mexico. Today the exchange rate is at 20 Pesos to 1 US dollar.
A high exchange rate like this makes it more expensive to buy in USD - hence making import harder, while increasing demand in exports for Mexico. This was something Mexico wasn't ready for and couldn't handle.
But the reverse also holds true. I remember watching a documentary on China that came under scrutiny for "currency manipulation" , devaluing its Renminbi to boost exports to the US and reduce imports (which fosters internal circulation).
While China gained massive trade advantages, many small businesses lost out, especially in SEA and globally. Devaluing currency or artificial currency was part of China’s economic strategy in the 90s and 2000s. It was also once pegged to the US from ‘94 - ‘05 but it has been a floating currency since and its ties with BRICS encourages more trades in RMB.
The Mexican Peso crisis might sound very similar to the 1997 Asian Financial Crisis.
I remember George Soros was a key figure in making speculative attacks that SEA’s strong trade will collapse - we never will know if it's due to him that everyone pulled out or he was right, but the Thai baht, pegged to the USD, could not withstand these speculative pressures. The gov’t lacked sufficient foreign reserves and had high foreign debt, which led to the decision to float the baht, resulting in its massive devaluation. And then the collapse spread like dominoes.
I also remember reading about the impact of the rise of interest rates by the US federal reserve which also played a key role in the 1997 Asian Financial crisis.
As U.S. interest rates increased, foreign investors pulled out their capital from emerging markets like Thailand in hopes for returns in the U.S. This capital outflow created a vacuum, fueling speculative attacks on these countries' currencies. Defending currency pegs became increasingly expensive because of the higher interest rates. It was a loss-loss situation. Indonesia and the Philippines were also affected.
Asian tigers - Korea and Malaysia were impacted with the loss of foreign investment, but Malaysia was originally not pegged. Maddy made the call to peg it to prevent further loss, as its reserve currency was in abundance (few things Maddy did right)
When we go through all this global trade chaos and historical economic shocks, can Bitcoin make a difference in the future?
In countries where currencies are manipulated or subject to gov’t instability, Bitcoin could serve as a hedge, independent of local gov’t or central bank policies. Given the growing acceptance and accessibility worldwide, businesses can continually operate within the global trade environment despite currency devaluation or capital controls.
Small businesses globally will not succumb to unfair competitions like China's currency devaluation strategy to boost export resulting in loss of business to trade hegemony, if importers and exporters use Bitcoin for cross-border payments, layer 2 through lightning.
Ultimately, Bitcoin could help provide the economic restart that countries need when they are in a limbo, shifting the power back to the people and away from governments that manipulate currencies for political gain.