With trade wars in the news constantly under the Trump administration, I took to looking at some statistics on the flow of stocks and bonds across borders. In 1990, the flow of goods, and holding of stocks and bonds across the globe was roughly a quarter of global gross domestic product (GDP). International trade in stocks and bonds has boomed since that time, with nearly all major corporations getting capital funding from foreign investment. It’s been interesting to see such chaotic times in the emerging markets, particularly Turkey and Argentina, given the growing trade tensions this administration is imbuing with the rest of the world.
The Turkish lira has lost more than a fifth of its value this year. Much of Turkey’s investments are financed through dollar-denominated investment. With the U.S. Federal Reserve raising interest rates, a lot of emerging markets like Turkey are losing capital with Turkey running a current-account deficit of more than 6% of GDP. Earlier last month, Argentinian President Mauricio Macri announced financial negotiations with the International Monetary Fund (IMF) after weeks of market volatility. With some reporting Argentina seeking as much as $30 billion in aid, this is the first time in 12 years that Argentina is asking the IMF for help.
China, too, has suffered a current account deficit in the first-quarter of this year, the first since 2001, and although China runs a substantial trade surplus, its current account position is likely to continue to be in occasional deficit. Since the global recession of 2007-09, the U.S. dollar has become increasingly important as the gold standard for an international currency. With foreign investors holding more and more dollar-denominated debt, the U.S. is the only country in the world that is able to borrow from abroad without having to issue foreign currency. Any other country in the world aside from the U.S. has to worry about foreign currency issuance when looking for money from foreign investors.
In new research from Harvard’s Matteo Maggiori, Chicago Booth’s Brent Neiman and Columbia’s Jesse Schreger, the trio of academics unveil a startling find: starting at the time of the global financial and Eurozone crises, the share of corporate bond holdings denominated in U.S. dollars surges while that denominated in euros collapses. The study documents that this striking shift was pervasive across countries, industries as well as bond types. This finding is hugely important for a number of reasons. It signals that the U.S. is the world’s only international currency first and foremost. Secondly, it suggests that small and mid-sized companies in the U.S. are more able to easily borrow from abroad, much easier than small and medium-size Eurozone companies.