A new Korean War

June 2, 2005 5:21 PM

The American administration is ratcheting up the rhetoric again about North Korea. Hostilities may or may not break out, of course, but if they do, what happens to the value of the South Korean currency?

Wondering short, medium and longer term in the case of war, here, and it's a personal question, because the sum total of my meagre assets are won-denominated. Historical perspectives appreciated, if you have any!

posted by stavrosthewonderchicken to work & money (20 comments total)

You say meager, I have no idea what that means. If I were you I'd put away several thousand in USD for a getaway. Don't put it in other Asian currencies (see: Asian economic criss, contagion effect). The ability for investors to quickly pull out of an economy at a moments notice is astonishing and the possibility of a nuclear war would most likely precipitate this.

The real question is how much help the world would give to get South Korea back on its feet in case of a war. Seeing as how they responded to the '97 crisis, South Korea is seen typically as an important country economically, all efforts would be made to get the war over quickly and S. Korea back on their feet.

Of course what you should do really is up in the air. If we're talking full scale war, your won would most likely plummet until the NK threat is eliminated. If it is a swift war or a prolonged border war is the real question. I guess the real answer you're looking for is the bigger question everyone is asking in the event of a conflict. As a small investor you're not looking at protecting large assets in SK, just merely enough for it not to be an impact. I guess if I was in a politically unstable region I'd always keep a small amount of gold on hand (readily convertable, doesn't really lose value like a currency would, will make a great tool to barter with in a bad situation -- historically that is) and invest small amounts abroad in a "lose everything" scenerio.
posted by geoff. at 6:00 PM on June 2, 2005

Thanks for that, geoff. For the sake of argument, let's say 'meagre' translates to under $100K, all relatively liquid.
posted by stavrosthewonderchicken at 6:06 PM on June 2, 2005

I second geoff on the gold.

But I'm not sure I'd keep getaway funds in the American dollar, given that the Americans are sure to be involved in any war on the penisula. In a volatile region, it might not be best to associate yourself with the Americans.

The euro might be a better bet. Neutral, relatively stable and widely accepted.
posted by Count Ziggurat at 7:09 PM on June 2, 2005

Hmm. If I had to pick a currency to bet on in case of war, it'd probably be the Swiss franc. Well, it did pretty well in World War II, anyway.
posted by sfenders at 7:45 PM on June 2, 2005

I second the Euro - Economists seem to be predicting the US dollar is nearing a correction (read: in for a fall), and there is some worry there is actually a risk of a crash, not just a fall.

Or better yet, put it in investment funds where the managers are pros at currency speculation, and let them worry about it.
posted by -harlequin- at 7:57 PM on June 2, 2005

Euros.

If hostilities break out the greenback is only going the same direction as the won (and even if they don't, the USD is way over-valued)
posted by pompomtom at 8:46 PM on June 2, 2005

(Oh, um.... my comment above should not be construed as investment advice)
posted by pompomtom at 9:21 PM on June 2, 2005

The USD might be overvalued with respect to Asian currencies (I'm thinking of the Chinese yuan here), but the euro can't purchase as much as its dollar equivalent (at least not in Germany). I haven't been to Britain, but I notice that a lot of prices I've seen seem to be close to double what they are here in the U.S., once you factor in that the exchange rate's been hovering near $1.85/£1 recently.

But since the Bush administration is likely to put its money where its big mouth leads it, the dollar would probably take a hit in the event of the DPRK doing something foolish.
posted by oaf at 10:15 PM on June 2, 2005

It depends stavros - where are you most likely to want to spend your money? I think the advice to move it out of South Korean currency might be a good idea, but are you from Canada originally? It might make sense to move it into Canadian, if you ever intend to return there. (My apologies if I have mixed you up with someone else). But it would all depend on what rates would be most favourable to you.

This website has good graphs - here is the won compared to the CND, Euro and USD.

