The Retreat of Financial Globalization?

Yves here. When Joyce discusses “financial globalization,” what he is referring to is cross border capital flows. And even though neoliberals and international banks would have you believe otherwise, a fall in these money movements is entirely a good thing. As Ken Rogoff and Carmen Reinhart found in their study of 800 years of financial crises, high levels of international capital flows are correlated with more frequent and severe financial crises. Similarly, a 2010 Bank of International Settlements study by Claudio Borio and Petit Disyatat ascertained that cross border capital flows were over 60 times trade flows, meaning they had almost nothing to do with them. The authors argued, persuasively, that the crisis was not the result of “global imbalances” or excessive savings but what they called “excessive financial elasticity.”

By Joseph Joyce. Originally published at Angry Bear

Eight years after the global crisis of 2008-09, its reverberations are still being felt. These include a slowdown in world trade and a reassessment of the advantages of globalization. Several recent papers deal with a decline in international capital flows, and suggest some reasons for why this may be occurring.

Matthieu Bussière and Julia Schmidt of the Banque de France and Natacha Valla of CEPII (Centre d’Etudes Prospectives et d’Informations Internationales) compare the record of the period since 2012 with the pre-crisis period and highlight four conclusions. First, the retrenchment of global capital flows that began during the crisis has persisted, with gross financial flows falling from about 10-15% of global GDP to approximately 5%. Second, this retrenchment has occurred primarily in the advanced economies. particularly in Europe. Third, net flows have fallen significantly, which is consistent with the fall in “global imbalances.” Fourth, there are striking differences in the adjustment of the various types of capital flows. Foreign direct investment has been very resilient, while capital flows in the category of “other investment”—mainly bank loans—have contracted substantially. Portfolio flows fall in between these two extremes, with portfolio equity recovering much more quickly than portfolio debt.

Similarly, Peter McQuade and Martin Schmitz of the European Central Bank investigate the decline in capital flows between the pre-crisis period of 2005-06 and the post-crisis period of 2013-14. They report that total inflows in the post-crisis period reached about 50% of their pre-crisis levels in the advanced economies and about 80% in emerging market economies. The decline is particularly notable in the EU countries, where inflows fell to only about 25% of their previous level. The steepest declines occurred in the capital flows gathered in the “other investment” category.

McQuade and Schmitz also investigate the characteristics of the countries that experienced larger contractions in capital flows in the post-crisis period. They report that inflows fell more in those countries with higher initial levels of private sector credit, public debt and net foreign liabilities. On the other hand, countries with lower GDP per capita experienced smaller declines, consistent with the observation that inflows have been curtailed more in the advanced economies. In the case of outflows, countries with higher GDP growth during the crisis and greater capital account openness were more likely to increase their holdings of foreign assets.

Both studies see an improvement in financial stability due to the larger role of FDI in capital flows. Changes in bank regulation may have contributed to the smaller role of bank loans in capital flows, as has the diminished economic performance of many advanced economies, particularly in the Eurozone. On the other hand, smaller capital flows may restrain economic growth.

While capital flows to emerging markets rebounded more quickly after the crisis than those to advanced economies, a closer examination by the IMF in its April 2016 World Economic Outlookof the period of 2010-2015 indicate signs of a slowdown towards the end of that period. Net flows in a sample of 45 emerging market economies fell from a weighted mean inflow of 3.7% of GDP in 2010 to an outflow of 1.2% during the period of 2014:IV – 2015:III. Net inflows were particularly weak in the third quarter of 2015. The slowdown reflected a combination of a decline in inflows and a rise in outflows across all categories of capital, with the decline in inflows more pronounced for debt-generating inflows than equity-like inflows. However, there was an increase in portfolio debt inflows in 2010-2012, which then declined.

The IMF’s economists sought to identify the drivers of the slowdown in capital flows to these countries. They identified a shrinking differential in real GDP growth between the emerging market economies and advanced economies as an important contributory factor to the decline. Country-specific factors influenced the change in inflows for individual countries, as economies with more flexible exchange rates recorded smaller declines.

