Financial de-globalization (a real trend?)
There has been lots of talk lately of “deglobalization“…especially since Gordon Brown (Prime Minister of the UK) mentioned these words at Davos, a little over a week ago. But what does it mean? Are we really de-globalizing? In this article, I will argue that while the treats of protectionism are real…it’s still a bit too soon to call “deglobalization” a trend (no matter how good this may sound in headlines).
A second concept that I will present … is that (a) trade protectionism is indeed a threat, but one that politicians ultimately have control over. On the other hand (b) financial de-globalization is an area which is less understood, and much harder to control. Financial deglobalization works in reverse….politicians want money to be spent at home….as opposed to “product” globalization where it’s in the interest of home politicians who want their products sold overseas.
Clearly the treat of protectionism is real, but I will argue that we are still a long ways from actually seeing “deglobalization” as an actual trend.
Deglobalization of trade (products)?
Nationalistic tendencies are on the rise. We have seen labor strikes in France, UK and others…demanding local jobs. We have seen the US congress propose “buy American” rules…and, we have seen protectionist actions from Switzerland and maybe even China. In Malaysia there is a proposal to “layoff foreigners nationals first” in order to protect local jobs.
“Protectionism” is clearly on the march…but is this really “deglobalization”? I dont think so. The threat of protectionism is not the same thing as “deglobalization”. Rather, they should be seen as two distinct steps. First comes protectionism…then, maybe (if we are unlucky) comes deglobalization. Im not saying that it wont happen, Im just saying we arent there yet.
Politicians still have a choice. This was clearly on display when Obama pleasantly surprised me and pulled the improbable “free trade” move by actively denouncing the “buy American” rules proposed in the stimulus package. He showed that clear-headed leaders have a choice about our path, and can choose to keep borders open to trade.
“Obama for the first time yesterday said he opposed language in the bill that would require steel and other goods used in infrastructure projects to be made in the U.S., saying such protectionism may trigger a trade war America.” source: Bloomberg
What is interesting about this move (beyond just being a huge relief to all free traders)…is that it clearly shows that protectionism / vs free-trade is a political decision, and one that democratically elected officials have control over…. the process of deciding to try and protect local jobs is a political decision, and as long as cooler heads prevail, free trade in goods and services will continue. (sure, there will be HUGE pressure from trade unions to “keep” local jobs, but the ultimate decision to close or open borders to trade is a decision that our leaders can make).
Exports are desirable for the US. So, it makes sense to keep globalization of products alive-and-well. Free trade of goods and services are clearly in everyones best interest (mosts economists agree that free and open trade is preferable to trade barriers).
But, the same can not be said of financial globalization. Economists are much more divided about the positive impact of globalized finance on economic development. Its not that they think its bad (although its clearly risky), the trouble is that there is much less consensus among respected economists about the benefits of globalized finance.
Who decides to (or not to) deglobalize finance?
Politicians can choose to have flexible exchange rates, and they can choose to allow capital to flow freely. Politicians, however, can NOT oblige banks to lend money overseas. In fact, its probably in the politicians interests to NOT lend money overseas (but rather at home to local companies).
Bank nationalizations will only increase the pressure to lend at home (rather than overseas). As banks get nationalized (as they surely will, or already have been)…there will be increased pressure to lend at home (at the expense of lending abroad).
“The fact that the financial sector now depends on a government backstop may have prompted the banks to pull back more from foreign markets than their home markets, though they are clearly doing both. Deglobalization – particularly financial deglobalization – isn’t going to be pretty.” Brad Setser blog
And, even if the banks dont get officially nationalized (which I believe is highly unlikely)…the process of financial deglobalization will be hard to slow down…
There is “growing pressure on banks and financial institutions to retreat from international business and concentrate on domestic markets. Trevor Manuel, South Africa’s finance minister, captured the fears of many when he warned that his country and other emerging markets were in danger of being crowded out of international capital markets and of “decoupling, derailment and abandonment”.
