The Expanding Grasp of Global Markets

By Richard C. Longworth
The Expanding Grasp of Global Markets

But if the global economy is not yet complete, it is becoming more intertwined and integrated every day. International trade is growing by 8 percent per year, more than double the rate at which the world’s total economic output is growing. Foreign investment (investing in the ownership of foreign businesses) has been growing by 12 percent per year and is now more valuable than trade: The annual economic output of foreign-owned businesses exceeds the value of all foreign trade combined.

Of all the parts of the global economy, the most developed are the capital markets that trade national currencies. These markets operate virtually unregulated and trade no less than $1.5 trillion every day, or $400 trillion per year. About 15 percent of this vast sum is vital, because it pays for the world’s trade and investment, and because it pays for the hedging that makes this trade and investment possible. Through this hedging, businesses and investors buy foreign currencies to protect themselves against potentially costly swings in currency exchange rates. For example, if the value of a country’s currency rises rapidly, businesses that hold a reserve of that currency can continue to make purchases and pay debts in the same country without first purchasing the currency at its new, higher price. Without such hedging, many companies probably would be reluctant to trade or invest abroad. But apart from this useful hedging, all the rest is speculation, as traders operating around the globe and around the clock buy and sell currencies, looking for quick profits of as little as 0.05 to 1 percent or less.

This is not idle speculation. Large capital markets are conduits for potent and relentless waves of money, constantly seeking the best price, a momentary edge. As nations in Asia recently discovered, these markets can confer wealth, jobs, industrialization, and riches on societies they favor. As the Asians and, later, the Russians found out, the markets can also pull these benefits out virtually overnight and, in the process, undermine entire societies. With the smell of fear in their nostrils, traders can cast instant judgments on other vulnerable economies, sending the panic careening around the globe, from Asia to Brazil to Russia and, finally, to Wall Street, which is what happened in 1998.

This tight linkage between global capital markets and national economies is something new. After World War II (1939-1945), the victorious powers set up systems of nation-based safety nets, rules, regulations, and other barriers to assure the safety of their currencies and economies from panic elsewhere. The global economy, powered by technology and deregulation, has eroded this system of safeguards. A prominent objective of deregulation, for example, has been to dismantle capital controls limiting the speed and size of currency movements in and out of countries. These controls have been removed in all but a few nations.

National and international policy makers are now pondering how to create a new set of global rules and regulations to replace the old web of national regulations. Their goal is to hem in the power of the global economy and restore some confidence and stability to global markets and the nations where they operate. One important target of these new rules and regulations is likely to be the powerful global corporation.

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