What is the global financial system: The world economy works on a set framework and the global financial system is one structure that assembles and holds legal instruments, agreements, informal and formal agents (economic actors) together. It helps trade financing and investment by facilitating international flows (financial capital).
The establishment of multilateral treaties, central banks, and intergovernmental treaties mark the wave of economic globalization that aims at the effectiveness of international financial markets and bringing reforms in regulation and transparency in the domain.
Establishment of The Global Financial System
In the late 18th century, communication and world migration supported the remarkable growth of investment and international trade. However, due to the commencement of world war 1, trade narrowed down as the forex markets froze because of the money market illiquidity.
In 1933, the trade almost came to a standstill followed by the protectionist policies. It worsened the effects of the tremendous economic crisis or depression faced by several economies of the world. However, several countries tried to brave it, but couldn’t.
Although persistence efforts during world war 2, reaped the rewards in revamping the international monetary system. It fostered a refreshing growth in global finance. Also, the exchange rate stability improved significantly.
In the 1970s, the crisis of oil and a rally of currency devaluations forced several nations to float their currencies. But it boosted the prospects of the world economy, and it became more financially integrated than ever before in 1980-90s because of financial deregulation and capital account liberalization.
Interestingly, the origin of the global financial crisis in 2007 was in the US, which gripped the entire world like a wildfire. Several nations grappled with it for many months. That acted as a catalyst for the recession globally. After a few years, the Eurozone crisis surfaced the world in 2009 caused by Greece’s non-compliance (monetary union). It triggered the sovereign debt crisis in other European countries.
Globalization & Global Financial System In Today’s Perspective
Globalization is the testimony of the dominant force in the financial market and economic and social international relations. It has an apparent effect on political context as well. Hence, it can be concluded that its impact is not related to mere finance but overall establishing dominance in the world. In the absence of a moral compass and mishandling of events, it can create disputes, conflicts and give rise to new simmering problems.
Notably, globalization is most visible in the global financial system. The process inflicted its intensity in the last century or so. Liberalization is one reason that is responsible for it.
The fact is, over the past twenty-five years, the movement of capital internationally has gone up by more than thirty times. Now, that’s a humongous number and attributes to the success of the global financial system.
One of the significant elements that most experts miss is the hike in the investment volumes in different portfolios. Today, there are plenty of financial instruments that include forex, shares, commodities, energies, metals, cryptocurrencies, etc. Online and offline brokers astonishingly back them. International trade has witnessed a spike of 320 percent in the goods and services sector. On the other hand, the world GDP has grown by 140 percent.
Global Financial System For Future
The international monetary fund believes that the future of the global financial system is approaching stability. However, there are a host of other challenges that may pose a threat to the growth prospects borne out of policy regimes and regional vulnerabilities.
The biggest challenge is to sever the ties of the US from its accommodative monetary policy. It isn’t easy because markets may adjust to new regimes at a higher interest rate. The rate can aggravate due to the decline in the liquidity in the market. Also, structural deleveraging in short period security may result in it. Several central banks are thinking to exit out of unconventional monetary policies.