stoweboyd:

In a recent McKinsey report, Financial globalization: Retreat or reset?, we can see that cross-border capital flows have collapsed since 2008, and remain more than 60% below the 2007 peak.

As the report states:

Western Europe accounts for some 70 percent of this drop, as the continent’s financial integration has gone into reverse. Eurozone banks have reduced cross-border lending and other claims by $3.7 trillion since 2007, and central banks now account for more than 50 percent of capital flows within the region.

Even beyond Europe, global banking is in flux. Cross-border lending has fallen from $5.6 trillion in 2007 to an estimated $1.7 trillion in 2012. In light of new capital and regulatory requirements, many banks are winnowing down the geographies in which they operate. Commercial banks have sold more than $722 billion in assets and operations since the start of 2007; foreign operations make up almost half of this total. Expanding the debt and equity capital markets will take on greater urgency as banks scale back their activities.

Takeaways:

Commercial banks and sovereign investors are drawing back from globalist investments, and looking closer to home for investment opportunities. Also, there is a major transition in international capital flows to old school foreign direct investment — owning all or part of foreign businesses — which is a much less volatile form of capital flow.

The authors suggest two scenarios, one which lines up with my theories of the postnormal economy we are careening into. That is a return to more domestic capital formation: glocalization, where nations and regional economies reject the high risks and volatility of globalized capital.

McKinsey is more sanguine about a second scenario, which is a lala-land ‘sustainable approach to financial-market development and global integration’ which would support high growth but sidestep the excesses of the past. Yeah, sure.

We should expect a continued disintegration of the globalist money machine, as distrust and discord divide even the advanced economies of the West. The message to us in business is clear, perhaps even stark: the high flying globalism of the late postmodern era — from the ’70s to the ’00s — has crashed. We’ve seen peak globalism, and the world is becoming a more divided place.

thirdwaythinktank:

If you ask Wall Streeters what capital markets actually do, they’ll say something like, “They allocate capital efficiently.” When you nod and smile cluelessly, they’ll clarify, “They help make markets.” All clear?

In the wake of the economic crisis, many Americans are confused at best—and dubious at worst—about the value that capital markets provide to our economy. Unlike manufacturers or retailers, the financial sector—now 8.4% of our economy—does not produce tangible products, which often renders them an enigma.

Third Way’s new primer seeks to unravel that riddle and explain why capital markets matter. We describe what capital markets do for Main Street, unpack their opaque but important functions, and warn policymakers what problems to look out for.

In short: the good, the complex, and the ugly.

Dear Joan,

Many thanks for your letter – it is a valuable addition to my museum and I shall hang it next to an extract from Sidgwick where, after lecturing Ricardo on a quantity of labour, he goes on cheerfully himself to talk of quantities of utility.

If one measures labour and land by heads or acres the result has a definite meaning, subject to a margin of error: the margin is wide, but it is a question of degree. On the other hand if you measure capital in tons the result is purely and simply nonsense. How many tons is, e.g., a railway tunnel?

If you are not convinced, try it on someone who has not been entirely debauched by economics. Tell your gardener that a farmer has 200 acres or employs 10 men – will he not have a pretty accurate idea of the quantities of land & labour? Now tell him that he employs 500 tons of capital, & he will think you are dotty – (not more so, however, than Sidgwick or Marshall).

— Letter from Piero Sraffa to Joan Robinson, quoted in Harcourt, G.C. (1997). A “Second Edition” of the General Theory, vol. 1. New York: Routledge, p. 131.

Around the world, very little new investment is financed by raising new equity (selling shares of stock in a company). Indeed, the only countries with widely diversified share ownership are the United States, the United Kingdom, and Japan, all of which have strong legal systems and strong shareholder protections. It takes time to develop these legal institutions, and few countries have succeeded in doing so. In the meantime, firms around the world must rely on debt. But debt is inherently risky. IMF strategies, such as capital market liberalization and raising interest rates to exorbitant levels when a crisis occurs, make borrowing even riskier. To respond rationally, firms will engage in lower levels of borrowing and force themselves to rely on more heavily on retained earnings. Thus growth in the future will be constrained, and capital will not flow as freely as it otherwise would to most productive uses. In this way, IMF policies lead to less efficient resource allocation, particularly capital allocation, which is the scarcest resource in developing countries. The IMF does not take this impairment into account because its models do not reflect the realities of how capital markets actually work, including the impact of the imperfections of information on capital markets.

— Joseph Stiglitz - Globalization & Its Discontents, p. 128

isomorphismes:

“[I]t’s a mistake … to think of equity capital as part of the “pool of capital available to the economy,” as if there were a simple fixed quantity of “capital” in the world…. What precisely the aggregate value of the stock market represents is far from clear – and that’s why it is in some sense not particularly surprising when this value drops by 40% over the course of a year. What comes to my mind when I hear “pool of capital” is the K of economist’s models working to constrain our ability to think about what capital is. Equity capital is something that we think we understand – until we think about it a little longer. It often incorporates the value of many intangible assets that may be alienable only as part and parcel of the whole business and/or fragile in the sense that they may be easily destroyed by bad managerial decisions (e.g. goodwill). Furthermore it is axiomatic that equity capital is inflated when asset prices are too high and it evaporates when they fall. (Steve Waldman has expounded on these issues much more thoroughly and penetratingly than I do here.) In order to have a meaningful “pool of [equity] capital,” it’s necessary to have some kind of stability in asset prices – but this is precisely what we don’t have in our current system. In addition, the focus on equity capital [distracts from] the important role played by … working capital…. Many real goods come into existence only because of … working capital. While only a fraction of the output financed by working capital is converted … into equity capital, … it [may] play a more important role in the … production process than equity capital…. I get the impression that most people don’t consider working capital to be an important component of the “pool of capital available to the economy,” but [they’re dumb / wrong].”

— Carolyn Sissoko

(Source: syntheticassets.wordpress.com)