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A Run in the Silk Stocking

October 30, 1997

NEW YORK (AP) _ It began during the summer with weakness in Thailand’s currency, and almost everyone but currency speculators thought it would remain there or at least be confined to Southeast Asia.

But it was a run in the silk stocking, the wonderful economic fabric that trading nations had woven _ the so-called global economy that had brought so many benefits to both exporters and importers.

It was confined for much of the summer, but then it spread to other Asian nations, unraveling their currencies and testing the value investors had placed on their stocks. Then it struck Hong Kong.

Hong Kong, too, has had its problems, mainly the uncertainty attendant to the transfer of power to mainland China, even if perhaps its products, unlike those of other Southeast Asian nations, remained competitive.

Once the run reached the Hong Kong market, which lives on trade with other nations, the unraveling could not be stopped from racing its way through the weakest links in the global economic fabric.

In the United States, the weak link might be described very broadly as overconfidence _ the certainty about good times that was reflected in overpricing of stocks and an unrealistic faith in mutual funds.

The overpricing was known to all professional traders, but as the money poured in from pension plans it had to be deposited, and the largest and most available depository was the stock market. And so it over-rose.

The run found the weak spot and ran right through it. As observers had blandly stated for weeks, it was a problem just waiting for an activator, but nobody thought the activation would originate in Thailand.

In that sense, they were blindsided. Almost every brokerage house newsletter had been saying essentially the same thing: A correction could occur, but the trigger could not be spotted in the state of the economy.

That is where they were looking _ in the economy where, they said, the fundamentals were good: productivity rising, profits OK, inflation and the deficit down, jobs secure, consumer confidence solid.

What now? The main concern is how deeply a continued decline in stock prices would affect the economy. It isn’t a question of if, but of how much.

Small investors would be hurt, perhaps worse than they had expected. Many have never experienced a margin call, which means adding cash to cover debts to the broker or else having stocks sold off.

Some investors would be furious as their mutual fund managers, and in the future would not be as naive as to believe they can escape full responsibility for investment decisions by giving their money to managers _ many of whom are woefully inexperienced _ and expect miracles.

It is these managers, investors might remember, who issued the traditional calls for calm among the small investment community while selling in panic themselves.

There could be legal problems. This is a litigious society, and mutual fund and pension managers, and even corporate managers of 401(k) plans are lightning rods.

But for the individual investor not all is negative should stocks fall further.

Prices for goods and services would likely remain stable; the danger might even be deflation. Home mortgage rates could fall, putting big dollars into consumer pockets.

In the corporate world, the record pace of mergers, mainly those to be transacted with stock, could ebb. Existing merger plans, based on inflated stock prices, could be thwarted or require rethinking.

Profits could slump for U.S. exporters to Asia, which will be less able to buy. And those that compete with Asia’s exports may suffer competitively, as that area lowers its prices to work off overcapacity.

And there could be questions, lots of them, about the inability of regulators to stop a run in the much admired global fabric. And demands that more be done too control currency speculators.

You can be sure that even now those European countries seeking a single currency are renewing their examination of the consequences.

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