Financial protectionism is driven by the logic of the market and political pressure. Banks that have lost confidence and capital in the credit crunch are retreating to the home markets they know best. And because so many banks have been bailed out by national taxpayers, they are also coming under political pressure to lend at home rather than abroad. source: Financial times blog
But, will finance get “deglobalized”?
No, I think not. Currency markets trade 100′s of Trillions of dollars per year. The sheer size of international financial markets ($140 trillion in promises 2005) makes it highly unlikely that finance will actually be “deglobalized” (see data below). While the size of the pie may shrink, I dont see that as the same thing as deglobalization (elimination of the pie all together).
Again, I think that this term of “deglobalization” is a bit overused in the press, and has a shock value, but not much else. Its important to realize that deleveraging of capital markets is going to happen (which means there will be less credit around for everybody). Its also important to realize that capital will flow to the safety of the US when emerging markets seem too risky, but it will flow in reverse when volatility subsides. Local banks may lend less overseas, and nationalized banks may be pressured to lend at home. But, this is NOT deglobalizaton of finance.
As long as barriers are not erected to keep local capital at home (as is the case in countries such as China with capital controls), then global financial capital will flow freely. As long as exchange rates remain flexible (in most of the major trading economies of the globe), then financial globalization will continue.
The economists will still debate about whether that is a good thing or not. But, for now anyways…I dont see “deglobalization” as a trend. The threat of protectionism is…deglobalization is clearly not.
Wiki: Read more & contribute in our GloboTrends Wiki:
- Protectionism: https://globotrends.pbwiki.com/protectionism
- credit crisis of 2007/08
- fiscal stimulus and crisis recovery 2009
- international financial markets
Size of the Financial sector:
- household & non profit:
- total assets = $64.4 trillion assets owned (5x USA GDP)
- total debts = $11.9 trillion
- total balance: $52.5 trillion
- of this $52.5 trillion…the breakdown was as follows:
- $25.6 trillion = tangible, mostly property
- $38.7 trillion = financial assets
- $6.1 trillion in deposits
- $3.1 trillion in credit market instruments
- $5.7 trillion in direct corporate equity
- $8.9 trillion in indirect corporate equity, of which…
- $1.1 trillion in life insurance
- $3.0 trillion claims on pension funds
- $1.9 trillion claims on gov’t retirement funds
- $2.9 trillion mutual funds
- of this $52.5 trillion…the breakdown was as follows:
So, total US financial assets in 2005 was as follows…
- Household & non profit sector (data from above):
- financial assets: $38.7 trillion
- Business sector - Non-farm, non-financial corporate sector
- financial assets: $10.9 trillion
- Business sector - Non-farm, non-corporate sector
- financial assets: $2.3 trillion
- TOTAL US private sector Financial Assets:
- $52 trillion USD (approx. in 2005)….obviously it grew more till 2008 (especially housing bubble), before falling…
Financial assets globally…
Compare this with world (in 2005): source : McKinsey report 2005, “Mapping the global capital market”
- USA (private sector only): $52 trillion = 37% (rounded)
- Eurozone (all): $30 trillion = 21%
- Japan (all): $19.5 trillion = 14%
- UK (all): $8 trillion = 5.7%
- Top 4 total $109.5 trillion / 140 = almost 80% world total !!
- World total (all, including private + govt + business): $140 trillion….owned of financial assets
How this $140 trillion breaks down…
- $44 trillion was equities = 31.4%
- $35 trillion was private debt securities = 25%
- $23 trillion was government debt securities = 16.4%
- $38 trillion was bank deposits = 27.2%…….down from 42% in 1980 (shift away from simple deposits to more indirect banking)
- $140 total
How has it grown? As a % of GDP…
- $140 trillion was = 3.16 x total world GDP in 2005….up from 2.18 times in 1995, and from 1.09x in 1980
- Regional trends from 1995 to 2005
- UK: rose from 2.78x to 3.59x GDP
- USA from 3.03x to 4.05x GDP
- Eurozone: from 1.80x to 3.03x GDP