The international finance story for the last decade is not the financial crisis but the shift in behavior in the current account and official account. Prior to 2000 the current and official accounts were both close to zero. After 2000, developing economies started to show increasing surpluses . This trend was reversed with the Great Recession but has more recently started to move back to the old trend albeit not at the same rate. The net official flows show the significant buying of Treasuries by developing market central banks in order to stop currencies from appreciating. The Great Recession again caused the switch to lower official flows because there was a general depreciation of emerging market currencies when the dollar started to rise in response to the flight to quality. As the global economies started to improve, there was a a surge in Treasury buying. The pattern matches the current account.
The mercantilist policies of emerging markets is the greater theme for the last decade. This had real effects on employment and growth in the US. It also allowed for the strong growth and increase in income levels in developing markets. This is the fight that will continue this decade and will be a major driver in longer-term financial asset levels. Emerging market equities will do well and smaller cap developed market equities may do poorer if they do not have an international focus. Commodities will also do well as income levels continue to surge in emerging markets.
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