European Debt And The US Dollar: When American Investors Take Their Money Home

Currency structures are wobbling perilously as U.S. investors unload foreign holdings. The recent dramatic reversal of flows in the capital markets could bring the global economy to a screeching halt.

Frank Stocker

BERLIN - Okay, so a vacation in the States costs more now. Maybe gas too. But for the German (and European) economy as a whole, a lower rate for the euro comes at the right time. It went down to $1.31 at the start of this week.

Last Friday, the euro traded at $1.34, while four weeks ago the exchange rate was $1.45 to the euro. So the European common currency experienced a relatively significant loss in a short time frame, which meant that German exports got 10% cheaper – which in turn meant more orders and greater profits. And that's good not only for companies but their employees and their investors. Or so you would think.

Unfortunately, it's not as simple as that. Because underlying the developments on the currency market are gigantic changes in global capital flows. For investors and users, this has so far only been perceptible in the euro's exchange rate trickling lower. However, just as in nature, a stream like that can very quickly swell into river currents that can pull the world economy down in a whirlpool. And that would be a disaster for companies, their employees, and their investors.

Finance markets move billions around the world daily. Sometimes trends go one way, sometimes the other. During the last two years, the word was to invest outside the United States since the government was piling up debts and the Federal Reserve was printing money like crazy. This undermined trust. "The euro was sort of an ‘anti-dollar,"" said Hans Redeker of Morgan Stanley, an investment bank.

Investors brought their money to Europe, preferably Germany. But the mood has turned these past couple of weeks. One reason for that are the interminable debt crises in Europe. But they alone wouldn't be enough to account for the switch, since they already existed. The difference is that now the whole world economy is wobbly. And when this happens, US investors take their money home.

They sold their German stocks, which caused the German stock market index (Dax) to fall in August. America's investors made particularly high profits on those sales; and then little by little went on to sell other investments.

Asian stock markets falling

Recently, for example, stocks from Indonesia and Thailand were involved. They had been holding up well for a while. In the last four weeks, during which time the Dax was more or less stable, the stock markets in Jakarta and Bangkok fell by some 20%.

It's been like that for weeks, one stock market after the other falling because US investors are selling, and taking their money home. The sums involved are gigantic. In the last week of September alone, as figures from Emerging Portfolio Fund Research (EPFR) show, some $3 billion were withdrawn from funds that invest in emerging nation stocks. That is the highest amount ever recorded. Funds that invest in bonds issued by these states sold for a further $3 billion – that's $6 billion in a week. And the selling wave continues.

But where's the money going? EPFR data again helps tell the story. At the end of September, funds that invest in US bonds were experiencing the highest inflow of money ever recorded – and that included a 54-week high for American municipal bonds. The Americans are putting their money into their own bonds because they perceive these to be the only safe port in the present storm.

This in turn has sent the dollar rate climbing dramatically for weeks – and euro rates (along with those of a lot of other currencies) falling in relation to the dollar. The Russian ruble fell by more than 10%, the South African rand by about 15%, the Brazilian real by as much as 20% –all in the space of just four weeks. The only currency that can withstand the trend presently is the Japanese yen.

The reason for that is that Japan has a relatively broad base of domestic investors and isn't as dependent on dollar investors. The picture is very different indeed for the emerging countries, who have been particularly hard hit by recent developments in the capital markets.

Credit could dry up again

As understandable as this development is from the viewpoint of US investors, the herd driving everything collectively in one direction risks trampling on some valuable "assets' in the way the world economy functions. A few months ago, an International Monetary Fund (IMF) study showed that capital from abroad to the emerging nations led banks to loan more money and thus promoted growth. At the time, the focal point of attention with regard to the huge capital flows was not overheating the economic situation or firing up inflation.

And now things are moving in the other direction. The threat now is that abrupt removal of capital will make credit dry up, which would stall growth in the emerging countries. And yet the economic situation in these countries is the last hope for the stumbling economy of the industrial nations. If growth in the emerging countries were to grind to a halt, it would lead to even stronger capital flows away from those countries and the rate of the dollar would go up yet more. A vicious circle would ensue.

The only country that is markedly less susceptible to these flows is China. Beijing can order its banks to extend credit – or not. So from that standpoint, China's economy is not under threat. The danger comes from elsewhere: over the past few weeks, the strong dollar has impacted the exchange rate of the Chinese yuan.

For years, the Americans have been complaining that China has been undervaluing its currency. However, these past two years the Chinese have let the value of the yuan grow slowly -- in the last 12 months alone, by about 7%. However, the renewed strength of the dollar has brought this development to a standstill.

The U.S. Senate has voted to begin debate on a bill that could place trade restrictions on China, and Beijing reacted harshly, accusing the United States of risking a trade war.

And if credits dry up or a new trade war sets off, the world economy could slide definitively into another recession. It is the billions that big American investors are moving around that has set up the current situation, and it is up to those same investors to prevent it from spiraling out of control.

