Market crashes and Migration Linked by Hot Money Flows

The collapse in stock markets and the surge in the number of refugees flooding into Europe captured August's headlines.

There are many underlying causes for each phenomenon, but they are linked.
Unprecedented flows of hot, or illicit, money are damaging most economies. Investors are fleeing this, as are migrants.

Ironically, China has outperformed all others economically even though it has been looted more than most. Between 2003 and 2012, an estimated US$1.25 trillion left, bypassing currency controls. The most recent attempt to turn off the tap contributed to the collapse of the Shanghai Composite.

Many commentators blamed the Shanghai's 8.5% plummet in hours on Beijing's orchestrated devaluation of the Yuan. But that occurred two weeks prior without impact.

The day before the crash the government announced a tougher three-month crackdown on underground banking to curb money-laundering and illegal funds transfers. Chinese law prohibits individuals from transferring more than $50,000 out of the country per year, but an underground industry of banks, casinos and intermediaries have remained relatively unimpeded.

The August 23 announcement followed reports that an estimated $100 billion left China in the first three weeks of August alone.

China was forced to bail out its markets through monetary and banking tampering. This has improved markets somewhat but volatility will continue. There are also worries because, during the melee, an anonymous article was published in state-owned newspapers warning that the reform process faces "unimaginably fierce resistance". This has led to speculation that the reformist regime is wobbly.

And, undoubtedly, has triggered the disappearance of more capital from its economy.
China's wealthiest have been getting themselves and their children, and money, out of the country for years, mostly to the U.S., Canada, Australia or Britain. This will increase and represents a growing migratory trend of well-heeled Chinese persons into the world's richest markets.

Such trends - outflows and migration - are also underway in poorer nations, with tragic consequences. Their economies tank and Europe bears the brunt of a growing refugee problem.

For instance, a recent study revealed that more money leaves the world's 82 poorest nations illicitly - an estimated US $1 trillion per year -- than flows in as foreign aid or direct investment, according to Global Financial Integrity in Washington.

The greatest damage has occurred in three regions which are the largest sources of refugees coming into the European Union at the rate of tens of thousands daily. Between 2003 and 2012, Sub-Saharan Africa, the Middle East and developing Europe were drained of US$2.5 trillion in capital and substantially more since.

In dollar terms, this is equivalent to what Russia, Mexico and India have lost but when compared to their populations, GDP and educational budgets, this is truly tragic. (All these outflow figures include trade frauds such as misinvoicing and illicit investments abroad as well as hot money outflows.)

In poor nations, such hemorrhages are destabilizing, but the money ends up in rich markets where it creates dislocations, such as in the Toronto, Vancouver and New York condo markets. Billions in hot money is salted away in real estate and is making prices unaffordable for locals.

There are other developing countries contributing to this issue. Between 2003 and 2012, Russia lost US$1 trillion and more since sanctions; Mexico US$500 billion and Indian US$439 billion.
The outflow of money and migrants is not going to stop anytime soon. A 2013 United Nations survey showed that roughly 230 million people live outside their home country by choice and another 640 million would leave if they could.

This sociological impact affects politics in all the countries involved. Illegal immigration in Europe and U.S. are becoming hot button political issues.

The American illegal immigration issue is becoming front and center. An estimated 11.5 million illegals live there (on top of one million annual immigrants and 39 million visa holders.)
By comparison, this year alone Germany was inundated with 800,000 non-EU refugees, four times' more than previous years. It is the principal destination for all the refugees because of its economic prosperity.

Solutions are necessary but elusive. An announcement like China's, that a crackdown on illegal outflows is imminent, only triggers more of the same. Similarly as word spreads that European countries are building fences, more refugees arrive.

The motivation is to get out while it's still possible. This is understandable but it's also becoming a global problem.

First published in National Post