Ripple Effect

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When someone drops a stone into a still pond of water, the water moves in ripples across the entire pond. A similar ripple effect occurs in economics. Economic ripples can be big or small, and the largest have an international impact. In 1998, when several of Asia's economies collapsed, primarily Japan, the effects came to the United States in both positive and negative ways. The negative ripple effect of the collapsed Asian economies was a sharp reduction in Asian demand for U.S. produced goods because of the sudden lack of disposable income. One area where the reduced Asian demand made itself felt was in the American Southeast, where the textile and apparel industries were weakened as overseas sales fell and foreign competition intensified. The U.S. automobile industry was also hurt because an increase in Asian demand for cheaper cars led Asian consumers back to purchasing cheaper Japanese-made vehicles rather than the often more expensive American-made imports.

The ripple effect in economics can have a positive side as well. The collapse of Asian economies led to an investment drain in the region. Investors pulled their money out of the now shaky Asian markets and back into the more stable U.S. market. With this increased investment in the United States, interest rates in the country dropped. Because of the Asian decline in 1998, the United States experienced a sharp bond rally and a drop in long-term interest rates, including mortgage rates. Many homeowners took advantage of the decrease in mortgage rates and refinanced their homes for a lower monthly payment.

The ripple effect, which occurs daily in many small ways throughout the world's economies, creates positive and negative effects which are largely unforeseeable. As world trade increases and nations work more closely together, the ripple effect's intensity increases. Asia's financial problems in 1998 were confined by International Monetary Fund (IMF) interventions, which kept the collapse contained to Asia. Without this intervention, the negative ripple effects could have wreaked more havoc in Latin America, where Brazil was vulnerable, and in Eastern Europe, creating a far deeper crisis for the U.S. economy.