In retrospect, the period of 1990-2007 represented an extraordinarily rapid rise in financial globalization, particularly in the advanced economies. The capital flows led to increased credit flows and asset bubbles in many countries, and culminated in an economic collapse of historic dimensions. The subsequent retrenchment of capital flows may be seen as a return to normalcy, and the financial and banking regulations–including capital account controls–enacted since the crisis as an attempt to provide stronger defenses against a recurrence of financial volatility. But the history of finance shows that new financial innovations are always on the horizon, and their risks only become apparent in hindsight.

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  1. Moneta

    I always wonder why Canada’s big pension plans get to buy infra assets from the U.K in their private equity segments… if the UK has the same pension funding problems why would they let foreign retirees consume the profits off their utilities? Maybe these assets aren’t so great after all… wouldn’t it make sense for the UK to force Canadian plans (retirees) to fund capex by changing rules and regulations over time?

    And then everyone wonders why Brexit happened. We’re in a world where specialists are glorified and big picture generalists are ignored.

    The big issue is why would a country invest in foreign markets when it could do the same internally? The answer is exploitation and diversification. But the last few crisis have shown us that markets tend to crash together weakening the diversification argument.

    1. cnchal

      Prepare for a tool booth at the end of your driveway. The latest crazy talk from Canada’s big pension plans is the demand that “government assets” be sold to them to keep the payouts going.

      Ironic, really. Canada’s big pensions are government employee pensions amid disappearing pensions for those that work in the private sector, who were taxed mercilessly to pay for those “government assets”.

      1. Moneta

        It’s not just government employee pensions, it’s also CPP which is something like 18% funded when based on the population that exists today. Lifestyles have shot up over the last decade with the RE bubble and most will not be able to keep up.

        I think the real shock will be when most of today’s 60+ can’t work anymore and they will try to get the young to pay for the leftover mortgages and healthcare after they have been stuffed with student debt.

        1. Fiver

          What is it about people having a pension that has had you posting comments on it for years, irrespective of the topic?

          Canada has made some very big mistakes – a commitment to maintain pension plans is not one of them.

          1. Moneta

            Don’t you see that publicly traded companies are cutting their own pension plans to increase profitability so these big pension plans can reap the profits?

            Don’t you see that government employees, with these plans are reaping the profits of the private sector?

            To make matters worse, many government plans are drastically underfunded and I believe the pension promises made in many government plans can not be paid without further squeezing private sector workers and the younger generation.

            I believe that all Canadians should have access to all the same quality pension plans.

            I believe that the pension industry is a major player in this global financialization of everything the topic of this article.

            I believe most do not understand pensions and do not see how our pension system currently structured is at the core one of the wealth discrepancy and financial engineering.

            The way the current pension system is structured contributes to stealth sectorial, geographic and generational looting.

            1. Fiver

              What I see is that the financial/corporate sector and its huge web of servants throughout media, academe, punditry, ‘the industry’ etc. have been set on destroying pension plans of all kinds for decades – and they’ve done a tremendous amount of damage all around: from profitable corporations that persistently refuse to meet their obligations, to a pathetic litany of far right (Conservatives) and centre-right (Liberal) Governments hacking away at the foundations of the social contract, to financial services giants eager to blow huge holes in fund balance sheets, to the industry and technocratic managers eager to play the money game, and of course to the thorough brain-washing over decades of members themselves along the lines that pension plan contributions need not increase because the ‘market’ will do it for them. Where do you suppose all the rank idiocy of retiring at 55 or even 50 at full pension came from?

              Nonetheless, just because there are funds that are far too cushy (these are typically for upper income earners btw) or funds that are broken does not warrant blanket attacks on pensions or pensioners. Do we need reform? Of course. The first thing to do is take remove pension money entirely from ‘markets’ (no more fund ‘managers’ to lose it all), adapt the universal CPP that already exists so that all employers must contribute and stay current (including self-employed), all income earners contribute right off their pay, ridiculous schemes like ‘freedom 55’ are all trashed, and contributions significantly increased.

              Everyone deserves to have a decent pension that he/she can draw on as necessary and which has been paid for throughout his/her working life – if you wish to carp about pensions, go after the people who have done the damage to pensions, the same people, it turns out, who’ve brought ruin to just about everything they’ve touched.

              1. Moneta

                I agree up to your paragraph on CPP.

