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Foreign Investment's Disconnect

The NY Times had a thought provoking tidbit this morning about a few IMF papers that reconsider the establishment's fundamental assumptions, namely low inflation and unfettered cross-boarder capital flows:
One paper has received particular attention for suggesting that central banks should set their target inflation rate much higher — at 4 percent, rather than the 2 percent that is the most widely held standard...
...The other paper, released Friday, said that in the aftermath of the crisis, officials were “reconsidering the view that unfettered capital flows are a fundamentally benign phenomenon.”
The second idea particularly triggered a train of thought for me.  It just makes me think of how little a foreign investor knows about his international investments.  All of his knowledge is delivered third or fourth hand, as opposed to first or second hand accounts provided for domestic investments.  (How much have you heard of the Chinese real estate veil, and the associated rampant vacancies and ghost [mega]towns?  For so long, the multiple layers of the media filter scrubbed the Chinese growth story until it was squeaky clean.  But now we hear more and more about the true China--a country that has apparently gotten a little ahead of itself.  I suffer from the same dependence on media accounts, yet more and more journalists return from China with first-hand accounts of empty mega-cities.)
The problem with foreign investors being so removed from ground-zero is that it welcomes "herding." I'm not necessarily talking about the kind of hot money crowding-out you see from emerging markets, but I'm talking about the hyped-up bubble brigade that chase hot leads then get out when the story turns... all because they're not there to witness it or judge for themselves.  Just a simple musing.




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