FINANCIAL GLOBALISATION AND INSTABILITY
THE CRISIS OF
INTERNATIONAL
CAPITALISM
IDEAS INTERNATIONAL CONFERENCE ON FINANCIAL INSTABILITY AND INEQUALITY IN
AN ECONOMICALLY INTEGRATED WORLD
Jan Kregel
Minsky and Heinz Pickles:
57 Varieties of Capitalism
 Evolution of Capitalist Realisation Crisis:
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Rosa Luxemburg extended Marx to International realization of surplus value:
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Dos Santos, Gunder Frank, Wallerstein:
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Dependency, Centre Periphery, World Systems
 Minsky’s Stages (Heinz 57 Varieties) of Capitalism:
 Commercial to Finance to Managerial to Money Manager to Global
Financial Capitalism
 Characterised by Evolving Financial Structure
 Post-War Evolution from National to Global
 Characterized by shift from Concentration to Dispersion
Divide and Conquer: From
Concentration to Dispersion
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Global Financial Capitalism: From concentration to dispersion
of production and investment decisions
Of global design and global supply chains
increased global labour supply,
Reduced bargaining power of labour
Reduced productions costs
Reduced labour incomes
Increased and more concentrated profits
■ Real labour incomes declining or stagnant
■ Marxian Realisation Crisis or Keynesian Global Demand Crisis
■ Demand only supported by Persistent Creation of Financial Asset
Price Inflation
■ Consumption sustained only by capital gains and/or increased
household debt
Dispersion in Financial Innovation
and Extensive Exploitation
■ Financial Engineering
– Unbundling the valuation of cash flows: Bond stripping
■ Unbundling and Recombination of risk
– Securitisation and Credit Default Swaps
■ Unification of characteristics of idiosyncratic assets
– To allow dispersion across global markets
– mortgages go from local to global assets
■ Shift to Global Dispersion of Risks
■ Dispersion of Asset ownership; Institutional Investors
■ Concentration of control over Assets: Money Managers
■ Share holder value, Incentive remuneration, Stock Options
■ Drive Financial Asset Appreciation and shift in incomes to
Corporate Managers and Money Managers
From UPS to UFS
■ Developed country capital markets’ financial cycles determine cyclical
behavior in the periphery
– End of 19th century, end of 20th-beginning of 21st century
■ Developing countries constraint is capital account, not current
account
■ The Constraints are not in the structure of production, but in financial
structure
– Not Prebisch/Singer/Myrdal Terms of Trade, or Diamand Unbalanced
Productive Structure
– It is the Unbalanced Financial Structure determined by capital flows
from Developed country capital markets
– Pettis: Correlated v. Inverted financial balance sheets
■ It is Global Financial Flows that determines the UPS
– Current example: Reprimarisation and deindustrialization that
impedes/reverses domestic industrialization
– And Produce an Unbalanced Financial Structure that magnifies UPS
instability and financial crises
Marx-Minsky Global Centre-Periphery Debt Cycles
■ Traditional View: Efficient Global Allocation of National Savings
– In free and open international capital markets
– National treatment of financial service providers (financial
intermediaries)
– Bernanke and the Global Savings Glut – Parsimonious Asians drive
capital flows
■ Structuralist View: Prebisch/Dimand: Colonial structure of
production: (primary commodity/Terms of Trade dependent)
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But: Schumpeter-Keynes-Minsky view:
Financial Institutions Create Liquidity
Savings cannot limit Investment
Savings Cannot be “intermediated”
Savings Glut is an Oxymoron
There is no limit to the creation of Liquidity
Liquidity Glut Determines Interest Rates and Gross International
Capital Flows
■ Keynes (Treatise on Money), Pettis (The Volatility Machine), BIS (Borio, C and P Disyatat
(2011): “Global imbalances and the financial crisis: Link or no link?”, BIS Working Papers, no 346, June.)
Marx-Minsky Global Centre-Periphery Debt Cycles
■ In the Current Stage of Global Capitalism, it is Developed country
Monetary policy to support demand sets liquidity growth
■ And flows to Developing Countries
■ And sets their UFS
■ Since 1980s Developed country expansions: Financial Asset Driven
Growth
– Excess leverage, excess liquidity creation:
– Asset inflation (booms-bubbles) replace wage price spiral and
generate global liquidity flows
■ Produce distortions in Emerging Market Economies (postWashington Consensus)
– Increased capital inflows
– Exchange rate appreciation
– Current Account Imbalances
– Unbalanced structure of production: Deindustrialisation
– Unbalanced financial structure: High Debt/GDP ratios, currency
mismatch
■ Crisis: Capital flow reversal, exchange rate reversal
The Modern Financial Direction of Causation
 The problem facing developing economies It is not
primarily the external constraint,

or primary commodity dependence and the evolution of the terms of
trade
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Recent sharp improvements in the terms of trade have also had negative
impact
 it is the excess liquidity creation in developed countries
to support their deficient domestic demand growth
 that produces the global capital flows to Developing
countries
 that generate the external deficits in Developing
Countries
 And induce UPS unbalanced productive structures
 And UFS unbalanced financial structures
 And exacerbate the negative impact of the collapse of
the Developed country liquidity boom on growth and
employment in developing countries
Example: Developed Country Monetary Policy: ZIRP and QE
Produces UFS in Developing Countries
 No Direct liquidity flow from US Financial Institutions to Periphery
 The bail out was a simple swap on Fed’s balance sheet
 “US financial institutions or US-sourced funds do not play a
dominant role in dollar credit extended to borrowers outside the US.
