The Currency Crisis in Vietnam: Don't Think It Can't Happen Here

The Wall Street Journal reporting on the current currency crisis in Vietnam seems very similar to what is going on here in the U.S.

"The government said this week the inflation rate in May was 25.2% on an annual basis, up from 21.4% in April and 14.1% in January. A slow government response was in large part to blame. When oil and food prices began to rise late last year, the State Bank of Vietnam, hoping to sustain growth, was slow to rein in inflationary pressure by raising rates or clamping down effectively on irresponsible lending. Efforts to control inflation proved ineffective -- such as a loosening of the currency's dollar peg, which backfired largely because of lending practices."

There you have it. Like Vietnam, this is where we are at now. The whole problem in the U.S. started with the tech meltdown in 2000 (actually started before then, but I won't go there). In order to save the economy from a deflationary death spiral, The Fed, under Greenspan, cut interest rates to negative real terms. So instead of protecting the value of the U.S. dollar, the Fed (as all politicians do) focused on growth. And the dollar was the sacrificial lamb. This works out fine at first. Asset prices like real estate, stocks and commodities move up, and most "feel" like they are wealthier. But what happens when some asset prices move up, like commodities, and others start to move down, like real estate and stocks? You then got a big problem.

It is interesting to note that this problem started with a building boom that was fueled not only by low interest rates, but also by low lending standards.

"After a building boom amid low interest rates and an export boom because of a weak local currency pegged to the dollar, Vietnam's economy has reversed course. The stock market's main index is down 55% this year, and the prices of goods are rising sharply.

Morgan Stanley, in a report Wednesday, warned that loose lending had created a banking crisis. It forecast that Vietnam's currency, the dong, could weaken dramatically against the dollar in the coming year."

Ouch. Are we talking Vietnam, or are we talking the U.S. here? We consult with many wealthy families and money managers, and they are starting to get scared. My first suggestion to them and to you is to buy gold. Start with physical bullion, and put it in a safety deposit box.

Second, if you are wealthy enough, consider moving such assets like bullion to an offshore safety deposit box. You should have minimally 5%-10% of your portfolio in gold as a hedge.

Third, start an evaluation of different gold and natural resources stocks. I prefer companies that are just going into production. With gold at these prices and we believe gold is going much higher, these companies will have significant cash flow. They are more or less printing money. Also, many of these junior companies assets are worth more than what the stock is traded at. If you had the money to buy them outright, they would be a "free" company. The last time this happened was in 2001. And that turned out to be a fantastic buying opportunity.

Finally, I leave you with this quote from the article:

"The Vietnamese, meanwhile, have been draining bank accounts and buying gold instead. Some have also started hoarding dollars as a hedge against inflation.

Apartment prices in Ho Chi Minh City, the country's commercial hub, have fallen by half so far this year, local media reports say. Morgan Stanley estimates loan growth has been expanding at over 35% a year and exposure to the property market is about 10% of total loans."

You don't think that this can happen in North America? It has already.