http://mrzine.monthlyreview.org/2015/images/fed.jpgWe are having in short a shift in the pattern of autonomous capital flows, with wealth-holders flocking back to the United States. All the phenomena that we observe at present, viz. a decline in the magnitude of world foreign exchange reserves; an appreciation in the value of the dollar relative to other major world currencies (to a point where the governor of the Reserve Bank of India can take consolation from the fact that the rupee has not done as "badly" as some other currencies); the "price effect" on exchange reserves that we mentioned earlier which brings them down still further when everything is measured in dollar terms; the travails of the Euro which is losing out heavily to the dollar; the collapse of asset price bubbles in China, India and elsewhere; are all explicable in terms of this asset-choice on the part of the world's wealth-holders, namely that they are flocking back to the United States. But the question arises: why are they flocking back to the United States? An obvious reason is the end to "quantitative easing" by the US Federal Reserve that is in sight. The Fed was pumping in huge amounts of dollars to the US economy to keep, not just the short-term, but even the long-term interest rates in the US at near zero levels, so that the economy could get stimulated. And these dollars were going all over the world in quest of lucrative "investment" opportunities. Now the Fed has decided to bring this "quantitative easing" to an end and has even suggested that the interest rates in the US would be increasing in the coming days, which makes the flocking back of investors to the US easy to understand. Added to this is a factor that is both a cause and a consequence of such a flocking back. In the case of asset price bubbles, as they get built up, this build-up itself contributes to their further build-up, which is why they are "bubbles". Likewise, if they collapse for any reason then this collapse itself becomes further self-reinforcing. An expected rise in the US interest rates for instance, by stimulating some initial outflows of funds from, say, the Indian stock market, causes a setback to the increase in stock prices. And this in turn stimulates a further withdrawal of funds from the stock market for investment in the US which then causes a further setback to stock prices, and so on. The collapse of the asset price bubbles in India and China are both a cause of, and also caused inter alia by, the shift of wealth-holders to assets in the US. This shift however will further aggravate the world capitalist crisis. It may be thought that since other currencies are declining vis-à-vis the dollar, this would help these countries to expand their exports; even if this were true, since this export expansion would be at the expense of the US, there would be no necessary increase in the world demand as a whole and hence no alleviation of the crisis for the capitalist world taken as a whole. Additionally however long before the effects of any such currency depreciation have made themselves felt, the outflow of speculative funds stimulated by such depreciation (and in anticipation of further depreciation) can become a torrent, bringing these countries to acute financial crisis. To stem the prospects of such an eventuality, countries then adopt contractionary measures, not just in the fiscal sphere, where "austerity" is rampant anyway, but even in the monetary sphere where interest rates are jacked up to prevent the outflow of funds. An exchange rate depreciation paradoxically then brings forth a policy response of inducing a contraction of the economy. And if this happens over the rest of the world as a whole, then there will be an overall contraction in this segment because of the wealth-holders' flocking back to the US. At the same time, within the US itself the increase in the interest rate that the Fed is promising to effect will nip whatever little recovery there has been. Taking the world as a whole therefore the prospect is one of a deepening of the crisis. Put differently, the rise in US interest rates will necessarily cause an increase in interest rates all around the world, which would only compound the world recession. Since fiscal means for stimulating the world economy are out in the current era of "austerity" there are no offsetting factors against this compounding of recession.

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