SPECULATION BUBBLEASIAN FINANCIAL CRISIS (1997) The Thai government guaranteed that holding

the exchange rate between the Thai baht and the US dollar at 25 baht per dollar would encourage trade with and investment from the United States and other countries in order to help Thailand’s economy grow The government assured that this would work since interest rates were lower in the US than they were in Thailand.

Thai finance companies were encouraged by the promise of the Thai government, thinking that it will stimulate investment. However, due to crony capitalism, international investors became concerned about the health of the Thai banks and the government’s ability to honor its exchange-rate pledge. This resulted to the foreign investors’ immediate pulling out of funds out of Thailand and converting them back into dollars. This panic made it difficult for Thailand to pay because as the flow of funds out of Thailand increased, the supply of dollar reserves was drawn down.

MEXICAN FINANCIAL CRISIS (1994) The signing of NAFTA and aggressive promotion for investment in ‘emerging markets’ led lots of people, especially newbie investors (e.g. grandmothers, authors, and clergymen) to invest in Mexico. Investor confidence was high despite the fact that the recently-signed NAFTA was clearly unstable at the moment.

Due to the assassination of presidential candidate Donaldo Colosio which scared investors on fears of political instability, Mexico had to choose between international financial responsibilities and domestic political chaos as a priority. They chose domestic issues as a priority then the Mexican peso fell in value. Peso depreciation, domestic inflation, and high interest rates plunged Mexico into a short but deep recession.

ARGENTINE FINANCIAL CRISIS (2001) The Convertibility Plan of Domingo Cavallo, former head of the Argentine Finance Ministry) pegged the peso to US dollar at a rate of 1:1. This policy was aimed at keeping inflation under control, a problem that had plagued the Argentine economy in the past. Further, Cavallo liberalized the economy by privatizing over 200 state-owned industries.

When the US dollar appreciated dramatically, Argentina found their currency overvalued. Due to cheap imports, many businesses closed down because they could not compete with low costs of foreign products. With the selling-off of state-run industries to the private market, thousands of Argentines were left without work. Simultaneously, the government went on a spending spree financed by debt. When Argentina eventually

decided to abandon the fixed exchange rate, it gave them domestic and political consequences.