AT the moment, the Federal Reserve’s favourite message appears to be either ‘not yet’ or ‘almost there’.

The Fed’s almost zero interest rate policies evidently are to be with us at least a bit longer. Moreover, it seems far more sensitive, or even sympathetic, to the impact its policies have beyond the US than in the past. Yet the massive liquidity that not long ago was sloshing around the globe, courtesy of the big central banks, seems to be evaporating by the day.

The burden of servicing borrowed money, especially borrowed dollars, seems to be rising by the day. Deflation is deepening, making that burden even heavier in real terms. Emerging markets currencies keep going down and outflows from emerging debt and stock markets are rising.

A world awash with dollars is being replaced by a dollar-scarce world. The rise in the dollar means tightening, regardless of what the Fed does. The pain of deleveraging for the most indebted will become more severe

There is almost certainly worse to come. A world awash with dollars is rapidly being replaced by a dollar-scarce world. The rise in the dollar means tightening, regardless of what the Fed does. The pain of deleveraging for the most indebted will become ever more severe.

Given the plunge in global markets, spooked by a combination of developments both in the real economy of China and its financial market and in European share markets, it is hard to imagine the Fed moving in September — even though the reasons are shifting. Last week, the surge in the dollar and the consequent tightening were a reason to postpone action. But with the global equity sell-off on August 24 and corporate debt markets coming under pressure, it is virtually inconceivable that the Fed will act.

It still is not clear how the pain for the most indebted will be distributed though.

Ironically, the US, long regarded as the most profligate of all borrowers thanks to the reserve status of the dollar, for the moment looks more immune than almost anywhere else.

Many companies will be less fortunate. Expect downgrades and defaults to increase dramatically, as commodity prices fall and cash flows dry up for an ever widening circle of companies in the commodities food chain.

Most emerging markets will have an even harder time. Many of the most vulnerable are tied closely to China, and the country’s falling purchasing managers’ index is worse news for them than for the Chinese themselves.

China itself, as always, is a harder call. In the past few years, it has become evident that its real competitive advantage has been an abundance of capital rather than of cheap labour. New initiatives, including the Asian Infrastructure Bank, the New Development Bank and the oddly named ‘One belt, one road’ infrastructure plan, are all about exporting capital to places such as Pakistan ($46bn soon coming its way) that can use it productively at a time when investment in China is losing its efficacy.

At the same time, though, lots of claims on what was once $4tn in Chinese reserves make that number seem less impressive than even just a few months ago. In the past four quarters, China has seen outflows of about $350bn and reserves have shrunk as export earnings have slowed.

At year-end, outstanding cross-border claims on Chinese residents totalled $1tn, according to the Bank for International Settlements, making the mainland the eighth largest borrower worldwide. Fully 39pc of that debt is in dollars. Moreover, many mainland companies borrowed dollars expecting the greenback to depreciate. Few expected that a renminbi that was appreciating ever more quickly would suddenly reverse course.

Goldman Sachs analysts recently concluded a study of the debt profiles of the top 125 listed Chinese companies, (with a collective $270bn in foreign debt) and found no worrying concentrations. But many companies use offshore subsidiaries and off-balance sheet vehicles.

While much of the capital outflow and the rise in the dollar can be accounted for by prudent hedging, jittery Chinese investors have less reason to keep their money in China than ever before. Capital outflows will only increase.

“The end of excess liquidity and the end of excess profits have engendered the end of excess returns in 2015,” the equity strategists at Bank of America Merrill Lynch noted in a report on August 19.

Excess pain, sadly, is likely to come up next.

henny.sender@ft.com

Published in Dawn, Economic & Business, August 31st, 2015

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