The industry is also concentrated: about twenty large complex financial institutions with vast operations—think JPMorgan Chase or Deutsche Bank—dominate global finance; according to the International Monetary Fund (IMF), just eighteen of these heavyweights were responsible for over half of the losses reported by banks and insurance companies around the world during the economic crisis of 2008.
This interconnectivity is supposed to make the global economy more efficient and effective, but it’s also inherently risky because a problem in one institution can quickly spread to others. When that happens, it’s called contagion—the same word used to describe a disease spreading quickly from people in close contact. Because the global economy is like a web, domestic economic problems in one country can quickly become domestic economic problems in another. Or, as was the case in 2008, they can catalyze a worldwide economic crash.
But while the global economy is interconnected, there’s no global governance, no global currency, and no global monetary policy.
Countries (or sometimes regions, as with EU countries) maintain their own currencies and their own monetary policies. Central banks around the world set various policies to meet their goals, such as keeping inflation to a certain percentage annually.
Of course, countries do cooperate on economic issues (they trade with each other and coordinate in times of crisis), and international financial institutions like the World Bank and the IMF exist, but neither one is a global central bank. The World Bank gives loans and grants to low- and middle-income countries so that they can economically develop; the IMF aims to keep the international monetary system stable by monitoring countries’ monetary policies and sometimes providing loans. The World Bank and the IMF focus on their specific mandates and don’t function as a global central bank for a simple reason: there is no global currency.
In fact, when world leaders convened in Bretton Woods, New Hampshire, in 1944 to establish an international monetary system and create the World Bank and the IMF, their objective was not to create a unified system that every country in the world would use. Instead, their goal was to establish a system in which countries would retain control over their own currencies and policies, and still be able to easily trade and invest abroad. The U.S. economy was large and strong at the time and so the U.S. dollar became the de facto global currency of this new system, used by governments around the globe to save and to conduct international trade and investment in.
Because of the dollar’s special status, the United States exerts massive influence on the global economy.
The United States is home to less than 5 percent of the world’s population but generates almost 25 percent of global gross domestic product (GDP), the sum of all final goods and services the world produces in a given time frame. The United States is also the largest importer and second-largest exporter of goods in the world; in 2016, U.S. imports and exports were each worth over $2 trillion. Beyond the sheer size of the U.S. economy, some of the world’s largest financial institutions are American banks with global operations, making the economic health of the United States vital to international prosperity.