1/ One of the contributing factors to Taiwan's seemingly nonsensical arms purchases and TSMCs ridiculously capex-heavy business model may be the island's need to have a structurally undervalued currency to balance out its life insurance and pension liabilities
2/ This is because, since 2010, pensions and life insurers on the island have piled into dollar assets without hedging their currency risk, which means if the NTD appreciates too much vs the dollar, they could become technically insolvent
3/ So to keep the NTD down, TW has accumulated forex reserves which are now equivalent to almost 80% of its GDP. This is not bad per se, but creates large potential losses for the central bank if the NTD appreciates and raises the risk of being branded a currency manipulator
4/ As a result, TW has been looking for ways to escape this conundrum. Dollar investments abroad only exacerbate the problem bc they are dollar denominated which means there is still currency risk. TW has to find something to buy with its USD
5/ TW can't let its currency appreciate to the point where it eliminates the trade surplus that creates this problem either, bc that would devastate its asset managers
6/ Which leaves buying overpriced weapons and bidding up the price of semicon fab equipment as one of the only ways out.
End/ One can see a significant treadmill to Hell effect here, as the longer the NTD is suppressed this way, the worse the yield of TW bonds, which exacerbates the asset mgmt problem.
The latent financial crisis here is a scarier problem for TW than the PLA. Think Iceland 08.
The latent financial crisis here is a scarier problem for TW than the PLA. Think Iceland 08.
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