VIEWPOINTS : World Funds Market Both a Boon, Bane for America

The “Big Bang,” the deregulation of London’s financial markets, has once again focused attention on the rapid development of a world capital market.

The Japanese don’t believe in “big bangs” but they have quietly joined the British in abolishing many rules and regulations that previously made it difficult or expensive to move money in and out of London or Tokyo.

New information technologies link London, New York and Tokyo more closely than firms in New York were linked just a few years ago. The volume of currencies bought and sold every two weeks equals the value of all world trade over a year.

But does all the sound and fury really make any difference to those of us who are not international financiers owning or managing large portfolios?

Some see a world capital market as America’s salvation. U.S. citizens don’t save as much as those in the rest of the world.

Without access to the savings of foreigners, American firms would not have the funds they need to invest in plants and equipment. Without a world capital market, America would have to force consumption standards of living down to generate the funds it needed to make the investments necessary for its future. With a world capital market, it can invest a competitive amount without having to save a competitive amount.

Others see a world capital market as a device for luring Americans into bankruptcy.

With a world capital market, Americans can borrow the funds they need to buy imported consumption goods. For a time, this allows Americans to have a consumption standard of living higher than their production standard of living--but at the price of becoming the world’s largest debtor.

Eventually these debts must be serviced, and when that happens, the United States will face an abrupt reduction in its standard of living much like Mexico faced after the world capital market lost confidence in Mexico’s ability to repay its loans in the summer of 1982.

International interest payments will eat up a larger and larger fraction of the American gross national product.

As is often true when such seemingly contradictory arguments are advanced, both are true. The two arguments aren’t really contradictory.

World capital markets have allowed Americans to run an economy that simultaneously incurred huge federal budget deficits, permitted record consumer borrowing and recorded unprecedented levels of corporate indebtedness to pay for mergers and takeovers--all in the presence of ever-declining savings rates.

Yet levels of investment in plants and equipment were as high as those in the past. The crowding out of funds for private borrowing, predicted by many, simply hasn’t occurred. World capital markets came to the rescue, and firms have been able to borrow abroad what they could not borrow at home.

At the same time, that ability to borrow has converted the United States from the world’s largest creditor to the world’s largest debtor in just four years. Some of the debts have been incurred in financing investment but most were incurred to finance public or private consumption.

Publicly, we borrowed foreign money to pay for our defense buildup and, privately, we borrowed money to pay for our imported cars.

As a result, most of America’s debts did not result in the productive investments that might have produced the extra output that could have made the debts self-financing.

They are real debts that will require America to lower tomorrow’s standard of living to pay for today’s standard of living. The future has been mortgaged and with every day of borrowing, the mortgage gets larger.

Some see the international capital markets as a source of increased efficiency. Money will be moved faster and cheaper than ever. With such increases in efficiency, world interest rates will be lower.

Others see a world capital market full of fraud and criminal activities. Finance will move to those places where there are the fewest government regulations requiring honesty, openness and the absence of insider trading.

Here again both are right. Interest rate spreads (the difference between the rates at which banks borrow and lend) seem to be shrinking. Financial markets are becoming more efficient.

But the opportunities for dishonesty are also rising. If you go to London, you don’t have to meet Securities and Exchange Commission requirements for honest, open reporting of your real financial condition. Insider trading is not illegal in Japan and is in fact a way of life.

Minor scandals have already occurred in the world capital market, and major scandals cannot be far behind.

Sooner or later every government has found it necessary to construct some system for policing its financial system.

At some point a major scandal will force governments to agree on some form of common international policing of their common world capital market.

But, unfortunately, they are unlikely to agree on such a system without a major scandal. In past financial scandals, it is often the little investor that gets hurt.

To a great extent, world capital markets have also made national central banks irrelevant. There is a world money supply but not an American money supply.

Financial deals in the United States can be executed without the use of American dollars. Federal Reserve Board policies affect the world money supply but they do not control it.

Policy-makers in the major economies can collectively control the world’s money supply but cannot separately control their own money supplies. If one cannot borrow dollars in the United States, one borrows German marks or Japanese yen.

Collective control, however, requires a degree of coordination and a yielding of national sovereignty that few countries are willing to recognize.