Continued Globilization of the Capital Markets

The following for WSJ Economics Online summarizes a report by the McKinsey Group indicating that the capital markets are growing beyond the control of the US. Furthermore, the current problems in the capital markets caused by the mortgage crisis is accelerating this process. Text in bold is my emphasis:

Increasing liquidity in foreign financial markets is contributing to a shift in global power, especially as foreign investors step in to recapitalize the slumped U.S. economy, according to a global economics report.

Global financial assets rose to $167 trillion in 2006, up from $70.2 trillion a decade ago, before adjusting for inflation, a 137% increase, according to the McKinsey Global Institute’s report on world financial markets. Global nominal gross domestic product climbed to $48.3 trillion from $30.2 trillion in the same period, a 60% increase.

The increase was perpetuated by markets such as China and Russia, which continued to grow and achieve financial depth. The consulting firm defines financial depth as the ratio of financial assets to GDP. The deeper the financial market, the more liquid it tends to be.

“What we’ve seen is this liquidity is finding its way into different parts of the world,” said MGI Director Diana Farrell. “You start to introduce the possibility of other markets playing a role.” The persistent challenges in the U.S. credit market will exacerbate the trend as the country moves to a less advantageous bargaining position and opens the door for other countries to pursue alternative investment styles and appetites, Farrell said.

“The answer is not going to be that these sovereign wealth funds and otherwise simply sign up to what the Anglo-Saxon model has said is the best practice for disclosure, the best practice for transparency,” Farrell said. “There’s a recognition that it’s not just going to be a mandate that’s going to come from the traditional players here.” While increasingly liquidity can spur inflationary pressures, publicly traded markets are not yet affected. Private markets, however, are beginning to see upward pressure on asset prices, Farrell said.

The report, the fourth Annual Mapping of Global Capital Markets (you can get a copy of the report if you register with McKinsey), says, “Europe’s capital markets are growing in size and financial clout, and emerging markets rising. Financial power is spreading beyond the U.S. as other markets mature….Emerging markets have rebounded from the financial crises that rocked many of their economies a decade ago. China is the heavyweight, but the group also includes Russia and other rapidly developing nations in Asia, Latin American, Eastern Europe and Africa. Altogether their financial assets grew $5.3 trillion in 2006 in constant exchange rates, or 29%, to a total of $23.6 trillion. That increase accounted for one-quarter of the global growth in financial assets. Since 1990, the total value of financial assets in emerging markets has grown at more than twice the rate of those in developed countries, or 21% and 8% respectively.”