                The CPP is just as broken… lots of private equity in there! It might be funded when looking at the next 100 years but based on today’s population alive today it is less than 20% funded so you can imagine the huge number of math and financial manipulations that can be done to makes things look good…

                The other issue is that our pension system, CPP is based on income… in an economy where earnings are getting pushed down.

                I believe in pensions but I also believe that no matter how deserving people are, if the money is not there, it’s not there. And I think it’s disgusting to make those without pensions pay for the underfunding of those with pensions no matter how the underfunding occurred.

      2. JEHE

        Should be JEHR

        cnchal, can you actually present a case where a private sector pension plan was “taxed mercilessly” by the government? It is more likely that private sector companies tried to increase their assets by depleting their employees’ pensions: take the actions of Conrad Black (and I’m sure he is not the only one):

        The founding of CCWIPP was a direct result of actions like those of the now-disgraced capitalist Conrad Black, who made off with a pension “surplus” when he controlled the Dominion store chain. In fact, because CCWIPP had then recently been established as the registered pension plan at Dominion stores that employed UFCW Canada members, theirs was the only pension plan untouched by Black’s manipulations.

        So the weakening and disappearance of private unions may have led to decreased pensions. There is an ongoing effort by private employers to get rid of defined benefit plans in exchange for shared risk pension plans (which really means the pensioner takes the risk and not the employer). In our province these changes are already taking place which means future pensioners will be worse off than present pensioners. When the public (government) sector has good pension plans for its workers, then the private sector will also have better pensions in order to compete for good employees.

        1. cnchal

          It seems there is a misunderstanding. Every worker in Canada is taxed mercilessly and my comment was not about “taxing private sector pension plans mercilessly” by the government.

          Overall, over the last couple of decades the individual tax rate has declined but CPP contributions have increased to the point that every dollar of annual income over $3,500 draws a 9.9% contribution rate until the contribution limit is hit, although there are no income taxes due until annual income is well over $10,000

          Conrad Black raiding pension funds so he can maintain a billionaire lifestyle while being a millionaire is no different than what Pirate Equity does all day long. Destroy the lives of little people for the benefit to the few at the top. Society is run on the Wells Fargo business model.

          I agree with most of your last paragraph. The future is going to suck for those employed anywhere but the government when it comes to pensions. Cat food will be too expensive so it’s down to shrubs and grubs and foraging in the ditch.

          . . . When the public (government) sector has good pension plans for its workers, then the private sector will also have better pensions in order to compete for good employees.

          I don’t think so. No one can compete with government. The government can simply raise taxes and fees on the private sector to continue paying it’s workers more. Just look at Ontario and the sunshine list

          Almost 80% of Toronto police officers make more than $100,000 annually. Not that they don’t deserve it.

          To get back to the topic of the post, cross border flows of money on the order of 60 times the value of the cross border flow of goods is insane. The peasants can look on in slack jawed wonder at the criminality of it all, and do nothing to stop it.

          Bernie Sanders: The business of Wall Street is fraud and greed. Bay Street too.

          1. Fiver

            ‘Every worker in Canada is taxed mercilessly’

            As a Canadian worker I can without hesitation state that the claim is false. The well-off in Canada have not carried their share of the load for at least the last 30 years. Notwithstanding that pathetic performance at the higher end, and while fully acknowledging ample room for improvement, the case remains that Canadians get a far, far better bang for their tax buck than that delivered in the US – and performance could only improve but for the efforts on the part of the corporate/business elite to roll back all gains ever made anywhere.

            1. cnchal

              Tax freedom day in Canada

              . . . June 7, is the first day Canadians start working for themselves, according to the Fraser Institute’s annual calculation, and not to pay off what they owe municipal, provincial and federal governments.

              This year, the average Canadian family will pay $45,167 in total taxes, or 42.9 per cent of its income ($105,236).

              For sure, your definition of mercy is different than mine.

              Anyhow, the future is getting crapified in a hurry. Trudeau has surrounded himself with banksters, and they insist that government assets be sold to them and their ilk, such as Pirate Equity, pension funds and sovereign wealth funds, and since they demand guaranteed profits, new toll booths will spring up everywhere. The rentier’s wet dream comes alive and we will have a fourth tax collector, only “private”.

