The Next Era of Global Finance

The US economic crisis is different. The current credit crisis, more cleverly titled "Dis-intermediation Crisis" by Roubini, is an endogenous and central event emerging from the epicenter of the financial system. The periphery was supported by the inherent leverage and risk taking behavior of the deregulated financial system. In an all out search for yield the Western advanced economy speculators went abroad. The retraction of excessive risk taking behavior has brought us back to the fundamental elements of keeping our own financial house in order...i.e. holding U.S. dollars. This trend is particularly concerning to the authorities. Hoarding cash will be a self-reinforcing feed back process that will further destroy local and foreign economies. Macro-economic systems rely on transaction, credit, trust, confidence, consumption, and earnings. Simply put, the mammoth client in the room (the U.S. consumer) has stopped spending.

The exposure foreign economies have to the U.S. credit scenario will jar the central banks. Countries throughout Eastern Europe, South America, the Middle East, and across the globe have had a rude awakening to their global financial exposure. They will respond. Protectionist measures will prove to be a hard pill to swallow. Foreign economies have clustered industries, expertise, and policies that facilitate global trade. Try telling Brazil (a commodities based export economy) that they need to develop an advanced consumption based economy overnight. It simply will not happen. However, I suspect that surplus economies including the Middle East, China, and Russia will start spending their reserves domestically rather than abroad. Watch for a wave of global infrastructure developments, localized banking systems, and diversification amongst developing nations.

I'm hopeful that foreign measures to self develop will include localized banking regulations and impetus sufficient for broad financial propagation. Global de-centralization may be the unanticipated outcome of unregulated Western centralized capitalism. The tipping point of diffusion has been reached. This process, however, will most likely be seriously regulated. The next cycle of global finance could prove to be more hostile, protectionist, localized, regulated, politically driven, and government sponsored.