Look beneath the self-serving posturing of politicians and central bankers taking credit for spending the money of their taxpayers and the crisis continues to maintain its grip. McKinsey have published a new article. Its conclusions are alarming.
Since 2007, globalisation has reversed, with a shocking decline in capital flows and foreign direct investment. Taking into account the bubble caused by an expanding money supply and feedback mechanism of US consumers recycling Chinese savings, this is a savage drop.
One of the most striking consequences of the financial crisis was a steep drop-off in cross-border capital flows, which include foreign direct investment (FDI), purchases and sales of foreign equities and debt securities, and cross-border lending and deposits. These capital flows fell 82 percent, to just $1.9 trillion, from $10.5 trillion in 2007. (A sharp drop in cross-border lending was the biggest reason capital flows dried up.) The trend appears to have continued in the first quarter of 2009, with global capital flows falling to an estimated $1.5 trillion on an annualized basis.
This is the level at 1998: completely wiping out the gains of this century.
Since globalisation appears to be in decline, the search for its roots are now undertaken in earnest. Jeff Rubin argues that the primary cause was not monetary policy, but the rise in oil to $147, ripping through and transforming potential risks into actual dangers. Certainly, the multifactorial stew which triggered the initial crisis remains opaque.
Now, as we move into the second phase, protectionism is coming to the fore under the radar, as governments ringfence their banks and attempt to secure capital for their local markets:
"If Redeker’s prediction about Germany is the case for other countries around the world, the likelihood is that we are only halfway through this collective purge of overseas assets. And as country after country follows suit, it will result in broader protectionism. As the BIS said in its annual report a few months ago, “after seeing foreign-owned banks pare back activity during the crisis, host country governments may become less sanguine about allowing outsiders to operate on their soil… And, by reducing the ease with which capital moves across borders, financial protectionism would shrink trade in goods and services and thus moderate growth and development.”
My concern resides in the next trigger: will it be a genteel stagnation or the punctuated equilibria of serial crises, as we lurch into the deleveraged truth. The next policy will be capital controls, designed to save us from ourselves and prevent us drinking cheap booze from Calais.