The Financial System—a Mirror of the Global World

As in real economy, profound interdependence has evolved in the financial sector, as well, whether through loans (bonds) that countries took from other countries or through other means. The most conspicuous example of that interdependence is the massive amounts of U.S bonds held by the Chinese government. Because of the speed at which money markets respond to changes in the policies and in the economy, these markets have become the most prominent characteristic of the global and interconnected world we live in. The interdependence among countries and investors is palpable and tangible in those markets.

Another distinct example is the sovereign debt crisis, which is currently unfolding in the Eurozone countries. The enormous debt of many countries demonstrates how all are in the same boat. The United States owes trillion dollars to Eurozone countries and to Japan, and trillions more to China, Russia, and many other owners of U.S. bonds. Germany owes 5.46 trillion dollars to the above-mentioned countries; the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) owe a total of 6.4 trillion dollars to those countries, and France owes them 5.46 trillion dollars. [5]

The economic and financial ties compel countries to become more involved in each other’s internal affairs out of fear for their own economies. On the one hand, financial interdependence accelerates international efforts to aid troubled countries, both directly and through the International Monetary Fund (IMF). On the other hand, financial and/or political interference could be construed as a threat to the country’s sovereignty and may instigate tension and conflict.

In regard to the crisis in the American economy, Chinese officials criticized the United States for its colossal budget deficit, which could undermine the stability of the U.S. economy and its ability to repay its debt to China and to other debt-holders. The tension wrought by the criticism prompted Chinese Vice President, Xi Jinping, to state, “The US economy is always highly resilient and has a strong self-repair capacity. We believe the US economy will achieve better development in the process of coping with challenges.” [6]

Because approximately half of U.S. bonds are purchased by foreign investors, primarily China, Japan, Russia, and India, the international monetary system’s sensitivity to the American economy and to the U.S. government treatment of it is obvious. A comment that demonstrates the involvement among countries was made by the U.S. Treasury Secretary, Timothy Geithner. In an official statement to the IMF, Geithner said, in regard to Europe, “The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally. ...Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe.” [7]

[5] “Eurozone debt web: Who owes what to whom?,” BBC News Business (November 18, 2011), http://www.bbc.co.uk/news/business-15748696

[6] “Xi Jinping and US Vice President Biden Attend China-US Business Dialogue,” Ministry of Foreign Affairs of the People’s Republic of China, (August 19, 2011), http://www.fmprc.gov.cn/eng/zxxx/t850833.htm

[7] Ben Rooney, “Geithner sounds alarm on Europe,” CNN Money, (September 25, 2011), http://money.cnn.com/2011/09/24/markets/geithner_debt/index.htm