More money, more risk in the new economic order
If money makes the world go round, the globe must really be spinning. Asia, Europe, and both North and South America are awash with bank accounts, stocks, and bonds. The world's financial assets now exceed $118 trillion - more than double the amount in 1993, 10 times the total in 1980.
That phenomenal growth is fueling the forces reshaping the global economy. The result is far more liquidity but also more risk. And who owns and manages those assets is also undergoing significant change, which means the balance of economic power in the world is shifting.
Hint: One Asian giant is declining, a second is growing like gangbusters.
For an example of the dynamics of this evolving new economic order, look at the financial drama that unfolded last week. On Monday, the central bank of South Korea noted in a usually obscure report to the National Assembly that it might diversify its "investment targets." Currency traders figured that meant it would sell off some American dollars in its international reserves. On Tuesday, the dollar took its biggest dive on foreign exchange markets since last October. Stock markets fell in the United States, Europe, and Asia. Oil prices soared.
With the dollar in seeming peril, the Bank of Korea quickly moved to ease fears, which had pushed its currency, the won, to a seven-year high. It stated it plans only to diversify a portion of its $200 billion in reserves from US Treasury bonds into better-yielding, nongovernment bonds. These would still be denominated in dollars, not in some other international currency. The Japanese finance ministry made similar assurances it would not dump dollars. The markets rapidly calmed on Wednesday.
Integration of financial markets can lead to more volatility, says Diana Farrell, one author of a new analysis of financial assets in more than 100 countries by the McKinsey Global Institute. In toting up global finances, the study finds that just four areas account for 80 percent of the world's financial stock: the US, Europe's euro zone, Japan, and Britain.
The US remains biggest, with $44 trillion in financial assets accounting for 37 percent of the world's financial assets. Nonetheless, with growth elsewhere, the US "is no longer so dominant," says Edwin Truman, a former Federal Reserve economist now at the Institute for International Economics.
China has one of the fastest growing financial markets in the world, with $5 trillion in assets. That compares to Japan's $18 trillion - a size that has been diminishing in recent years.
The McKinsey report finds that financial markets "are becoming deeper, more liquid, and increasingly integrated."
Deeper is shown by the fact that since 1980, the value of global financial assets has grown from an amount roughly equaling the world's gross domestic product - that is, its total output of goods and services - to three times its size.
That trend is usually beneficial, the study notes. It gives households and businesses more choices for investing their savings and raising capital that can be put into homes or into plant and equipment, or other investments. It promotes more efficient allocation of the money into investments that produce results, and, presumably, at less risk.
So, if Australian stocks are falling, funds might flow to French government bonds or Latin American commodities. That's the effect of globalization, which binds nations' markets closely together and makes it easier for investors to shift money around the world.
In other words, investors get "more bang for the buck," says Mr. Truman.
The markets are also more liquid. More than $1 trillion trades each day on the world's foreign exchange markets. That's bigger than the economy of Canada. If a trillion dollar bills were stacked on top of each other, they would reach to the moon and back - twice.
One reason for the growth in markets: the spread of capitalism in Asia and in the former Soviet bloc after the cold war. Since Asians account for 2 of every 3 people on the globe, the spread of capitalism in the East in the last 20 or so years has lifted more men and women out of poverty than ever before in history - more than the industrial revolution did.
But risk also rose. In July 1997, a currency crisis began in Bangkok which spread rapidly around the region. The Asian financial markets, by then open to international flows of money, couldn't handle the surge of market fears. Huge, sudden outflows of money badly damaged their economies. Malaysia, China, and Vietnam escaped much of the harm by managing the flows of capital.
Another benefit from the growth in capital markets is that investments in "emerging" markets in Asia, Africa, the Middle East, Europe, and Latin America have grown enormously. Last year, 29 nations got $279 billion of private financing from abroad, estimates the Institute of International Finance in Washington. That far exceeds the $56 billion or so the world spends each year on foreign aid.
One other trend noted by the McKinsey study: Capital markets have seen a striking shift away from banks as the primary intermediary between savers and investors. Their share of the global financial stock has fallen to 30 percent from 45 percent in 1980. Today more capital consists of debt (bonds) and equity (shares).