At the end of last week it looked as if perhaps they were starting to see sense. The euro exchange stabilized again. The latest figures from the EPFR showed that "only" $4.8 billion had been removed from the emerging countries, somewhat less than the preceding week.

But that doesn't mean that the trend has been reversed. So during the next few weeks, German investors would be better off staying on the sidelines and avoiding investment – stocks or bonds -- in emerging countries. Because they'll be crushed by herds of big investors if there's another stampede.

Read the original article in German

Photo - owlpacino

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Feed The Future

COP26 Should Mark A Turning Point In Solving The Climate Crisis

Slow Food calls for an action plan to significantly reduce and improve the production and consumption of meat, dairy, and eggs by 2050.

A new dawn?

If, as the saying goes, we are what we eat, the same also goes for the animals that end up on our plate. How we feed our own food can have knock-on effects, not just for our own health but also for the planet. We are now aware of the meat and dairy industry's significant carbon footprint, responsible for more than a third of global anthropogenic greenhouse gas emissions.

Large-scale cattle productions that favor pure profit over more sustainable practices also add to environmental woes through biodiversity loss, deforestation and pesticide use — with some of the world's richest countries contributing disproportionately: The five biggest meat and milk producers emit the same amount of greenhouse gases as the oil giant Exxon.

The good news is that we could meet — if we would — some of these challenges with an array of innovative solutions, as the fields of farming, breeding and nutrition look at ways to shift from centralized intensive agro industry toward a more localized, smaller-scale and more organic approach to production.

Cows fed corn and grain-based diets may grow larger and are ready to be processed at a younger age — but this requires significant energy, as well as land and water resources; in contrast, grass and hay-fed cows support a regenerative farming model in which grazing can contribute to restoring the health of soil through increased microbial diversity. Compared to highly processed GM crops, natural-grass diets with minimal cereals also lead to more nutrient-rich livestock, producing better quality meat, milk and cheese. Farmers have started focusing on breeding native animal species that are best adapted to local environmental contexts.

This new approach to agricultural practices is closely linked to the concept of agroecology, where farming works in tandem with the environment instead of exploiting it. If mowed a few times a year, for instance, natural meadows produce hay that is rich in grasses, legumes and flowers of the sunflower family, like daisies, dandelions, thistles and cornflowers. These biomes become reservoirs of biodiversity for our countryside, hosting countless species of vegetables, insects and birds, many of which are at risk of extinction. Until recently, these were common habitats in meadows that were not plugged or tilled and only required light fertilization. Today, however, they are becoming increasingly threatened: in the plains, where the terrain is used for monocultures like corn; or in hills and mountains, where fields are facing gradual abandonment.

It is worth noting that extensive agriculture, which requires smaller amounts of capital and labor in relation to the size of farmed land, can actually help curb climate change effects through carbon dioxide absorption. Researchers at the University of California, Davis determined that in their state, grasslands and rangelands have actually acted as more resilient carbon sinks than forests in recent years. Through a system of carbon uptake, these lands provide a form of natural compensation, going as far as canceling the farms' impact on the planet, rendering them carbon "creditors."

In the meantime, grasslands and pastures allow animals to live in accordance with their natural behavioral needs, spending most of the year outside being raised by bonafide farmers who care about animal welfare. A recent study by Nature found that allowing cows to graze out of doors has both psychological and physical health benefits, as they seem to enjoy the open space and ability to lie on the soft ground.

Some might worry about the economic losses that come with this slower and smaller business model, but there are also opportunities for creativity in diversifying activities, like agro-tourism and direct sales that can actually increase a farm's profit margin. This form of sustainable production goes hand-in-hand with the Slow Meat campaign, which encourages people to reduce their meat consumption while buying better quality, sustainable meat.

Others may assume that the only environmentally-conscious diet is entirely plant-based. That is indeed a valuable and viable option, but there are also thoughtful ways to consume meat in moderation — and more sustainably. It also should be noted that many fruits and vegetables have surprisingly large carbon footprints: The industrial-scale cultivation of avocados, for example, requires massive amounts of water and causes great hardship to farming communities in Latin America.

But forging a broad shift toward more "biodiversity-friendly" pastoralism requires action by both those producing and eating meat, and those with the legislative power to enact industry-wide change. It is urgent that policies be put into place to support a return to long-established agricultural practices that can sustainably feed future generations. Although no country in the world today has a defined strategy to decrease consumption while transforming production, governments are bound to play a key role in the green transition, present and future.

In Europe, Slow Food recommends that the Fit for 55 package include reducing emissions from agriculture activities by 65% (based on 2005 levels) by 2050. Agriculture-related land use emissions should also reach net-zero by 2040 and become a sink of -150 Mt CO2eq by 2050. But these targets can only be met if the EU farming sector adopts agroecological practices at a regional scale, and if consumers shift to more sustainable diets. If we are indeed what we eat, we should also care deeply about how the choices we make impact the planet that feeds us.

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