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Years of Globally Mobile Capital, Goods, and Labor Have Gotten Us... Where?


It feels as though we are only at the beginning of figuring out the answer.

Earlier today, PIMCO founder Bill Gross tweeted:

"Gross: Hedge funds appear to control the fate of #Greece -- by extension Euroland -- by extension…??"

While I will leave it to others to fill in the blank left by Mr. Gross' note, he raises an important issue. Unlike prior sovereign debt crises, the principal holders of distressed sovereign debt today are not just the world's major banks. Hedge funds, mutual funds and other non-bank institutional investors own a historically high percentage. And there are two other significant differences from past crises as well. The rapid transferability of sovereign debt from one owner to another across the globe is unprecedented, and, because of the changes in ownership, not to mention changes in bank-accounting rules, a far greater percentage of sovereign debt is held today in marked-to-market portfolios in which gains and losses on the holdings are put in and taken out of equity on a daily basis.

It is a very different world.

At the risk of a slightly awkward analogy, the current Greek debt negotiations feel a little like our own Revolutionary War, when you had the British standing in straight lines (in this case, European policymakers) trying to fight American patriots hiding behind trees and under rocks (bondholders). Despite their valiant efforts, the traditional methods that policymakers are trying to deploy in Europe seem woefully mismatched to our modern capital-markets world.

Don't get me wrong, public policymakers still have plenty of ammo in their arsenal which they can deploy, but it is very clear, given the protracted nature of the current discussions involving Greece, that policymakers have not yet figured out how to negotiate with investors who, unlike a traditional bank, may have only their own particular financial interest at heart and not necessarily the interests of the broader global financial system. Further, policymakers have a limited ability to exert regulatory pressure on non-banks as well.

It could be just me, but it feels like we are only at the beginning of figuring out how the unprecedented global mobility of capital over the past 20 years and the resulting boom in non-traditional, and often transnational, investors has truly altered the rules of engagement when things go bad, particularly with sovereign debt.

And it may be for more than capital, too. This Sunday, the New York Times had a cover story on Apple's extensive foreign sourcing operations. It included this line: " 'We sell iPhones in over a hundred countries,' a current Apple executive said. 'We don't have an obligation to solve America's problems. Our only obligation is making the best product possible.'" With domestic unemployment continuing to linger near double digits, I can't help but wonder whether US policymakers have a different thought and may be wondering whether the benefits of the unprecedented free mobility of goods is still justifiable given our country's current job malaise. And I could just as easily see other countries not only agreeing to that thought, but also wanting to add unprecedented global labor mobility to the list as well.

As I look around, I see a long list of unresolved questions all revolving around the theme of responsibility and how self-interest (for individuals, corporations, financial institutions, and even nations) will or will not be reconciled with the interests of other national, regional and even global organizations.

Bill Gross may believe that hedge funds control "the fate of Greece -- by extension Euroland -- by extension…??", but I suspect those currently in control of "??" may have a few other thoughts in mind.
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