What's going on?

Emerging market economies have for years increased their holdings of foreign currencies like the US dollar, the Euro, and the Sterling. Halfway through 2014, that total foreign currency reserve peaked at $8.06 trillion. 2014 was the first year in two decades in which currency reserves held by emerging market economies declined. At the end of 2014, the reserves totalled $7.74 trillion, $320 billion less than six months earlier.

What does this mean?

There has been a huge flow of money from developed to emerging economies. Companies first invested in emerging economies to build factories. Consumers then paid for the cheap goods and commodities. Many of those emerging market governments however chose not to cash that money into their local currencies. Instead, the money stayed in the developed markets and was reinvested in things like government bonds. The emerging economies did not want their currencies to become more valuable. A more valuable currency means that you lose competitiveness because what you produce becomes more expensive to foreigners. They have chosen future economic competitiveness as producers over immediate rewards as consumers. In the meantime they financed the world with cheap money. The best analogy is a shop that sells its products on credit to the millionaire customer while keeping its underpaid employees from cashing their paychecks. Meanwhile, that paycheck kept growing and the millionaire kept consuming without realising that she owes money. Why has this trend reversed? The biggest trend seems to be the reversal of the so-called Chinese carry trade. Private Chinese investors have borrowed cheap money abroad to invest in good deals at home. That whole trade is now becoming shakier. The Chinese shadow economy is unravelling, money abroad is becoming more expensive and the Chinese currency is at a more balanced valuation level.

Why should I care?

If you live in developed markets, this is relevant because it signals that goods will become more expensive. For years, your goods have effectively been subsidised by unnaturally low currencies in emerging economies.

If you live in emerging markets, you might be happy that finally your currency is appreciating as it should be. Finally, you can go on the consumer and travel binge that your fellow people in developed markets are on. Investors in developed markets might be concerned that all that cheap money is disappearing. That concern is best captured by Warren Buffet�s adage. �Only when the tide goes out do you discover who's been swimming naked.� Some investments have only made sense because of this cheap money. In those times, you do well sticking to safer things like gold, government bonds, or companies that have less cyclical earnings (e.g. electricity). Emerging market investors would be thinking about currency stability. With lower foreign currency reserves, those countries might become less capable of guiding their currencies through the ebbs and flows of money transfer to and from emerging markets. Usually, these variations are countered by changing foreign currency reserves.