Drastic Changes in Global Finances and Economy
Aug 06, 2021
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Financial markets and the world economy are experiencing huge changes, dramatically changing the short- and long-term environment and backdrop of the US economy. The origins of these tectonic upheavals in the global economy go well beyond the fall of US housing values. Allen Sinai, Chief Global Economist, and Decision Economics Strategist, Inc. (DE), has described several seismic changes including China and Asia's new global economic geography, collective force and energy in developing countries around the globe, and a re-balancing trade, debt, saving and investment imbalances that characterize the global economic climate for humans. The impact of such seismic changes on the US economy and their repercussions on US higher education is discussed in Sinai. The report finds that the required adaptations to the relative decrease in household wealth, a serious cyclical decline in the U.S. economy, and a seismic shift from consumption to saving are threatening US higher education's future funding and reputation.US Secretary of the Treasury Steven Mnuchin commissioned in 2017 four significant studies on the US financial system that examined the efficiency, resilience, innovation and regulation of this financial sector. These studies showed the domination of the United States in all four fields: banking, capital markets, asset management, and financial technology. To quote: "America has the strongest banking system in the world. The bigger, deepest, and most lively US stock markets in the world are the $29 billion equity market, the $14 trillion US Treasury bonds market, the $8.5 trillion corporate bond market, and the market for $200 trillion (notional) derivatives." "The United States is home to nine of the top ten global asset managers."
"Around half of the $117 billion in worldwide cumulative investment from 2010 to 2010 were spent by US businesses in the financial technology sector." In terms of foreign currency transactions in 2019, the dollar represented 88% and of official currency transactions 59%. It is commonly used in manufacturing invoicing but less so in the trading of services.
We all know the stunning pace of economic growth in China, estimated at 9.2% per year from 1997 to 2007 and the equivalent rate for India 6.8% per year (compared to 3.0 percent for the United States and 2.5 percent for the EU during the same period). Asia has also had substantial economic development, averaging between 4.5 percent per year from 1997 to 2007, and Russia, and Eastern Europe, with 5.3 and 4.2 percent, both newly industrialized countries - Korea, Taiwan, Hong Kong, and Singapore. In recent years growth of 3.2% annually between 1997 and 2007 in Latin American nations, which profited from increased crude oil prices, has been significant.
These nations may have progressed beyond emerging and evolved more economically than many know. Their countries are more economical. Taken together, they can accomplish more than a conventional growth engine like the United States to invigorate the world economy.
The US has a large $739 billion imbalance in its current account, which corresponds to 5.6% of GDP. In comparison, China has a surplus of $367 billion, equivalent to 11.3% of GDP. With cheap labor and artificially low currency, China has built its huge surplus, which has down export prices. As China's expenses rise and its existing policies may not continue nor may it want to, its stable currency has made it possible for China to collect its enormous surplus in the current account. The tremendous riches bring economic and financial strength and we are also taught by history, political power. Other Asian nations (with the noteworthy exception of India) and Russia, in general, have become affluent with dramatically growing prices of crude oil and commodity products for several years, including for the Middle East and Venezuela.
Foreign reserves (foreign currency deposits kept and invested by central banks in various assets), according to TopRatedForexBrokers, are a tangible indicator of wealth. The U.S. has foreign currency reserves of $76 billion, equivalent to barely 0.5 percent of its GDP.
Additional nations with large foreign currency reserves (and GDP percentage of the reserves equivalent to those of the following countries) include: Japan, $1.0 billion (22%); Russia, $507 billion (37%); Taiwan, $287 billion (71%); South Korea, $264 billion (27%); (74 percent ). A foreign exchange reserve of 178 billion dollars represents a total of 101% of Singapore's GDP.
As the large IMF research showed, pricing effects on the exchange-rate strategies of the Emerging Market Economy (EMEs) would have a low positive export impact but would exacerbate the contraction of imports. Moreover, given that EME debts are primarily denominated in dollars, an assessment of a dollar would generally affect the liquidity and growth of EMEs. This is why the rise in US interest rates is dreaded by nearly every EME economy as well as the US Treasury. The recent seismic change in the global financial environment has resulted in several reasons combined.
First, the banking system's dominating stake has been undermined by financial technology. The Non-Bank Financial Stability Board (NBFI) report for 2020 showed that by the end of 2019, 49.5% of global financial assets were $404 trillion, compared to $38.5% for banks. Indeed, overall NBFI loans currently surpass bank loans due in part to stronger restrictions on banks and greater bank capital and liquidity costs.
Secondly, financial technology has made it possible for new arrivals in the financial sector to deliver custom-orientated financing for individuals and businesses, not only to new Fintech start-ups but also for big technology platforms using big data, artificial intelligence, applications, and their dominance of cloud computing. This month, an important BIS research shows how Big Tech muscles traditional banking activities, particularly payment services, lending, or even asset management, into the consequences of fintech and digitalization in the structure of the financial market.
Taking together the development of NBFIs and Big Tech, conventional bank regulators and supervisors are finding that their financial system is regulated less and less, yet central banks are accountable for financial stability overall! Regulating the complicated financial environment is like attempting to tie down a giant elephant, each confined in its own silos by a group of experts. And politically, nobody wants to empower them all to be super-regulators.
Thirdly, due to severe geopolitical rivalry, the financial landscape expanded into new mining areas. How should funding be addressed when global supply chains are separated by various standards and when we get to a Splinternet of diverse technologies? As the United States is putting pressure on Chinese firms and individuals by means of new legislation and sanctions, financial institutions and firms strive to cope with shifting objectives and game changes.
The Ant Finance & Didi incidents indicate additional regulatory questions about the subject matter of international laws with national safety consequences in big domestic massive database platforms. Will India continue, for example, to enable Big Tech to own all of its customer data? Fourth, the "Expose Financial Data" regulatory trend in which banks open their customer records, to enable other companies to access consumer accounts and to create new goods and services. However, this also implies that customer privacy and data security are serious problems. No government has yet found out how to appropriately regulate competition throughout the world of fintech since five companies (Amazon, Microsoft, Google, IBM, Oracle) account for 70% of cloud-related infrastructure services.
Fifthly, digital currencies, cyber currencies, and the central bank have been steadily ongoing, allowing for less reliable payments and transactions on official and non-regulatory currencies. Briefly, the government's regulators are accountable for the stability of the system but may not have access to what truly takes place. This is a crash waiting for it to occur. These all point to an accelerated, more complicated, and intertwined global financial system than any single country could operate on its own. What are the hazards of financial mishaps that might quickly increase to financial crises when the biggest financial systems are trapped in ever-higher geopolitical rivals? The Group of 20 was united for a complete series of reactions to the 2008 global financial crisis.
There is nothing united this time as the US continues to use financial penalties against its opponents and rivals, with 4,283 cases in January 2021, 246 of which were against Hong Kong and Hong Kong.
The bubble in Fintech's assessment that fed steep stock and technology investment is mostly fueled by easy monetary policy on the part of central banks. Central banks have increased their assets faster than banks (3.8%) or NBFIs (5.9%) on an average by 8.4% per annum between 2013 and 2018 to 7.5% of global financial assets. Is this to presume that financial markets will continue to support central banks' prosperity?
As inflation rebounds, central banks will have to change their loose currency position to stress the global financial system. Structural and regulatory flaws exist in the global financial system, but they can only be resolved via a degree of political understanding. Expect a chaotic outcome without it.