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WHAT COMES IN CAN GO OUT AGAIN

Ours is a world of free-flowing capital. Companies, mutual funds and individuals increasingly invest across national borders. This is one of globalization's most erratic -- and brutal -- upheavals. The latest reminder is the steep decline of the euro (Europe's new money). It's lost about 25 percent of its value against the dollar since being introduced in January 1999. The main reason is an adverse flow of global investment funds. As money shifts from Europe to the United States, euros are sold for dollars. This depresses the euro.

Some Americans may take quiet satisfaction from the euro's slide. After all, this is a case of private Europeans (corporations, institutional and personal investors) voting with their money in favor of the United States. In 1999 Europeans bought about $200 billion worth of U.S. stocks and bonds. Corporate takeovers of U.S. firms added to the total. Many Europeans see America as an economic and technological wonderland. They want in on the action.

American smugness, though understandable, would be shortsighted. Unpredictable capital flows -- the fancy term for global money movements -- loom as a constant threat to world economic stability. The last major disturbances occurred in 1997 and 1998, when capital flight out of Asia and Russia caused local depressions. The United States is not immune to this. The flows that now favor America could someday slacken or reverse, with damaging consequences (higher inflation or a recession).

Few Americans realize the size of foreign money flows. In 1999 foreigners bought $332 billion worth of U.S. stocks and corporate bonds and spent $276 billion on direct investment in the United States -- buying American companies, building factories, shopping malls or office complexes. The foreign enthusiasm for U.S. economic assets has exploded since the mid-1990s, and the cumulative effects are now sizable. Here is what foreign investors owned in March 2000, says the International Monetary Fund:

$1.4 trillion worth of U.S. stocks, or 7 percent of the total.

Almost $900 billion of corporate bonds, 20 percent of the total.

About 35 percent of publicly held federal debt, with a face value of $1.3 trillion.

About $1.2 trillion worth of direct investment, around 5 to 8 percent of the total (estimates are imprecise).

Because Europe provided much of this money, the euro has suffered. Doubts about the euro have magnified the effects. Will the new currency survive? Can the European Central Bank (Europe's Federal Reserve) reconcile the different interests of the 11 euro countries? In currency trading, the drift has been to sell euros. If Denmark votes today not to adopt the euro, selling pressures may intensify.

So far, none of this has done much economic damage. Quite the opposite. The euro's fall has enhanced Europe's economic growth, even while wounding its pride. The currency's decline improved export competitiveness. A European widget priced at one euro would have cost $1.16 when the currency was introduced; now the cost is between 85 and 90 cents, depending on the daily exchange rate.

Similarly, the United States has benefited from large capital inflows. They have bolstered the demand for stocks and, presumably, boosted prices. The strong dollar -- the mirror image of weak currencies elsewhere -- has suppressed inflationary pressures. It has made imports cheap, holding down U.S. prices. Meanwhile, the ravenous American appetite for imports has helped Asia recover from the 1997-98 financial crisis as well as benefiting Latin America, Japan and Europe.

Why worry? Well, all these wonderful trends might stop. Capital flight is a grim phrase that Americans associate only with Third World countries or creaky Europe. But it could happen here. Foreigners could slow new U.S. investments -- or even withdraw funds. What triggered capital flight from Asia and Russia was disappointment. Investors didn't get what they expected. America, too, could disappoint. Profits might slow. The stock market might stagnate or drop. The magnitude of capital inflows into the United States ought to give us pause. They could reflect genuine strengths -- or represent speculative excess. Hardly anyone truly understands today's rapidly changing world of global finance. Even for the United States, what goes around could come around.

Washington Post Writers Group

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