Unlike Canada, which imported on average 8 per cent of GDP per year in the three decades before World War I, emerging markets are currently net capital exporters (Chart 6). In effect, there is a massive recycling operation under way: private capital flows from advanced to emerging economies are being more than offset by official outflows in the opposite direction.
While emerging economies are having difficulties absorbing large private flows, advanced economies have often misallocated surges in yield-insensitive gross claims. In Canada, as elsewhere, large capital inflows will require vigilance from public authorities and private financial institutions. Financial history, particularly during times of large power shifts, is rife with examples of booms stoked by dumb money that turn good situations to bad.