(Actually, it looks like the won is pretty strong lately, but I don't know the long-term trend.)
posted by jb at 10:19 PM on June 2, 2005

Gold isn't a good idea. Buying gold isn't much better than buying expensive crystal goblets. Yeah, you reduce your currency exposure, but you end up with a lot of expensive crystal goblets at the end of the day. The Euro is a possibility, but really, if things get bad, all currencies will be affected. In the WCS there's the real possibility that a free-falling USD could effect 'competitive devaluation' in which countries play chicken with a full on depression/massive inflation. If you really want to protect some assets because you're afraid of something really bad happening, there are a wide suite of funds designed specifically to protect against currency exposure.
posted by nixerman at 12:06 AM on June 3, 2005

I appreciate all your comments, of course, but my question was actually this : what happens to the value of the South Korean currency? Short term, it would plunge, I'd assume (but then I know too little about this sort of thing, which is why I asked).

But assuming, say, a shortish war (which I think would be quite reasonable, barring total global meltdown if China jumps into the fight on the wrong side, again), and the massive rebuilding effort that would follow, with South Korean industry moving gangbusters up north, what happens over the following 3 or 5 years, say, against $US or Euros or canuck bucks, for example..?

(My question-writing skills must suck. This is the second or third time I've asked something and everyone answered a different question. Which is still interesting and appreciated, of course.)
posted by stavrosthewonderchicken at 1:27 AM on June 3, 2005

I think we can simplify this - here's my view : at the outbreak of war the South Korean currency would indeed plunge. Then you've got two possiblities : it's over fast or it drags on.

If it drags on the currency would probably stablise or possibly even decline further. You wouldn't see any gains while the war is waging as investors hate uncertainty. There would be all sorts of capital flight, the funds would be dumping Korean assets big time. And wars have a way of getting really messy if they drag on. Really, really messy. Just imagine what might happen to the Won if the North occupies Seoul, even for a short time.

If it's over quick, then you've got three options. Status quo (divided nation), the North wins, or the South

I don't see much good in the status quo. As an investor, why would I put money into South Korea when the hostilities might flare up again? And there might be damage to plants, etc., to repair. In this scenario, the Won declines or stabilises.

If the North wins, it's game over. No more South Korean currency.

If the South wins then they - like the Germans - get to pay to reindustralise the North. It's been over 10 years and the Germans are still struggling with the bills. Why would it be different with North Korea? By most accounts they are far more backward and unindustrialised now then East Germany was in 1989.

If you've got $100K to invest and you've never messed with currencies, I'd suggest you keep in it the bank. No disrepect, but I've had friends that have wiped out $500K of personal savings trading currencies.

These are highly volatile markets and the instruments of speculation (i.e., Futures, and other such derivatives) are notoriously expensive should they turn against you.

Great question!
posted by Mutant at 3:50 AM on June 3, 2005

i've tried to get money out of chile into the uk whenever possible/legal (eg when parents come to visit, we pay all their expenses - they then refund us in pounds in a uk account). even to the point where i'd rather pay interest on a loan in pesos rather than move savings to chile. i'd suggest you do the same (but to the usa or canada or wherever).
posted by andrew cooke at 8:16 AM on June 3, 2005

sorry, that didn't really answer your question. in my opinion, the most important thing is that the economies are likely to be unstable. you might come out of a period of instability making money, but unless you're rich enough to be able to afford such a gamble, you should prefer stability.

if there are chances for making a profit, you can always move money back later. no government stops the inflow of cash. but it's possible that instability would be handled with stricter laws conrolling the outflow of money.
posted by andrew cooke at 8:20 AM on June 3, 2005

My understanding was that if war breaks out, the first thing that happens is that prepositioned NK artillery in hardened sites pounds Seoul until they're just bouncing rubble, and maybe adds some gas toxins for the fun of it. They also have the missile capacity to easily reach all of the peninsula with whatever weapons they feel like putting in the warheads.

Both Koreas would end up massively fucked. Even from a short war, SK would likely suffer massive loss of life, quite possibly including your own bad self, and extensive damage to its productive capacity.