              After they are done I wouldn’t be surprised to see tax freedom day shoved out to December 30th.

              The same bankster that sold Hydro One is making sure his cronies get first crack at the goodies, Canadian peasants be damned.

              I don’t know where you live, but in Ontario, before the sales taxes were harmonized to blend the 8% provincial sales tax with the 5% federal GST to have a combined sales tax of 13%, the federal tax didn’t apply to used cars sold between individuals because a sales tax had already been paid when it was new. At the same time, Ontario kept charging the 8% sales tax over and over on the same car every time it changed owners. After harmonization the sales tax jumped to 13% and Ontario grabbed it all.

              Ontario punched low income people in the head with this tax grab. Mercifully their eyes weren’t gouged out too.

              1. Yves Smith Post author

                I don’t recall evah seeing an estimate of total taxes paid by an “average” American, given the great disparity in local real estate taxes, and state sales and income taxes, as well as taxes we forget about (gas taxes and in Jefferson County, Alabama, ginormous sewer charges!). When you roll all those together, the effective tax rate is a lot higher. And Canadians, with among other things, a national health care that works, get a hell of a lot more for their tax dollars than Americans do.

                1. Cry Shop

                  Americans get a lot for their tax dollars, they get one of the most overarching losses of privacy, they get a security state that can shoot them dead at the slightest sign of not cowering, they get the creame of their youth sent to 3000+ military bases outside the USA, where they are formed into the same racist, paranoids who find employment in the aforementioned security apparatus…

                  The real question is how much of what they get do they know about just what they are getting?

                2. cnchal

                  And Canadians . . . get a hell of a lot more for their tax dollars than Americans do.

                  Echoing Cry Shop, Canadians don’t rule the world or even try to, but we have a raging infection of neoliberalism.

                  Trudeau believes the banksters advising him, that to fund new infrastructure projects, whatever they may be, already existing infrastructure needs to be sold to pay for it.

                  The main argument from pension funds, is that there is a dearth of profitable investment available and they need these assets to milk so that pensioners get paid, most of which are retirees from government. It seems almost no one gets the inherent contradictions.

                  That sure isn’t Keynesian stimulus, which is what was sold in the last election, and the last time I looked, Canada still has it’s own currency, the Northern Peso.

                  Where do I find a market for toll booth futures?

                  1. Moneta

                    Last summer I took the new highway south of Montreal to Brossard. When I got to the toll booth, the wait was really long so I thought the traffic was bad getting closer to destination. However, past the toll there was nothing!

                    The retirees will need our money to fund their promised retirements but we won’t be able to be efficient… getting from our kids appointments to our parents appointments will leave us no time to work… we are going from 5 workers per retiree to 2 after all… lol!

                3. Moneta

                  The thing is that our material goods cost a lot more than yours… something happens at the border. Just compare cars… huge difference!

                  So way cheaper material goods are what you get for your tax dollars.

                  1. Cry Shop

                    except maybe pharmaceuticals, at least the legal, and therefore the ones where the money rolls into the oligarchy’s pocket.

        2. Moneta

          Companies need to cut expenses to increase roe to please pension plans… I don’t see how this helps employees of puplicly listed companies… it seems to me that more underfunded plans will lead to even more cuts in the private sector.

  2. Sound of the Suburbs

    You can only pillage the world once, though I think they are going for second helpings in Brazil right now.

  3. tegnost

    m’kay so kind of like robbing peter (emerging markets with growth potential) to pay paul (goldman until peter goes broke (asset bubble collapse) so paul can’t be paid until he “natural” growth potential of emerging markets recovers (peters growth potential recovers from the asset bubble/debt overhang with best performance to those with more flexible currency) so that paying paul (new grifts, oops financial innovations) can be foisted on them again leading to, in hindsight only of course, and notably after paul has been paid, another collapse? rinse and repeat….is there any sense to this postulation?

    1. RBHoughton

      I think that’s not completely right. Peter always pays because Paul must have the transfers.

      Even when Peter’s economy collapses, the national assets – banks, mines, land, industries – of the victim are transferred to us at knock-down prices and paid in new issues of our paper which, since demonetization, increases (the paper issue) with the size of our national economy.

