The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Stealth Globalization

09/10/2010

There is no good measure of globalization, a fact that drives economists crazy. Traditionally, we have used the Baltic Dry Index, which measures the cost of shipping dry goods around the world. It’s a good start, but here is another.

Every three years, the Bank for International Settlements in Switzerland measures the volume of trading, not in stocks or bonds or commodities, but in currencies. Their latest study found that $4 TRILLION of currencies trade every day. This is more than twice as much as it was five years ago.

Obviously, the more international trade there is, the more international currencies that need to change hands. Does that mean international trade has doubled in the last five years? Only partially!

It also does mean currencies have become another asset class, where investors can make or lose fortunes by simply investing in currencies, like investing in stocks or bonds. Of course, smart investors usually lead the way. They are betting that increased globalization will increase demand for foreign currencies, and they are investing in those currencies.

Lastly, if the dollar resumes its long decline, as I expect, that will also make foreign currencies more valuable. It’s just not prudent to be dollar-centric in a globalized world!

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