Financial risks and rewards Essay

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Female narrator: TODAY'S WORLD ECONOMY IS BECOMING INCREASINGLY FINANCIALLY
INTEGRATED. FUNDS ARE FLOWING IN VAST AMOUNTS ACROSS THE GLOBE. IN TODAY'S
WORLD, THE MONEY MOVES INSTANTANEOUSLY. THE MONEY IS AN ELECTRON
SOMEWHERE ON SOMEBODY'S HARD DRIVE. A U.S. CITIZEN CAN PROVIDE FUNDS TO A
FOREIGN ENTITY, LIKE SONY OR TOYOTA, BY BUYING STOCKS OR BONDS ISSUEDBYTHESE
CORPORATIONS. OR A JAPANESE CITIZEN CAN LEND MONEY TO THE U.S. GOVERNMENT BY
PURCHASING U.S. TREASURY BILLS. THIS IS ALL FEASIBLE THROUGH FINANCIAL
GLOBALIZATION, WHICH IS THE REMOVAL OF RESTRICTIONS ON THE INTERNATIONAL
TRADE OFFINANCIAL ASSETS. FINANCIAL GLOBALIZATION IS TODAY PERHAPS ONE OF THE
MOST CONTROVERSIAL ISSUES WITHIN INTERNATIONAL ECONOMICS. MOST ECONOMISTS
ACCEPT THAT TRADE LIBERALIZATION IS BENEFICIAL-- THAT'S THE ELIMINATION OF
BARRIERS TO INTERNATIONAL TRADE IN GOODS AND SERVICES. BUT POLICYMAKERS AND
ACADEMICS ARE DIVIDED OVER THE BENEFITS OF FINANCIAL GLOBALIZATION. THOSE IN
FAVOR OF FINANCIAL GLOBALIZATION OFTEN REFER TO THE VIBRANT GLOBAL CAPITAL
MARKET OF 1870 TO 1913 AS EVIDENCE OF POTENTIAL BENEFITS. THEY ALSO POINT
TOWARDS THE GROWTH OF INTERNATIONAL FINANCIAL MARKETS IN THE LAST COUPLE
OF DECADES AND THE MENU OF DIFFERENT ASSETS THAT IT PROVIDES TO INVESTORS.
BUT OPPONENTS OF FINANCIAL GLOBALIZATION ARGUE THAT SUDDEN CAPITAL FLOWS IN
AND OUT OF A COUNTRY CAN WRECK DOMESTICECONOMIES AND THEIR FINANCIAL
SYSTEMS, AS HAPPENED IN INDONESIA WHERE A PLUMMETING CURRENCY AND MASSIVE
CAPITAL FLIGHT LED TO FOOD RIOTS. WE ARE THE ONES WHO HAVE TO PUT FOOD ON THE
TABLE, AND IT'S INCREASINGLY DIFFICULT TO DO THAT. OPPONENTS ALSO CLAIM THE
GLOBAL CAPITAL MARKET ALLOWS A FINANCIAL CRISIS IN ONE COUNTRY TO RICOCHET
TO OTHER COUNTRIES. THIS HAPPENED MOST RECENTLY WITH THE ASIAN FINANCIAL
CRISIS IN 1997, WHICH STARTED IN THAILAND AND SPREAD NOT ONLY TO NEIGHBORING
COUNTRIES SUCH AS INDONESIA AND MALAYSIA, BUT ALSO TO FAR AWAY COUNTRIES
SUCH AS SOUTH KOREA, BRAZIL, ANDRUSSIA.
( shouting and screaming )
Man: THE VIRULENCE WITH WHICH IT SPREAD WAS EXTRAORDINARY. AFTER THE HONG
KONG DOLLAR GOT ATTACKED IN OCTOBER, AND THEN YOU SAW KOREA SUDDENLY
GOING DOWN AND INDONESIA BEFORE THAT. AND THERE WAS ONE DAY ON WHICH WALL
STREET WENT DOWN 200, UH, 500 POINTS, AND THEN IT WENT TO BRAZIL, AND THEN IT
WENT TO RUSSIA. THAT WAS A LOT. THESE CRISES HAD DEVASTATING EFFECTS ON THESE
ECONOMIES, COMPARABLE TO THE GREAT DEPRESSION IN THE 1930s. WHAT WE'VE
LEARNED FROM THOSE EXPERIENCES IS THE IMPORTANCE OF HAVING SOME SORT OF
REGULATION ON CAPITAL INFLOWS UNTIL THE DOMESTIC FINANCIAL SYSTEM HAS
MATURED TO THE POINT WHERE IT CAN HANDLE LARGE--LARGE INFLOWS. INCREASED
INTERNATIONAL CAPITAL MOBILITY HAS BOTH POTENTIAL BENEFITS AND COSTS. MOST
ECONOMISTS AGREE THAT THE TWO MAIN BENEFITS ARE INTER-TEMPORAL TRADE AND
RISK DIVERSIFICATION. INTER-TEMPORAL TRADE ALLOWS FOR SMOOTHING SPENDING
OVER TIME. FOR EXAMPLE, DURING HIS WORKING LIFE, A PERSON MAY REDUCE HIS
CURRENT INCOME AND SAVE IN ORDER TO MAINTAIN A HIGH LEVEL OF CONSUMPTION
DURING RETIREMENT. OR A STUDENT MAY TAKE OUT A LOAN SO HE CAN CONSUME

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COMFORTABLY TODAY AND PAY BACK THIS LOAN BY FORGOING FUTURE CONSUMPTION
WHEN HIS INCOME IS HIGH. IN A SIMILAR FASHION, A POOR COUNTRY LIKE BANGLADESH
OR NIGERIA CAN BORROW FUNDS IN THE GLOBAL CAPITAL MARKET IN ORDER TO SPEND
MORE THAN ITS CURRENT NATIONAL INCOME LEVEL AND REPAY THESE FUNDS IN THE
FUTURE WHEN DOMESTIC INCOME IS HIGHER. RICH COUNTRIES, ON THE OTHER HAND,
CAN LEND FUNDS THROUGH THE GLOBAL CAPITAL MARKET SO THAT THEY CAN
MAINTAIN THE HIGH LEVEL OF CONSUMPTION THEY ENJOY NOW INTO THE FUTURE.
INTER-TEMPORAL TRADE ONLY HELPS TO SMOOTH CONSUMPTION IF THE FUNDS A
COUNTRY BORROWS OR LENDS ARE INVESTED IN PROFITABLE PROJECTS THAT BRING A
HIGHER FUTURE INCOME. A STUDENT MAY TAKE OUT A LOAN TO GET AN
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