Globalization is dead.. Long Live Globalisation

The  recent chain of events in the world of  banking and finance Finance have dealt a death blow to the concept of globalization in its present form.  Consider the following events that have happened in the past week

-Icelandic banks have been ordered to start selling foreign-owned assets to help the country avoid bankruptcy, a move that could lead to the fire sale of some of Britain's best known names on the high street.

-A fresh spotlight has been thrown on the culture of American investment banks after the administrator for Lehman Brothers' European business asked for the return of $8 billion (£4.4 billion) transferred from Europe to New York in the days before the bank's collapse .Lehman's London staff are angry that the practice of withdrawing funds to New York at the end of each day left coffers at the European business empty.

-Indian  Banks  appear to be headed for better profits this quarter in sharp contrast to banks in the West which are issuing profit warnings amidst massive writedowns. Most banks in India are likely to show better profits for the quarter ending September compared with the previous quarter .  This is directly a result of the lesser exposure of the Indian Banks to the Banks and Institutions overseas.

-The end of of the yen carry trade could be devastating for capital markets throughout the world. Experts estimate that there are several hundred billion dollars of positions in the carry trade to be unwound. David Bloom, currency analyst at HSBC, says that it has pervaded “every single instrument imaginable”, so that when it comes to an end later this year it’s going to be “ugly.

The past decade has seen capital  being leveraged tremendously and then being allowed to flow freely across geographies and across asset classes in the name of globalization duly dictated and directed by the largest economy of the world.  This has been done by creating an intricate web of interdependence of the entire free world on the USA based on two things- a) The US dollar and  b) Supply of goods and services to the USA.  Ostensibly USA supplied capital to the world that in turn facilitated the enormous consumption and living beyond means of the USA.  The rise and collapse of this model has been predicted so well by Mr M.R. Venkatesh , an Economist, whose lecture I chanced across on the web. In fact I owe the title of this article to him as this was anectodotaly referred to by him.  

Now that this model of Globalization has collapsed, a new financial order will emerge which will start the process of globalisation afresh. I see the following things happening in this process.

- The Dominance  of the US Dollar , Euro , and the  Japanese Yen will end. The world will move to a single common currency for the purpose of  all crossborder transactions including Oil . The Issuing Authority for this currency would be a global central bank on the lines of the IMF.  Each countries reserves of this currency will depend on the financial strength of its economy ie. if the country is a net saver like China or Japan is, it will be a creditor to the global central bank and if the country is a net consumer like the USA is, it will be a debtor to the central bank.  The amount that a country can borrow of lend to the central will be regulated by a global board which will be in charge of the bank.

- Individual countries will continue to have their own currencies which will drive the dynamics of their own economies.  In this process . The strength of the local currency vis a vis the single Global currency will be market driven.

-  Emerging Powers like India and China  and a resurgent Russia are likely to have more of a say in the creation and control of this new Financial Order.

-  The USA's place in the New order will be be the one BIG question which in fact , cannot be solved easily and therefore will act as a barrier to the creation of such a system.

-  Tough Economic and Political Negotiations or the Scary  Possibility of a  World War III  may precede the creation of the new financial order. The winner of this War (hopefully there isnt going to be one) or the negotiations will be the leader of the new multipolar world order.

Thoughts anyone....