After the stock market collapse of 2008 and a decline of 3.4 percent for U.S. GDP in 2009, investors rushed to stash funds in emerging markets (EM) where economies were growing at a 3.1 percent annual rate. But the US stock market fell in January of this year largely due to financial trouble in emerging markets.Â
The economies of EM nations, such as, Brazil, Russia, India, Turkey, Thailand, and China, have deteriorated in part because of the withdrawal of US dollar investments from them. Here is a chart from the Institute for International Finance (IIF)[1]showing the capital flows to EM nations:
This dynamic confirms the effects of monetary policy as described by the ABCT, the Austrian business cycle theory. The ABCT states that inflationary monetary policies, such as those of the Fed for the past five years, will cause an unsustainable boom as new money pours into the economy and stimulates demand for consumer goods and capital goods, increasing prices and the relative price of capital goods. Usually we think of the ABCT in terms of a single nation, but the EM problems demonstrate that it has international implications as well, especially in a world of increasing trade integration and a currency that other countries use for trade and their banks keep for reserves, such as the US dollar and the Euro.
Mises wrote about the international effects of banks creating more credit money than the domestic population wants to hold:
The role money plays in international trade is not different from that which it plays in domestic trade. Money is no less a medium of exchange in foreign trade than it is in domestic trade. Both in domestic trade and in international trade purchases and sales result in a more than passing change in the cash holdings of individuals and firms only if people are purposely intent upon increasing or restricting the size of their cash holdings. A surplus of money flows into a country only when its residents are more eager to increase their cash holdings than are the foreigners. An outflow of money occurs only if the residents are more eager to reduce their cash holdings than are the foreigners. A transfer of money from one country into another country which is not compensated by a transfer in the opposite direction is never the unintended result of international trade transactions. It is always the outcome of intended changes in the cash holdings of the residents. Just as wheat is exported only if a country’s residents want to export a surplus of wheat, so money is exported only if the residents want to export a sum of money which they consider as a surplus.[2]
