[Initial Moment] When a Typhoon Hits the Swimming Pool

[Asia Economy Reporter Kim Hyun-jung] The history of the United States wielding economic sanctions as a diplomatic tool on the international political stage began in 1807. At that time, President Thomas Jefferson enacted the Embargo Act of 1807 to counter interference from Britain and France. As British plundering continued under the pretext of war with France, President Jefferson decided to block trade routes. Despite objections from the Treasury Secretary and others concerned about the economic impact on the U.S., Jefferson was determined and calculated to inflict maximum damage on Britain and France.

However, he failed to achieve the original goal. Britain seized the export dominance in South America, which the U.S. had vacated, increasing British exports, while import prices soared and smuggling flourished. As the U.S. economy fell into distress, citizens protested by reversing the word Embargo to shout "O Grab Me." The Embargo Act was repealed in March 1809 after only 15 months, but it led to the War of 1812. It was truly a failed sanction and a failed policy.

The recent scenario of economic sanctions against Russia shows a similar pattern. After the sanctions, Russia and President Vladimir Putin expanded their trade routes toward China, mocking the Western coalition, and the aftermath escalated into supply shortage-driven inflation. The surge in prices is accelerating, fueled by demand swollen by liquidity unleashed to combat COVID-19.

As major countries including the U.S. take a 'big step' toward tightening monetary policy, emerging markets at the bottom of the financial pyramid are experiencing hunger due to capital flight, soaring prices, and foreign exchange reserve shortages. According to Bloomberg, foreign capital outflows from seven countries?South Korea, Taiwan, India, Indonesia, Malaysia, the Philippines, and Thailand?amounted to $40 billion (about 51.82 trillion won) in the second quarter of this year. This is due to bond sell-offs following U.S. interest rate hikes aimed at curbing inflation. It is said that such a level of capital flight did not occur even during the 2008 global financial crisis.

Investment genius Warren Buffett said, "When the tide goes out, you can see who’s been swimming naked." This means that in markets where bad news emerges after a period of economic boom, the true value of companies and investors can be revealed. It is likely one of the investment sayings many recall amid the recent repeated downturns following a long bull market.

However, the water in the global pool in 2022 does not seem to be draining gently. To put it differently, it is a pool being swept by typhoons and massive whirlpools. The U.S., as the issuer of the key currency and an oil-producing country, is like a swimmer fully equipped with an oxygen mask and life jacket, ready to dive. It can endure whether there is water or not. Of course, many Americans also suffer from inflation, but they are not in a position to worry about systemic collapse.

Meanwhile, numerous emerging countries that have borrowed at low interest rates, rely heavily on imports for most of their clothing and food, and have been politically unable to make any decisive decisions, are like naked swimmers who do not know what to do. Before defaults and political instability, blackouts, public transportation paralysis, and food shortages have become part of daily life. The problem is that the typhoon in the pool is not expected to stop here.