Political Economy and Financial Market Sustainability in the 21 st century: US Election Spillover into the Global Financial System - I

Finance and Politics: Review of Trends

The US, the third largest populated country in the world and leading economy, is home to the world’s most powerful financial institutions and markets. Due to globalization, the US financial system supports the financial markets and transactions in all parts of the globe. The fact that the IMF and World Bank headquarters are both seated in Washington, DC corroborates this claim. From Africa to the Middle East and Asia, the level of integration into global finance is evident across the stock markets and other investment dealings in Nasdaq where firms from all across the world are listed in unison. Ultimately, Wall Street measures the heartbeat of the world’s finance. Although it seems that China’s economy has overtaken the US economy, America retains its position as the global financial hub and watchdog.

China has been trying hard to circumvent the US dominance of the global financial system. The proposed New Development Bank (NDB) founded by the BRICS countries (Brazil, Russia, India, China and South Africa) in 2015 is intent on challenging the authority of the World Bank. However, this threat has not come to fruition, despite China’s domination of the global trade. Another factor is the indisputable role of political institutions and processes in determining the behaviour of economic agents, financial markets as well as financial institutions. This is evident in the wake of the recent US elections. The state of the financial markets across the globe and institutional expectations in the presence of Covid-19 has led to market uncertainties and volatilities (see Detrixhe 2020).

US political institutions are acknowledged as the main determinants in formulating fiscal and monetary policies across the world. This premise rests on the importance of the US national election which happens every four years. The winning party, either the Democrats or the Republicans, has a heavy bearing on the world’s fiscal and monetary policies. This effect has become evident since the Bretton Woods conference in 1944.

References:

Detrixhe, J. (2020). Traders are positioned for a clear US election outcome. QUARTZ. Retrieved November 3, 2020, https://qz.com/1926288/vix-falls-as-traders-position-for-a-clear-us-election-outcome/?utm_source=email&utm_medium=daily-brief&utm_content=10117912