Globalization falling - look at financial flows

Globalization is declining and we should be worried. Even with all of the changes in communication and all of the discussion concerning the world being flat, the world is moving back in time with respect to financial flows. International trade also has declined and is growing at a slower pace since the Great Recession, but finance is still a more important segment to global markets. This decline in trade should not be surprising given the decline in global GDP, but more importantly, the decline in the growth of financial assets around the world will affect long-term global imbalances. Financial flows are what has been an oil that drives the trade engine. Financial flows are what will solve the great savings imbalances around the world. Flows are slowing and there are many who do not care.

Financial assets were growing around the globe at a rate of around 8% and has been flat since the end of the Great Recession. There has been a 60% decrease in cross border capital flows since the peak in 2008. European banks have reduced their cross border flows by $3.7 trillion with $2.8 trillion being intra-Europe. Europeans do not want to lend to other Europeans outside of their country. This is even with the same currency!

There is a movement to localized finance whereby debt and equity raising is done from local investors who are keeping money within their home country. There is also an increase in capital controls across the globe to stop hot money inflows and outflows. The major government institutions like the IMF have pushed to reduce hot money flows and have embraced the institutional school of capital flows which states that there is harm with how money is raised for project financing and current account deficits are financed.

The decline in cross border flows is going to further negativelyimpact trade and is going to fragment the globe into regions and localized markets. New development will now be restricted to the desire of local bankers and politicians without the chance to receive funds based on the value of the project. Of course, this is the positive view to cross border flows. There is also the view that cross border flows are bad and this return or movement to localized financing will reduce the change for a financial crisis.

I fall into the camp that reduced flows are negative for the globe and will casue more harm by not allowing savings to find the right home.