Over the last two decades, the two most striking cases of currency collapse in non-basketcase countries were Thailand and Iceland. When crisis hit Thailand in 1996 and Iceland in 2008, the baht lost half of its value against the U.S. dollar, and the króna lost over 60% against the euro. The growth in the money supply leading up to the crisis in both currencies is the same trend we see occurring with the Renminbi now.
The Bank of Thailand has excellent monthly statistics on money and banking going back to the 1970's. The Central Bank of Iceland only provides sufficient data in its broad money time series. We will compare Thailand's banking system before 1996 with China's current banking system, and then compare the three countries' money supply growth.
Similar to the Chinese banking system, there was nothing out of the ordinary about the Thai banking system before the crisis. Vault cash was increasing as a portion of demand deposits throughout the 1990s, meaning the chance of a bank run was decreasing.
The money supply as a whole was never leveraged to any level that would seem outrageous. In fact, the ratio was trending downwards between 1993 and the crisis. By comparison, the ratio between U.S. M2 and reserve money in December 2007 was 8.75, so we cannot say Thailand's ratio was particularly high. What happened in Thailand was not a currency crisis stemming from the private banking system. Instead we need to turn our attention to the central bank.
Unlike the People's Bank of China, the Bank of Thailand kept its leverage ratio at a very conservative level. It wasn't until the current crisis did its leverage ratio spike. If we just looked at these three ratios—vault cash to demand deposits, reserve money to M2, and central bank leverage—we would not see anything out of the ordinary.
Almost all of the problems stem from central bank balance sheet expansion, and therefore reserve money growth. If we start in January 1980, when reserve money stood at THB52.5 billion, we can see that it doubled by November 1987. It then doubled again by December 1991. By February 1996, it had doubled again. During this time the ratio between reserve money and M2 was increasing, so the total money supply was increasing at a faster rate. After June 1996, the Thai baht began its free-fall against the U.S. dollar.
Ten years (or 120 months) before the forex crisis in Thailand and Iceland, the money supply increased over 400% in both countries. If we compare that trend with the Chinese money supply over the last ten years, we can see that it is essentially the same line.
Before the forex crisis in Thailand and Iceland, the baht was appreciating against the U.S. dollar and the króna was appreciating against the euro. After the market realized its mistake, both currencies lost over half of their value in the span of a month. Similarly, the Renminbi has been appreciating against the U.S. dollar for some time, but I won't be surprised when the USDCNY exchange rate goes above 12.00 or so.
