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At its most basic, it means money being put into US dollars from foreign entities. It could be a country's central bank buying US Treasury notes, or purchases o
by ryandamm 9y ago
At its most basic, it means money being put into US dollars from foreign entities. It could be a country's central bank buying US Treasury notes, or purchases of US companies by foreign entities, or even just investment in the public stock market by individuals.
Anything where someone is investing money in the US from outside is a capital flow. They all have the same macro effect. The reason so much capital gets parked in the US is a combination of desirability (stability, etc) and the open capital markets. It's sometimes called 'exorbitant privilege,' and it's not actually good for the US (or at least, US workers). It does make capital cheaper here, though.
- ryandamm 9y agoI should point out I'm conflating things a bit; there are transactions involving US dollars that never come home. For example, US dollar-denominated transactions between business entities; those dollars are simply recycled. They don't have a major effect on capital balance, as the dollars are simply a medium of exchange. The larger effect, though, is money that actually gets deployed in the US. Again, that can happen via purchase of debt, purchase of equities (stocks, or even companies), purchase of assets (homes, etc), purchase of debt itself (buying up US consumers' credit card debt). Because the financial markets in the US are deep and liquid, it doesn't matter where those investments occur; they aren't distorting, because yield-seeking investors will (theoretically) respond to the reduced yield in the particular asset and invest elsewhere. In the meantime, the total flows must still balance, so that inflow results in debt somewhere in the economy. Hope that helps...