1/9 FT: "investors worldwide were already nervous about owning too many US dollar investments. This news only energised a growing conviction by them to seek other places to put their money, including the emerging markets." https://www.ft.com/content/85e...
2/9 I am not sure this is actually happening—it's not what the BoP data suggest—but if it were, it would be a very good thing. Capital should not flow from fast-growing, capital-poor economies to slower-growing capital-rich economies. It should flow in the opposite direction.
3/9 The fact that it isn't suggests that international capital flows do not consist mainly of investment flowing from where it is less needed to where it is more needed, as the proponents of unfettered capital flows claim.
4/9 It suggests, instead, that capital flows are driven mainly by currency and stock-market speculation, herd behavior, leverage, flight capital, and the pursuit of safe assets. There may be good reasons for investors individually to do these things, but collectively it...
5/9 distorts global economies by forcing changes in external imbalances that have little to do with the productive flow of capital. Changes in external balances, of course, must be matched by changes in the internal imbalances of countries that provide or receive these flows.
6/9 A few years ago, most economists thought it was crazy even to suggest that the capital account could drive the trade account, including in big economies like that of the US. Today it is much more accepted, even if many economists still don't understand the implications.
7/9 But a world in which capital flows are largely driven by productive investment flows is very different from one in which capital flows mostly for other reasons. In both cases, domestic economies have to adjust to capital-flow imbalances, but in the former, they adjust to
8/9 in productive investment, whereas in the latter they don't. If global excess saving flowed less to the US, the UK, and Canada (roughly two-thirds of the total) and more to developing countries, global demand would rise, rather than shift from deficit countries to surplus
9/9 This was the point Keynes made in his Bretton Woods trade proposal, and why he (and Harry Dexter White, too) were so opposed to the unfettered flow of global capital. It is surprising that it is taking us so long to understand why. https://www.commonplace.org/p/...