Interconnected for better or for worse?

Am pleased to note that Saudi Arabia and Qatar are likely to lead recovery in the Gulf. Their proactive government support and spending have been instrumental in helping banks maintain relative stability. Can’t help reflecting how interconnected the world is.

We all know how the markets work, but isn't it incredible that Saudi Arabia on the other side of the world got hit by a global crisis made in the US? Shows how interconnected the world is, doesn't it?

Understand how the markets work, but isn’t it incredible that a financial crisis made in America can even hit Saudi Arabia. Not only is the kingdom on the other side of the globe, it also has more money than any other country in the world. Actually the Gulf banking sector as a whole faced a challenging 2009 with most countries facing limited or negative GDP growth, reduced liquidity, lower business volume, and a drop in asset values, representing a significant deterioration in banks’ operating environments. Mainly because of what started far away in the United States.

We are so interconnected what happens is sometimes crazy. Another example is the Swedish currency being hit by the problems in the Euro zone, despite the fact that Sweden’s budget deficit is next to none. At the same time foreigners investors have since the beginning of the year moved $21 billion into Swedish government bonds. And let’s not forget how North Korean sable rattling negatively impact markets world-wide.

Understand perfectly well that almost anything that happens can have an impact on the financial markets. However, what happens as a result is sometimes ludicrous. Where is the logic in Kim Jong-il being allowed to have a negative impact on anything, let alone the markets, outside of North Korea? The fact that he has gives him power he shouldn’t have. What are the chances of China lining up behind Pyongyang to start World War III? But financial markets all over the world still worry about it, which only plays into the hands of the little North Korean dictator.

For global markets, the renewed military tension on the Korean peninsula apparently came at a particularly sensitive time. The threat to South Korea’s fairly big economy — its GDP is four times larger than Greece’s — adds to the markets getting the impression of a world out of control. But why? Sincerely, there have been wars throughout history and we will have wars until the end of time, unfortunately. So why do the markets have to panic because of Pyongyang threatening to start another one? It’s all out of proportions. Not least since although the South Korean economy is bigger than Greece’s, it just accounts for 1,5 percent of global GDP. Europe on the other hand contributes 22 percent.

Maybe the markets impression that the world is out of control isn’t so far fetched? I’m truly international and would like to see the whole world becoming much more global than it is. But some of the negative effects are alarming. Thankfully Wall Street will now be regulated, but if the rest of the world doesn’t follow suit they will just start handling derivatives and other high risk financial products from offices elsewhere in the world.

Just read that until a few months ago, the governments, which had responded so powerfully to the financial crisis, were a comfort to the markets. But weak and wild policies around the globe are now suddenly undermining their conviction. Simply cannot comprehend how the markets could be unaware of the huge government budget deficits? Even I was aware of that escalating problem not only in Europe but also in the United States. How come the markets closed their eyes? And on top of it they suddenly decided it was a problem which wiped a few billion off the markets.

That the Euro slides against the dollar and investors head for the safety of gold makes perfect sense. But that while the Euro goes down European shares rebound sharply doesn’t make sense. Seriously I know this is how the markets work, but it’s crazy. The markets really are out of control. Or is it the whole world?

Photo: Patrick Q – Flickr

6 thoughts on “Interconnected for better or for worse?

  1. A really cogent and thought-provoking set of views here. I was about to add some thoughts about how the sinking of a South Korean ship fits into the picture……… then I had a lighter, personal thought about inter-connectedness.

    So if you'll allow me, I'll point to some benefits. I'm sitting in Jeddah listening to flamenco music broadcast from London to my laptop and reading your interesting ideas. Told you it was (uncharacteristically) light!

    1. Glad you like my article. Am going to publish something similar in a few days.

      Agree with you about the benefits. Have lived and worked all over the world. Even am the only Western woman ever to have held a senior management postion in a 100% Saudi owned company in Riyadh. I would like to see the world being even more connected. But the downsides are really bad because of the markets. And believe me I know how it works since an ex of mine is a top guy on Wall Street.

  2. Agree with you Guy, Kim Jong-il's motives are easy to understand. It is all in his favour.

    Sure the markets make a bit of money, but they are also contributing to prolonging the "imprisonment" and suffering of the population of North Korea. Most likely the markets would benefit if the North Korean regime would fall and the country opened up to the world? If they did the Chinese would probably assist Pyongyang in opening up the way Deng Xiaoping did with China. But long term thinking isn't the flavour of the moment is it?

  3. I guess there are benefits and disadvantages to this interconnected world, Catarina. I do understand the whole world, including the Gulf, being caught by the problems that first came to light in the US: simply put, the banking system that was engaging in the very dubious instruments is a global one – all banks involved were caught and that included many banks/funds in the Gulf. On top of that there was a severely overheated property market in some areas, so people in adjoining countries (like Saudi) got caught by that, too.

    However, having said all that, I believe a lot of the instability today is fuelled by traders who have found that, in a generally nervous market, they can profit greatly from adding to the nervousness by rumours and speculation, and are so doing.

    1. I understand and appreciate all that Guy – but it is still crazy that it works like that. Wrote this article not since I don't understand how it works but because when you reflect upon it, it's mindboggling.

      Kim Jong-il is a good example. If it wasn't for the media and the markets he would not be able to do what he is doing. And the world would be much better off if he wasn't.

      1. Think the North Korea thing is about Kim Jong-Il either ensuring his (3rd) son can take over the reins of power or has lost control to the military – seems nobody's quite sure which. Either way it's about showing a "victory" to the people there by having their tightly-controlled media show that North Korea has sunk a South Korean warship…

        Of course, the fact that the traders are using this to promote further market nervousness and so benefit from it is a different issue.

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