Anthony Rowley

Opinion | An America awash in global capital risks spreading financial instability

Free capital flows accelerate economic growth but can also be destabilising, spreading jitters via financial markets

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Traders work on the floor of the New York Stock Exchange on November 7, a day after the S&P 500 and Nasdaq Composite closed at all-time highs. Photo: Getty Images via AFP

Anthony Rowley

Published: 4:30pm, 30 Nov 2024

The curse of wealth has come upon America – that of abundant capital inflows, inflated financial asset values and a strong dollar. These are conditions that can test the ability of any financial system to absorb shocks and expose its hidden vulnerabilities.

The US may, ironically, be about to experience a version of the trauma that struck Asian economies in the run up to the 1997 crisis when the region received huge and ultimately destabilising flows of foreign portfolio investment.

At first sight, this might seem improbable. The US has much wider and deeper capital markets than those of Asia in 1997 – or now, for that matter. But the size of global capital flows is much larger today and America’s absorption capacity is not unlimited.

What we may be looking at is not just a problem of potentially destabilising capital flows into the world’s largest economy, any more than Asia’s 1997 crisis was just a regional problem. Capital flows are of a global nature and any problem or crisis occurring as a result of their direction will affect every country via financial markets.

Wall Street stocks have hit record highs since Donald Trump’s resounding election win, largely on the back of foreign investor enthusiasm and, more generally, because the US economy continues to act as a magnet (or maybe black hole) for foreign investors.

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Specific sectors that appear to be facing growing risks in the US and beyond include, according to official and other sources, banks (in everything from consumer lending to real estate loans) nonbank lenders, hedge funds, corporate and individual borrowers, margin investors and others.