      Its amazing that we continue to get away with this free transfer of assets from Africa, Asia and South America. You’d think someone would say something but the people don’t understand and the governments that do have their reasons for not speaking :)

      1. tegnost

        Thanks,I suppose that explains the response to to 2008 crisis as counter intuitive as it seemed at the time, paul had to get paid, nothing else mattered and “that’s the way it is”, or TINA was the only response we could get out of anyone in spite of rational ideas contradicting that bitter pill… next question, why would flexibility of currency ease the impact?

  4. JF

    Why do you use the term ‘capital’ when referring to credit/lending that is not related to economically real ouputs. The rest of the article tells this story but the lead groups it all as ‘capital’ flows.

    This is an editorial suggestion really one that does not conflate or mislead when treating credit creation used for financial asset trading as if it were the same general thing as FDI, that is, direct investment.

    We have seen the financial system react to the crisis by recognizing their own unhinged behavior, and doing much less of it for good reasons. They know their credit creating behavior was nit coverting Savings into Investment, they know it was not ‘capital’ – so editors, let us help our writers to bring more clarity.

    1. Grebo

      I agree. We need a separate word for ‘financial capital’. I am thinking ‘ante’ or ‘stake’ or some similar word from the world of gambling and confidence tricks.

    2. readerOfTeaLeaves


      Possible new terms:
      foreignDirectInvestment (FDI)

      Yes, these are all noun stacks.
      And noun stacks can be the devil to read (see also: legalese).
      But nonetheless, we now need more specific, descriptive terms moving forward.
      And part of the purpose is to clarify what is primarily rampant speculative gambling (i.e., ‘making money from money without generating new economic goods or services’), as opposed to genuinely generative activity that directly leads to new goods and services.

      I think new, improved vocabulary would help clarify thinking. And, consequently, discussion.
      Perhaps there could be a separate link on the right side of the NC page under the main topics for ‘financialVocabulary’?

      1. JTMcPhee

        And maybe we can debate whether the category ought to be called “financial globalization,” or “global financialization”? Seems to actually make some substantive difference…

  5. fresno dan

    “And even though neoliberals and international banks would have you believe otherwise, a fall in these money movements is entirely a good thing. As Ken Rogoff and Carmen Reinhart found in their study of 800 years of financial crises, high levels of international capital flows are correlated with more frequent and severe financial crises. Similarly, a 2010 Bank of International Settlements study by Claudio Borio and Petit Disyatat ascertained that cross border capital flows were over 60 times trade flows, meaning they had almost nothing to do with them. ”

    This is probably something that not one in 10,000 people understand (I don’t really either) – but I think it is apparent that the entire edifice of finance has been jiggered to benefit, Davos man and NO ONE ELSE. And why shouldn’t Davos man want it to continue – the aftermath was set right for the 0.1% remarkably fast in the aftermath of the Great Recession – by HUGE infusions of government money, guarantees, credit, forbearance, etcetera – which for some reason can NEVER be made available to the 90%

    This is probably the most salient reason Hillary lost, but it can never, ever be proffered as a reason for it would reveal that ALL our problems are due to the rich….

    1. JTMcPhee

      The rich, a category made up of individuals linked so effectively in their several sodalities, all of whom are intensely and deliciously aware that they get to live large, high on the hog, top-drawer, to be catered to and cossetted and cared for by both suck-ups, and decent people in the caring and helping lines who can’t help themselves and have to give comfort and skilled succor to the barstids — barstids who, at the end of their individual wealthy lives, looking outward only for where to steal MORE, and inward only to study new, improved ways to titillate their pleasure centers, will be carefully and lovingly tended, their drool wiped and their diapers changed and their trach tubes suctioned and such, by decent kindly people they will scorn. And then the Few get to die, to go beyond any retribution or restitution, and to laugh all the way to the mortuary, with “Apres nous le deluge” on their collagen-enhanced lips…

      1. tegnost

        I’ll stick my neck out here and posit that the rich are not a monolithic group, there are rentiers, and there are business people and although both may achieve fabulous wealth, one group is focused only on collecting rents, while the other understands demand is necessary so they’re not quite the same enemy, and this is where my feeling that trump may not be quite as bad as many people fear, it sort of boils down to how much one relies on financialization to make things happen. There are those who see a need and fill it, resulting in spoils, and others who see or seek to create asymmetric imbalances in order to take advantage of the weaker or less informed parties. The TPP, for instance, increases patent protections in order to ensure a rentier income stream, while others actually desire to fill needs, think drug dealers and airport shuttle operators, innkeepers, coffee shops, love him or hate him, howard schultz figured people like coffee and created an environment, while goldman rehypothecated junk mortgages and walked with the dough not caring whether their customer got anything from it…there are degrees of separation ie in one case it’s a one way street, and the other it goes both directions . I’m sure I’m over simplifying here…

        1. Moneta

          Your president elect is at the top of the rentier class.

