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.
The temporal gap occurs when the needs of the borrower and the lender arise at different points in time – borrower needs money after a month but the saver has money now. This later gap is bridged by banks through provision of liquidity services – a bank would take a deposit from the saver now and lend to the borrower after one month.