The international monetary system has gone through several changes over the past two centuries, moving away from the gold standard to flexible exchange rates. This means each currency’s value is affected by the economic actions of its government or central bank, instead of the value of gold at a certain time.
Some economies have a historical tendency to affect others more than most, such as the US. Today the dominance of the US dollar positions itself as the world’s banker, creating conditions that make it more desirable or “safer” to price and trade in dollars.
This was part of the conditions that created a unipolar international order in favour of America, which became the social, cultural and economic point of reference for the entire world, sometime after the end of the Cold War.
The world has come a long way since the end of the Cold War. The dollar is no longer the only major currency of note–in an increasingly multipolar world, the value of the euro, yen, renminbi and even cryptocurrencies such as bitcoin are at play in today’s economy.
Flexible exchange rates, increasing globalisation and interconnectedness of markets changed the way the international economy works. Since there’s a higher level of interaction among countries, the actions of domestic banks have an inevitable effect on other markets. Periods of trade downturn and upswing are shared across borders, often at the same scale.
In these conditions, there is a growing demand for safe assets or assets that do not carry a high risk of loss across all types of market cycles. A vibrant international economy offers more opportunities to grow, but savvy investors understand the importance of minimising the risk of loss in one asset to protect the rest of their basket of investments from tanking.
With increasingly unpredictable conditions and inflation, investment in more stable assets like gold is proving to be more relevant as it helps minimise risk among other investments.
What does it mean if the world is multipolar?
It helps to understand what a multipolar world order means before it affects your personal finances. The world is increasingly multipolar already, so it’s crucial to adjust for more changes as they come.
A multipolar world means there is no longer just the one (uni) or two (bi) “poles” of the international order which set the conditions for the global economy. “Poles” establish the major trade and investment interactions that will affect individuals through central banks’ financial measures, like price control or changes to interest rates.
A current example is the high volume of economic interaction between China and the United States, the two poles, and between China and US allies in East Asia, which are the other poles at play.
China and the United States also trade and invest all over the world, so even if the United States tries to limit its trade with China, Beijing can compensate by increasing its trade with other partners, such as Europe.
The more poles there are at work, the more economies determine what will happen to the prices of commodities, assets and share prices. Those all have a knock-on effect on your finances.
3 ways the multipolar world affects your money
You’ll find that the multipolar world affects individual finances in more ways than you think, especially since the multiple players at work will ensure the global market is constantly in flux. The ever-changing conditions of the international economy can work to your advantage if you understand how it will bear on your expenses and investments.
1. Your investments are vulnerable to different economies’ actions
One of the main effects of the multipolar world is a more interconnected global economy. This means that even if you’re investing domestically, on the other side of the world, say the US, any movement still affects the share price of your investments as markets are integrated.
Domestic stock prices are affected by supply and demand, a company’s health, economic reports, trader sentiment and other technical factors like inflation, the strength of the market and news about the company. In a multipolar world, several economies and the companies in their markets are subject to all of these elements that affect prices globally.
Aside from US market movement, equity investments are also subject to any motion in other adjacent economies like the Asian and European markets. According to Morgan Stanley researchers, a multipolar economic world will have groups of nations all bearing enough influence and incentive to engage strategies that don’t wholly follow the direction of other global power centres.
Multipolarity places finances in a vulnerable position, still with the potential for growth, because regional markets will have an effect just as “major” economies like the US or China do. An investment in the ASX 200 is subject to the factors that are affecting shares in Asian, European and Arab markets because of this highly integrated international economic order.
2. You have more options to grow your savings
On one hand, a multipolar world puts your investments at more risk because you need to be conscious of movements in more markets than initially expected, but this comes with additional possibilities for your savings to grow.
Multipolarity opens up more opportunities to invest in markets that may not have been on your radar before, particularly for regions like Europe or Asia. Emerging markets and their growth are of the global order where regions seek to control a greater portion of their key economic inputs and processes, and these strategies also include inviting more capital investment.
In this order, your savings have more potential to grow because all these markets aren’t dependent on the plan of a singular country setting the agenda with their activity. If one regional market in your basket of investments is doing well and another is going through a slump, then you’re able to better assess where to channel a bit more of your savings.
3. Digitisation plays an even bigger role
Traditional currency and equity investments are also subject to the changes brought by innovation on a global scale. As they assert themselves and exert more influence over their economic procedures, regional markets have their own developments and trends to consider.
For one, digital currencies develop at a fast pace with fundamental technological transformations like distributed ledger technology (DLT), encryption, analytics of “big” datasets and artificial intelligence. These disruptions work behind the scenes of international trade and everyday transactions to make financial services more secure, simple and efficient.
These technological innovations are highly complementary to one another, interacting in ways that drive rapid change, and in a multipolar world, these keep pace with each other. Regional markets continue to compete and respond to our changing economic environment.
Keeping up-to-date on fintech trends is one way you can adapt better to digitisation, no matter what or where the economic shift comes from. When you learn the trends that impact fintech, you can understand the current market situation and improve your wealth and financial management, even in unforeseen circumstances or a shift in the multipolar world order.
A multipolar world order offers a different set of opportunities that you can maximise if you’re savvy about how you invest and take advantage of the digital innovation at your fingertips.
When you’re ready to seize the financial knowledge and tools you need in building your finances as the world changes, download the Nauggets app and see how we can make things work to your benefit. We can help you find gold in your financial journey.