Économie et Statistique n° 438-440 - Aspects of the crisis
The Crisis of Globalized Finance
This study seeks to explain the growth in international transfers of savings from the emerging countries to the developed countries from the late 1990s on. We show that the external opening has allowed emerging countries to enjoy brisk growth despite a propensity to spend well below unity. In particular by exerting downward pressure on their currencies, these players-mainly in emerging Asia-have shifted the distribution of global market share in their favour and allowed trade-weighted demand for their exports to outgrow their domestic spending. The developed countries, notably the United States, have responded to the resulting deflationary pressure by supporting their economic agents' consumption through debt-friendly policies. As their domestic demand is outpacing income, the developed countries have become importers of savings that the emerging countries needed to export in order to drive their rapid growth. For these transfers to occur, however, the financial risks associated with them had to be carried. Financial globalization played a crucial role here: these risks can now be separated, as Western players have been able to take on those not carried by the emerging countries. As the latter have invested most of their accumulated reserves in low-risk assets, they are mainly exposed to an exchange-rate risk-leaving the Western financial system with the bulk of the credit and term-transformation risks. The rise in transfers of savings has thus fuelled a steady accumulation of risks in the Western financial system. However, the process has occurred in the system's least regulated and least monitored sector. The magnitude of the financial crisis that began in summer 2007 is thus directly tied to the conditions in which the savings transfers of the 2000s took place.