Shifting to data for the end of 2013, only $2.3 trillion ($2.1 trillion)
out of the $8.6 ($7.6 trillion) in dollar claims on non-banks (nonfinancials) outside the US were held in the US.
 BUT: “offshore holdings represent almost three-quarters of the
dollar credit extended to non-financial borrowers outside the US.
This is possible because non-US banks operating outside the US
have trillions of dollars of deposits, and can swap other currencies
into dollars.
 Similarly, asset managers located outside the US have large dollar
assets under management. Thus, depositors and investors outside
the US can and do provide most of the dollar credit to non-US
borrowers.”
BIS Working Papers No 483 Global dollar credit: links to US monetary policy and leverage by Robert N McCauley,
Patrick McGuire and Vladyslav Sushko
US Banks Marginal Lenders to Non-financial non-US
borrowers
Brazil: off shore $ bond issuance,
China and India: $ borrowing
Banks were not big Investors
Developed Country Monetary Policy
Produced UFS in EMEs
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Accommodative US monetary policy and cheap leverage promote growth in this credit,
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First, dollar credit has flowed since the global financial crisis to an unusual extent to
emerging markets and to advanced economies that were not hit by it. …
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Second, non-bank investors have extended an unusual share of dollar credit to nonUS residents since the crisis. Such credit flowed through the international bond
market to an unprecedented extent, while banks have stepped back as holders (and
issuers) of bonds. Non-bank investors have not only bought all the net increase in
bonds outstanding but taken up the bonds that have come out of bank portfolios.
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Third, prior to the crisis, the familiar drivers of international bank credit played a
predominant role in offshore US dollar credit growth. Bank leverage or low-cost
leverage set the pace for offshore dollar lending, as measured by quarterly growth
rates.
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Fourth, since the crisis, the Federal Reserve’s compression of term premia via its
bond buying has led to a surge in US dollar borrowing through bond markets. …
inflows into bond mutual funds played a significant role in transmitting monetary
ease, …In particular, given the low expected returns of holding US Treasury bonds (in
relation to expected short-term rates), investors have sought out and found dollar
bond issuers outside the US, many rated BBB and thus offering a welcome credit
spread.
And Increased short-term borrowing linked to
Carry Trade Flows to EMEs
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Reach for Yield led to Global Portfolio Rebalancing
■ And mispricing out the yield curve through QE
■ And massive issues of fixed interest obligations by non-US nonfinancials
■ USED TO FUND CARRY TRADE ACCORDING TO BIS Study
■ “When the availability of external financing from international capital
markets varies with global liquidity conditions, the surrogate financial
intermediation activity of nonfinancial firms in emerging economies will
reflect (at least in part) the ebb and flow of global liquidity conditions
themselves. Consistent with this hypothesis, we find that the extent of
the intermediation activity of non-financial firms is closely linked with
their borrowing in US dollars. In particular, with emerging economy
firms being more susceptible to carry trades and the associated
surrogate financial intermediation activities.”
■ And the associated production of unbalanced financial structures
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“Global dollar credit and carry trades: a firm-level analysis” by Valentina Bruno and Hyun Song Shin, BIS
Working Papers No 510 August 2015
Impact of US Financial Flows and Monetary
Policy on UPS and UFS
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Liquidity creation after 2000 dot-com bubble collapse produced
mortgage bubble and investment in commodities as an asset class
Rise in Commodity prices
Exchange rate Appreciation
De-Industrialisation – Recommoditisation of production structure
Extraordinary Monetary Policy after the 2008 crisis
Rise in non-financial sector issuance of $ liabilities
Fuelled Carry trade to developing countries
Supported overvalued exchange rates
Created currency mismatch and translation risks throughout the
developing world
■ The new UPS and UFS magnify the impact of the slow recovery on
developing countries
■ Highlight the problem in
– 1 Lack of global demand
– 2 Failure of Developed country crisis policies to generate global
demand
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