So odds are you wouldn't care much about your savings anyway, being either very dead or just happy to have gotten out even with just the shirt on your back.

If you're worried about it, I'd just start shifting some of the money back to Canada.
posted by ROU_Xenophobe at 8:43 AM on June 3, 2005

The currency would drop like a lead brick. Investors would pull out of the S. Korean market, exaserbating the effect.

Buying gold isn't much better than buying expensive crystal goblets.

Incorrect. Gold (and platinum) are special metals with properties that give them intrinsic value. Crystal goblets aren't, for example, very widely used in high-tech industries.
posted by Civil_Disobedient at 11:37 AM on June 3, 2005

I would guess that more than 90% of the value of gold comes not from its intrinsic properties, but from the fact that people think of it as money. Which is where the value of any currency comes from: people believing in its value. Crystal goblets might be fashionable today, but they don't have the thousands of years of traditionally being thought of as "money" that gold and silver do. Some say that gold will eventually lose that value, but I'd say it's a lot less likely to become worthless (or rather, worth only as much as its utility for industrial processes or whatever) than is any national currency.

Now might be a good time to be buying gold, actually. But that'd be as a relatively short-term investment. For the uses that money is generally put to, it's quite a bit less convenient than dollars, euros or francs. Then again, a major war would almost certainly increase the price of gold.

Everyone answered a different question because nobody actually knows exactly what the answer is to the question you asked. Currency markets are not so easy to predict. It would be bad, but very hard to say exactly how bad.
posted by sfenders at 12:29 PM on June 3, 2005

Civil_disobendient:
Gold may not have the intrinsic properties you think it does. Industrial consumption of gold is (surprisingly, to me) utterly utterly dwarfed by the consumption of it for jewerly. You could, of course, rightly call jewerly appeal an intrinsic property also, but I think in an economic crash with knock-ons around the world, buying luxuries like jewerly could cease to be such a high consumer priority, resulting in far far more gold on the market than industry needs, resulting in it's worth going down the toilet. I guess what I'm saying is that the intrinsic value of gold is not tied to industry, it's tied to luxury consuming much like crystal goblets, which is more vulnerable to economics than it used to be now that the world is globalised.
IANAExpert tho :)
posted by -harlequin- at 12:30 PM on June 3, 2005

"Regardless of the dollar price involved, one ounce of gold would purchase a good-quality man's suit at the conclusion of the Revolutionary War, the Civil War, the presidency of Franklin Roosevelt, and today."

Peter A. Burshre

I don't have a date for that quote, but an ounce of gold now would purchase a nice suit in either New York or London, so it still seems to be true today.

I've put a fair amount of my personal, investable assets into gold just because I think most of the inflation data is understating the real cost of living. Does anyone here really believe inflation is running about 3% in the US? How about the UK? I certainly don't, and I keep quite good records on my purchases and expenses.

Need further proof of golds utility as a store of value? How much in dollars would a good quality suit cost at the three points noted in the quote above? And what would those same dollars buy now?

Gold is a store of value, nothing more. From an asset valuation perspective, it carries a negative dividend, because you have to pay storage charges.
posted by Mutant at 12:39 PM on June 3, 2005

One of the nice things about gold, however, is that you can (theoretically, and if you were prudent, not theoretically) have it on hand, as opposed to being tied up in a stock/bond/t-bill/inflating dollar/etc. The portability of gold (or platinum) can hardly be matched.

Of course, this will all change when the U.S. passes anti-hoarding laws to prevent people from converting all their cash into something useful to stem inflation. /speculation

If you really want to be safe, you could buy your gold in a recognized currency: Maple Leaves, Pandas, etc. You still get the gold, don't pay much of a surcharge (~$445 for Chinese Panda vs. ~$425 oz. bullion), and it's still "currency" that you won't have to have appraised (unlike raw bullion).
posted by Civil_Disobedient at 1:15 PM on June 3, 2005