Prospector

More money, more risk in the new economic order |

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from the March 03, 2005 edition CSM

More money, more risk in the new economic order
By David R. Francis

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.

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.

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.

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.

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.

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.

More money, more risk in the new economic order | csmonitor.com

posted by Prospector @ 7:45 AM