Reshaping the global financial order

The networked anarchy of global financial markets was not visible to many outside observers, let alone those inside or those designated to oversee the financial markets at the time of the 2007/8 financial meltdown.  Trends which had been praised over the previous thirty years including increased openness, improved regulation, greater globalization and better access to credit for individuals and corporations, all revealed less than benign downsides as credit dried up and the full extent of global interconnections and exposures became clear.  The question is how the changes the crisis has set in motion will impact some seismic shifts in the nature of capital which were already underway.  Global financial flows will need to adjust to the new realities, with the role of new financial power brokers including RDE central banks, sovereign wealth funds, private equity and hedge funds — and of course, the new stateholders — to be determined.  While discussions of a new international system of financial governance are continuing, domestic priorities are center-stage, as concern over the risk of sovereign defaults rises.  The most significant wild card in the new global financial order is the consumer.  Shaken by the loss of assets, the decimation of public and private retirement funds, and the future tax burdens of mounting national debts, consumers in the developed world have already started to increase savings.  The days of negative saving may be replaced by a new era of consumer frugality, risk aversion by banks, and the rise of alternative forms of retail financing — the questions being for how long and where these changes are likely to have greatest impact.  What is clear is that it will take time before a new financial order is established, an order that will offer new sources of power as the players compete to find new roles, from very different starting points.

Questions for business leaders

• Which of the new financial power brokers will influence the shape of future financial markets — and your industry and company?
• What will happen to funding flows?  The US and Western nations have relied on the kindness of strangers (RDEs) to fund vast amounts of government and trade debt. As economies recover, will these players direct funding at home, or will they continue to buy assets overseas?
• How will a new era of consumer frugality impact you? Where will you see the greatest impact on your business model in the markets you serve?

The GT Trend Report: Capital offers analysis and food for thought as you tackle these questions.