It is known as the flight to safety, yet it may be leading the global economy toward fresh danger.
In the week since Britain stunned the world with its vote to quit the European Union, coloring markets in uncertainty, investors have dumped much that seems risky — the pound, the euro and shares on stock exchanges around the world. They have entrusted the proceeds to that rare sure thing, United States Treasury bills.
Too much money may now be sloshing toward the dollar.
For the United States, a stronger currency makes exports more expensive on world markets, complicating an already halting economic expansion. For emerging markets, the move into the dollar could presage a tide of investment flowing out, imperiling economies from Brazil to Indonesia. For Europe, a weaker euro underscores fundamental doubts about whether leaders can finally muster a formula for economic vibrancy after years of disappointment and recrimination.
When economies function in healthy fashion, money flows across investments in pursuit of rewards that are supposed to be correlated to risks. But when a shock hits and fear takes hold, investors tend to trust only storehouses with one key trait — the certainty of survival.
Since Britain’s vote to leave the European Union, or “Brexit,” the dollar has gained nearly 3 percent compared with a broad basket of currencies, about 2.5 percent against the euro, and nearly 12 percent against the pound. The latest surge came on Thursday, when Mark J. Carney, governor of the Bank of England, said the central bank would probably have to lower interest rates to support the economy. That sent the pound hurtling downward anew. On Friday, the yield on 10-year United States Treasury notes dipped to a record low, 1.385 percent, reflecting the eagerness of investors to lock their money in a safe place even for minuscule returns.
The charge into the dollar says less about investors’ faith in the United States and more about the alarming situations confronting other major economies.
With the vote, Britain has jeopardized its dominant financial center and trade with Europe, the largest common market on earth. The country is now enmeshed in a leadership crisis that makes everything uncertain, including who will negotiate the terms of a messy divorce with the European Union. If leaders follow through and initiate that process, Britain must haggle with the remaining bloc, made of 27 different European governments operating with their own domestic politics.
The 19 countries that share the euro appear vulnerable to political discord and widening separatism as they contend with an influx of refugees, aging populations and tepid economic growth. Years of confusion may be unfolding — the sort of turmoil that could make a money manager crave safety.
The United States is not without risks. Its public debt exceeds $19 trillion. Fractious politics have in recent years brought the country to the verge of self-inflicted default. It has economic inequality rivaling the Gilded Age of the late 19th century and tens of millions of working people who have essentially lost faith in the American economic bargain as living standards have declined.
The Republican Party is on the verge of nominating Donald J. Trump as its presidential candidate. His intimations that he might oversee the Treasury much as he has managed now-bankrupt Atlantic City casinos — by renegotiating with creditors — sent shudders through global markets.
And yet, the United States can print its own money while finding seemingly limitless demand for its debt. The dollar remains the foundation of global finance, the one piece of a cosmically complex puzzle in which continued faith is required or the totality ceases to make sense.
So powerful is the market’s craving for dollars in times of crisis that it has intensified even when the United States has itself been the locus of trouble. From September 2008 to February 2009, as the collapse of the investment bank Lehman Brothers turned a crisis into the worst financial panic since the Great Depression, the dollar surged by nearly 10 percent.
“Rightly or wrongly, there are existential questions about the future of the euro,” said Barry Eichengreen, an economist at the University of California, Berkeley. “Say what you will about the dollar, no one questions that it will be around 10 or 20 years from now.”
In recent years, as European leaders failed to spur growth and as Greece slipped toward the abyss, nearly abandoning the euro, a lack of effective political coordination has time and again bedeviled effective response.
The worst-off countries, like Greece, Spain and Portugal, have sought to unleash government spending, running deficits to stimulate their economies. Germany, the eurozone’s most powerful member, has vetoed that move, demanding that they instead cut spending, including on pensions and social services.
Britain’s decision to leave the union has been widely construed as an angry admonition to the establishment from working people who have absorbed global trade, immigration and European political integration only to see their living standards stagnate. Britain has its own currency and authority over its budget. It has much lower unemployment and healthier economic growth than the eurozone does. If such ferment can explode in Britain, the eurozone looks like a tinderbox.
“The people running Europe have gotten so disconnected from what the majority wants, and has always wanted for decades,” said Mark Weisbrot, co-director of the Center for Economic and Policy Research.
Will Britain’s withdrawal alter the politics and spur Germany to moderate its obsession with austerity? Will Berlin assent to less dogmatic economic policies aimed at bolstering growth and spreading the spoils?
Those are questions lacking answers. At the same time, the British vote to leave has energized populist movements with separatist inclinations in Hungary, Italy and the Netherlands.
Every new development heightening doubts about the cohesion of the European project risks provoking investors to demand greater compensation for loans to debt-choked borrowers like Italy, Portugal and Greece. The more those countries have to pay to keep credit flowing, the greater the worries about the health of their banking systems.
The greater the reduction in banks’ willingness to lend, the tighter the chokehold on European economic growth. And the absence of growth is both cause and effect of the populist inclinations coursing through the region.
And so the cycle potentially turns, with only one predictable outcome: a flight to safety.
“Continuing uncertainty is going to make the dollar go up more,” said Kenneth Rogoff, a former economist at the International Monetary Fund and a professor at Harvard.
“If the uncertainty continues, it’s going to hit the periphery of Europe,” he added. “It’s probably going to hit emerging markets.”
World markets are now so interconnected that when money shifts with unexpected severity, it can yield unanticipated effects. Such was the case in 2013, as the Fed signaled its intention to slow the pace of its extraordinary interventions.
The Fed had been buying vast quantities of bonds to keep interest rates low after the financial crisis. Ben S. Bernanke, then the chairman, let slip in May 2013 the Fed’s intention to “taper” such purchases. The result became known as the taper tantrum — a damaging stampede out of emerging markets.
Currencies dropped in Argentina, Indonesia, Mexico and Turkey. Stock markets fell. Businesses suffered, laying off workers.
A repeat today would unfold at an especially difficult time. The slowdown of China’s economy has diminished the appetite for goods produced worldwide. Weaker growth in Europe puts more pressure on emerging markets.
The Fed is supposed to serve American interests, yet as the taper tantrum brought home, its impacts are felt everywhere. Now, the Fed is weighing when to lift rates after years of maintaining them near zero.
“There’s a potential for huge volatility and huge shocks,” said Mark Blyth, a political economist at Brown University. “The part of this that no one can say out loud is that the Fed is the global central bank.”
(The New York Times)