The Volatility Machine: Emerging Economics and the Threat of Financial Collapse

by Michael Pettis

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This book presents a radically different argument for what has caused, and likely will continue to cause, the collapse of emerging market economies. Pettis combines the insights of economic history, economic theory, and finance theory into a comprehensive model for understanding sovereign liability management and the causes of financial crises. He examines recent financial crises in emerging market countries along with the history of international lending since the 1820s to argue that the process of international lending is driven primarily by external events and not by local politics and/or economic policies. He draws out the corporate finance implications of this approach to argue that most of the current analyses of the recent financial crises suffered by Latin America, Asia, and Russia have largely missed the point. He then develops a sovereign finance model, analogous to corporate finance, to understand the capital structure needs of emerging market countries. Using this model, he finally puts into perspective the recent crises, a new sovereign liability management theory, the implications of the model for sovereign debt restructurings, and the new financial architecture.
Bridging the gap between finance specialists and traders, on the one hand, and economists and policy-makers on the other, The Volatility Machine is critical reading for anyone interested in where the international economy is going over the next several years.

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Average Customer Review: 5 out of 5 stars

0 of 1 people found the following review helpful:

5 out of 5 stars

Highly recommended!, 2007-03-23
I needed to have background knowledge of the Emerging Markets and this book was recommended by a colleague.

3 of 6 people found the following review helpful:

4 out of 5 stars

Exonerates the hedge funds, 2003-03-01
One of the most common (mis)interpretations of the east Asian currency crises of the late 1990s is that they were caused by George Soros and other speculators, hedge fund principals for the most part, who shorted those currencies and the respective bonds in order to create a self-fulfilling prophecy.

I was happy to se that Mr. Pettis knows better. He writes that he was in regular contact with three large macro hedge funds in 1997, in his capacity as an emerging markets specialist for Bear Stearns, "including the most famous of these, and our discussions about Asia generally centered on ways to gain protected access to LONG rupiah positions. There was very little interest in shorting the currency."

Indonesia and its rupiah provides a particularly vivid example of the capital structure trap that Pettis adumbrates so admirably in this book.

4 of 6 people found the following review helpful:

5 out of 5 stars A refreshing view, 2001-07-05
Michael Pettis has succeeded in mystifying the collapse of EM economies. His approach is new and indeed very methodical. I found the book intellectually challenging and have learned quite a lot reading it. I highly recommend it for those who want to understand how LDC economies rise and fall. Having a background in corpporate finance is crucial to enjoying the book though.

4 of 6 people found the following review helpful:

5 out of 5 stars Understand What's Happening In Emerging Markets, 2001-05-05
This is a MUST READ for institutional investors worldwide! For the first time I have a confident sense of what is at the core of emerging market instability. Now if only some government policy makers would read this (even they would understand it!), the causal conditions might start to improve.

3 of 5 people found the following review helpful:

5 out of 5 stars A breakthrough in economic theory, 2001-02-14
This book completely transformed the way I think about sovereign financial crises. Michael Pettis creates a simple yet elegant framework by which to think of sovereign crises, the fundametal problems which precede them and potential solutions. This book should be every finance minister's primary reference tool for the development of sovereign capital structure.

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