Modern economists believe that capital flows drive trade flows. When foreign investors want American assets, the capital that flows in is balanced by a deficit in our balance of trade. But with the U.S. trade deficit at over 4 percent of GDP, who is so anxious to buy our securities?
Morgan Stanley economists Joe Quinlan and Rebecca McCaughrin have the answer.
Net US inflows from Asia ex-Japan totaled $17.3 billion in November and another $19.8 billion in December, the strongest two-month surge on record. In December alone, the region accounted for 42% of total US inflows, with China and Hong Kong the primary sources of capital. The late-year surge in inflows from Asia ex-Japan pushed the regional total to a record $111 billion for the year, more than double the level of the prior year. As a result, Asia ex-Japanís share of US inflows rose to 21% last year, up from 11% in 2000.
Asian investors have more confidence in the U.S. economy than in any of their local economies. My guess is that they are irrationally exuberant about our economy (or irrationally pessimistic about Japan and other Asian economies). Meanwhile, they are helping to keep the dollar bubble and our stock market bubble inflated.
Discussion Question. A rapidly-growing developing country, like China, needs to import capital. How is it that China is able to supply capital to the United States?