Financial de-globalization (a real trend?)

2009/02/06 in credit crisis, macro trends

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

Political decision

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:

Data

Size of the Financial sector:

1.  USA:

  • 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

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

* data from McKinsey report 2005, “Mapping the global capital market“  and http://www.federalreserve.gov/releases/

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1 response to Financial de-globalization (a real trend?)

  1. The current US government economic stimulation plan is to print up a bunch of new paper money and other similar paper securities and sell these securities mostly to foreign investors (of producing and manufacturing countries) to pay US people to re-build and expand the US infrastructure (Pork Barrel Projects) in order to reduce unemployment. This money will probably be spent on illegal alien labor, imported earth-moving machinery, imported materials (Steel, equipment, Pipe & Wire), new imported private airplanes, outsourced engineering, outsourced CAD drafting, etc., and the US workers are still unemployed?

    This is probably necessary at this time, even if it will cause massive inflation to the point that it takes a week’s wages to buy one loaf of bread. Any Economic Stimulus Spending also needs to prohibit any imported products (even if we no longer manufacture those products) from being purchased with these funds, and also prohibit all outsourcing of the Labor Required.

    How can we ever re-start our industries (re-industrialize) to generate a positive balance of trade that will restore our economy? Most of the men who knew how to operate the US basic industry and factories were fired 30 years ago and are now long dead. There are no books that completely tell everything about how to do most of the things that we knew how to do years ago when we created the industries that won WWII and then gave us our bountiful way of life. We need science-oriented citizens to create products and services that we can exchange for foreign currency. Foreign owned US dollars and foreign gold.

    The dollar buying power or value is partly about psychology when it is backed by the “full faith and credit of the US government” rather than gold. This is the same as my definition of “Junk Bonds”.

    Since the US government stopped redeeming freshly printed US dollars for gold, foreign governments and foreign individuals continue to use these freshly printed dollars (and other freshly printed US securities that they earned in exchange for their products that they exported to the USA) to purchase title to real estate, forests, industries, breweries, hotels, factories, casinos, financial institutions and everything else of value that is located in the USA. We paid these foreigners with our freshly printed dollars to manufacture or supply the things that we imported and consumed (rather than US citizens working to make these products ourselves in this country). Some government sources estimate that the title to 25% of our property and businesses are now foreign owned (http://www.economyincrisis.org/content/ownership). What will be the buying power of the dollar when we have nothing left to redeem the dollars earned by foreigner manufacturers?????????

    There is (probably) a limit to the amount of paper dollars that the foreign country manufacturing people and the foreign country raw material supplying people will continue to accept in payment. This limit will become apparent as soon as foreigners own title to everything of value in the USA and nothing is left that the foreign dollar holders want to buy with their freshly printed paper dollars. This is selling of our children’s legacy to foreign owners, and the US government calls it “Investing in America”. This is sort-of like selling our body parts to keep from working!!!!!

    The USA population will probably become employees, indentured servants, or maybe slaves of the foreign countries and foreign individuals that will own everything of value in the USA in the near future. The foreigners know that the US dollars that they earn will buy less and less each day that they do not spend them. They also know that these securities are not redeemable for anything except the “full faith and credit of the USA” (aka junk bonds). Our children and grandchildren might also have to change to the religion of the business owner if they want a job.

    It is not the foreign manufacturer’s fault that this economic condition exists. We created this condition ourselves. We purposefully destroyed most of our industries and fired all of the employees that were located in the US for various reasons. Why should we work and make the things that we consume as long we can get people in other countries to work to make these things for our consumption? We can pay them with freshly printed-paper currencies and other types of freshly printed-paper securities (Junk Bonds). They can redeem these freshly printed-paper currencies by exchanging them for title to our real estate, hotels, forests, breweries, casinos, factories, and our remaining businesses (instead of Gold). Our Stupid Legislators of both political parties, Ignorant Government Employees, Self Serving Corporate Managers, Greedy Unions, Wall Street Financial Genius Criminals, Enron and Arthur Anderson type Master Criminals, NAFTA, EPA, WTO, and OSHA, just to name a few, have created this situation.

    How can we ever re-start our industries (re-industrialize) to generate a positive balance of trade that will restore our economy? Most of the men who knew how to operate the US basic industry and factories were fired 30 years ago and are now long dead. There are no books that completely tell how to do most of the things that we knew how to do years ago when we created the industries that won WWII and then gave us our bountiful way of life. We need science-oriented citizens to create products and services that we can exchange for foreign currency and foreign gold.

    We desperately need more scientists and engineers to innovate and produce new products to export and also to export services that will improve our balance of trade. We need to stop the H1B import of low paid scientific and engineering talent, in order to create a financial incentive for our students to major in technical and scientific subjects that are needed to re-industrialize the USA, instead of other topics that do not benefit the economy.

    The USA needs protectionist tariffs to drastically reduce imports because our citizens do not want to work for the slave wages that foreign workers are happy to receive. Riots and insurrection are predictable, ala the French Revolution, when the people find their situations economically hopeless. In the last few decades we have purposefully destroyed the industrial bases that won WWII and gave us today’s bountiful way of life. Pork Barrel projects that pay people to pave roads, build infrastructure, plant trees, dig holes then refill the same holes, rake leaves, write poems, paint pictures, etc. are not be useful and do not contribute anything to correcting the basic US economic problem. The only thing that will save the US Economy is the re-building of our gold reserves in order to preserve the buying power of the dollar. The only way to do this is to produce export more (dollar value of) things than we import. The only way that we can accomplish exporting is to re-industrialize and make these products with US materials & Labor. The only way that our products will be sold abroad is if these products are technologically superior. We need to increase the percentage of USA citizen college students studying science and engineering from 5% to more than 60% to emulate the Asian countries. The USA has way too many MBA financial geniuses, and maybe it is now time to close those classes. We need to stop the H1B import of low paid scientific and engineering talent, in order to create an incentive for our USA students to major in technical and scientific subjects that are needed to re-industrialize the USA. Only a positive balance of trade will protect the purchasing power of the US Dollar, or the USA will never return to the economic powerhouse position that we enjoyed during and after WWII. We must create tariffs to imports that will be sufficiently high to effectively prohibit all foreign imports in order to re-create our industrial base and export products that will improve our balance of trade, increase our gold reserves, and protect the buying power of our dollar.