Meme of the Day: The Sudden Stop


Setser started it, back on November 19:

Bottom line: private demand for US financial assets has disappeared. In emerging

market terms, the US has experienced a sudden stop.

Yves Smith picked

up the ball, as did Wolfgang

Munchau: "financial flows back into the US appear to have come to a

sudden stop this summer".


Krugman explains that this is not a term to be used by the economically

unsophisticated: it refers to a famous theory of emerging-market economic crises

developed by Inter-American Development Bank chief economist Guillermo Calvo,

a theory which is emphatically not applicable to the US.

But the bigger datapoint is clear: while the US used to be the happy recipient

of tens of billions of dollars in cheap foreign capital every week, now those

flows have reversed. Back to Brad for the numbers:

Consider the change in (net) demand for US financial assets between q2 and

q3. In q2, net inflows were, according to the TIC data, $237.4b, or about

$950b annualized ($194.1b in recorded private inflows and $43.4b in recorded

official inflows). In q3, net inflows were negative $82b, or negative $328b

annualized (negative $112.2b in private flows and positive $30.2b in official


The overall swing was rather large. Net inflows — really net non-FDI flows

— fell by $320b between q2 and q3. Annualized that is a huge number, $1280b.

Is this sustainable? By definition, no. And Brad himself has been known to

wonder of late whether the current fall in the dollar might be coming to an

end. But it does seem that one of the weirder imbalances in the global financial

system has finally unwound itself.

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