In a recent McKinsey report, Financial globalization: Retreat or reset?, we can see that cross-border capital flows have collapsed since 2008, and remain more than 60% below the 2007 peak.
As the report states:
Western Europe accounts for some 70 percent of this drop, as the continent’s financial integration has gone into reverse. Eurozone banks have reduced cross-border lending and other claims by $3.7 trillion since 2007, and central banks now account for more than 50 percent of capital flows within the region.
Even beyond Europe, global banking is in flux. Cross-border lending has fallen from $5.6 trillion in 2007 to an estimated $1.7 trillion in 2012. In light of new capital and regulatory requirements, many banks are winnowing down the geographies in which they operate. Commercial banks have sold more than $722 billion in assets and operations since the start of 2007; foreign operations make up almost half of this total. Expanding the debt and equity capital markets will take on greater urgency as banks scale back their activities.
Commercial banks and sovereign investors are drawing back from globalist investments, and looking closer to home for investment opportunities. Also, there is a major transition in international capital flows to old school foreign direct investment – owning all or part of foreign businesses – which is a much less volatile form of capital flow.
The authors suggest two scenarios, one which lines up with my theories of the postnormal economy we are careening into. That is a return to more domestic capital formation: glocalization, where nations and regional economies reject the high risks and volatility of globalized capital.
McKinsey is more sanguine about a second scenario, which is a lala-land ‘sustainable approach to financial-market development and global integration’ which would support high growth but sidestep the excesses of the past. Yeah, sure.
We should expect a continued disintegration of the globalist money machine, as distrust and discord divide even the advanced economies of the West. The message to us in business is clear, perhaps even stark: the high flying globalism of the late postmodern era – from the ’70s to the ’00s – has crashed. We’ve seen peak globalism, and the world is becoming a more divided place.