          He is the reflection of all the most questionable undercurrents in the US over the last 4 decades:

          – A focus on real estate
          – Speculation (casinos)
          – A focus on non-essential and hedonistic activities fed by over consumption of energy and resources
          – Dependence on greater fools (Trump University)
          – Easy money and bailouts (loans for real estate)
          – Financial engineering (no taxes and corporations to protect wealth when bankruptcies occur)
          – Global arbitrage (cheap labor)
          – Image over substance (use of media)
          – Objectivisation of women
          – Nepotism (concentration of wealth)

          It’s hard to believe Trump will promote the opposite of what he has learned and achieved throughout his career so I expect him and the US to “double down” on all these elements leading to the hockey stick effect.

          Time will tell I guess.

          1. susan the other

            all true. if trump succeeds as a leader it will be because he recognizes (even tho he doesn’t say) that it is all totally screwy… how can you live and be a mega-developer for 50 years, watching things get crazier by the day, and not know that there needs to be a sea change… trump is not stupid, which is why he is interesting. if he throws all the difficult questions back to the states we could get a renaissance in thinking, decentralization and real diversity. maybe.

          2. susan the other

            this is not a duplicate comment: Moneta: all true. if trump succeeds as a leader it will be because he recognizes (even tho he doesn’t say) that it is all totally screwy… how can you live and be a mega-developer for 50 years, watching things get crazier by the day, and not know that there needs to be a sea change… trump is not stupid, which is why he is interesting. if he throws all the difficult questions back to the states we could get a renaissance in thinking, decentralization and real diversity. maybe.

  6. Dave

    I’ve often wondered how “The Multiplier Effect” of money, [not] circulating and recirculating in our local economies, at the consumer level, is affected by money sent out of the country by “immigrants”?

    Is this such a small amount as not to be considered part of “cross border capital flows”?
    How does it affect local economies that are more important to us than what happens on Wall Street?

    Three numbers hopefully to provide ‘balance’:

    1. JTMcPhee

      How much of that money goes to repair and infill for the damage that is done by “taxpayer-funded” US Imperial military, paramilitary. FIRE looting and destabilization? As in, “Confessions of an Economic Hit Man”? The studies don’t seem to draw a very wide boundary around all the transactions that affect the Big Picture…

      But by all means, let us follow the Trumpster down the ‘beat up on the illegal immigrants’ slippery slope. Any idea what is at the bottom of the slope?

      And besides, have you got a simple accurate complete answer to the question that keeps popping up here, “What is money?” The one I gleaned out of the Samuelsen text, , from Econ 101 in 1969 sure seemed to come up short…

      1. Dave

        “Any idea what is at the bottom of the slope?”

        Certainly do have an idea: Full employment for working class people, American teenagers, veterans, tradesmen–all earning a livable wage that may cut into profits of those who hire illegals now, but, would be boosted by lower housing costs and fewer social welfare expenditures.
        Any other questions?

        Rescinding NAFTA would do more for Americans and Central Americans than any other measure.

  7. Oregoncharles

    The environmental economist Herman Daley advocates forbidding international capital flows, following Ricardo’s (think I got that name wrong the other day) theory of Comparative Advantage, which depends on both capital and labor NOT moving freely. I’m not sure how that would work; perhaps he goes into it in more detail in his book on Steady State Economy.

    Daley and his associates have a website, newsletter, etc. at, the Center for the Advancement of Steady State Economics. Pretty crucial if we’re going to make it through the next few decades.

    Despite th eplain language of Ricardo’s theory, free traders use it to justify free movement of capital, and to a lesser extent of labor as well – certainly in the EU.

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