Chapter 1: The Expansion and Globalization of Financial Markets
Page 1 1. The Expansion and Globalization of Financial Markets The rapid expansion and globalization of financial markets shadows most other recent developments in international economics. This chapter documents and defines financial globalization and discusses what caused it: developments in informationprocessing technologies; government deregulation; and the more global nature of all economic activity. International interest rate parities and financial strategy parities are presented as new, dominant, dynamic equilibria in the global economy. An understanding of these structural changes and new equilibria provides a necessary introduction to subsequent chapters, where it will be argued that the financial globalization processes have increased the risk of economic crises. In later chapters it will also be argued that financial market globalization has been a driving force behind the large US trade deficits and other controversial new trade patterns. In addition, the selfadjustment mechanisms within the global economy have been irreversibly changed by financial globalization. I. THE RAPID EXPANSION OF INTERNATIONAL FINANCE Clearly, the last two decades has seen an explosion of international financial activity. The London Eurodollar market, now the major market for the world's largest financial institutions, was in its infancy several decades ago — turnover in the entire year of 1970 was $59 billion. But by the mid1980s it was turning over $300 billion of financial capital on an average working day. This volume was many times the total reserves of the world's central banks and at least 25 times the value of world trade in merchandise and services. The...
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