So we've seen that markets are related internally, domestically, to one another. Equity markets are related to other equity markets are related to debt markets to commodity markets. But what about crossing borders? What about internationally separated capital markets? Globalization, where finance knows no borders. So just to remind you why globalization might actually be good for you, good for corporations, good for the economy, good for consumers. Capital markets are undeniably, increasingly global, allowing unfettered access to international issuers, borrowers, and investors alike. The globalization of financial markets has a number of good things going for it. It has enhanced, significantly enhanced, corporate funding opportunities. Allowed these corporations to grow, to invest in these positive net present value investment projects. It is also allowed funding to flow unhindered to the optimal investment opportunity. Prioritizing those projects that have a higher net present value than others. It's allowed investors better risk diversification opportunities. So all of the roles that capital markets fulfill are advanced through globalization of those markets, causing a reduction in the cost of financing for corporations. Allowing the exchange and adoption of best practice in market design, for example, whereby emerging markets could copy the good things of already existing markets, and repairing those things that did not work so well in those markets, in the market's design. And lastly, but certainly not unimportantly, globalization has significantly improved global transparency. Very important, for example, if you recall, for commodity markets where there could possibly be five simultaneous coffee prices. Now, global markets for coffee would have immediately indicated where it would be cheapest to buy your coffee beans. So the ability for corporations to go global means that corporations have been able to list their shares not just on the domestic market, but also at other major international markets, thereby tapping into equity funding. So here's an example for a large international mining company, Rio Tinto. And you see 2 graphs, one for Rio Tinto as it is traded on the Australian Stock Exchange, the blue line. And one for Rio Tinto as it is traded in the New York Stock Exchange. Keep in mind that the price of shares in Rio Tinto on the Australian Stock Exchange is quoted in Australian dollars, whereas the price in the New York Stock Exchange, of course, is quoted in U.S. dollars. Which might explain why these two graphs, while they track each other, while they seem to mirror each other, are in fact, separated. So for your convenience, I've computer the price differential after the conversion into the common U.S. dollar currency. I've taken the New York Stock Exchange price, the green line, and subtracted the Australian Stock Exchange price, the blue line. You can see on the right hand axis, for the red line, that price differential was negative $10, in the early part of this time series, but it is slowly diminishing towards $0. Does that mean that the markets have become more efficient? They've realized that the price differential made no sense, because it was the same share in Rio Tinto? Not necessarily, there could be other factors explaining a price differential between two separate equity markets. Regulatory course, taxation differentials between the US and Australia, for example. So here, we've seen an example where corporations are able to tap into overseas equity funding. That was a good outcome of globalization. Making these markets accessible has made it possible for a company like Rio Tinto to invest in new projects with positive net present value. But globalization is not entirely good, and here's why globalization can be bad for you. You might recall the occupy movement from a few years ago. They called themselves the 99%. They highlighted significant concerns with globalization of capital markets and globalization of corporations. Financial liberalization and deregulation as it happened from the mid 1980s onwards may have well stimulated economic growth through the credit boom that we've seen where significant funding all of a sudden became available for overseas corporations. But, as the 99% highlighted, that movement has also increased global income inequality. Globally operating corporations were misbehaving, not utilizing these increased opportunities, these new enhanced funding opportunities for the benefit of society. And not being held accountable, because they were crossing borders and regulatory authorities struggled to hold them accountable. Lack of screening and monitoring of credit risk was alleged to have occurred because of the globalization of these markets. It turned out to be much harder to, as we would call it, follow the money for corporate owners and for regulators, making corporate governance all that more difficult for shareholders. And lastly, globalization has offered an opportunistic approach to exploit regulatory loopholes in those markets where regulation was not yet up to scratch. So to make that point very clearly, look at this graph where we've plotted the income share held by the lowest 10% in the United States against the income share held by the lowest 10% in China. The blue dots for China, the red dots for the United States. Since 1994 until 2010, you can see that the income share held by that lowest 10% was more or less stable in the U.S., held at about 2%. Economic growth occurred throughout that period for the U.S., but even more so for China. So maybe it is a little surprising to see that for China, the income share held by the lowest 10% actually deteriorated over that time period of strong economic growth. From almost 4% they've gone to a situation where the lowest 10% were holding about the same share as the lowest 10% in the United States, holding just below 2%. Of course, it's worth reminding you that disquiet about globalization is not all that new. It in fact dates back quite a few decades. You might recall stories about rogue traders engaging in global capital markets, thereby jeopardizing the survival of some well-known international banks like Barings in 1995. Or you might recall some of the hedge funds that were attacking economies. Good examples there were the attack on the British Pound in 1992 by a major international hedge fund, causing, at that time, the UK's exit from the European exchange rate mechanism. Where a relatively small speculative entity, the hedge fund, was able to cause major mayhem for a global economy, the United Kingdom. And then there was the attack on the Hong Kong Dollar. That same hedge fund being involved in the 1997 Asian financial crisis. Much more sophisticated operation. By that time the hedge fund was using multiple markets at the same time to put pressure on the value of the Hong Kong Dollar. We will label these events, these episodes, as the unaccountable. Exactly the point that the 99% is trying to make. And here's some other worries for you to ponder over. Globalization has, in all likelihood, had a somewhat negative impact on the efficiency of markets worldwide. Causing in the process what we would label as asset bubbles. Possibly entirely rational asset bubbles from the perspective of the investors. Where prices just go out of proportion with their real underlying intrinsic value. That occurs allegedly in housing, in currencies, in biotechnology shares, and internet stocks. There are examples for each of those market segments, where prices seem to diverge for too much and too long from their true fundamental, their intrinsic value. Or there's the set of behavioral errors that has become increasingly relevant. Where investors and lenders, borrowers and lenders, are increasingly making what we would label as irrational decisions. Irrational exuberance might have played its role in the dot com bubble. Over-confidence by investors, loss aversion, are other concepts that reflect occasional irrationality by investors. All of these impacts, bubbles, behavioral errors, contribute potentially to a misallocation of those so scarce resources. And, in the process cause what we would label as market interruptions, market misfires, or ultimately market crashes.
