Capital Flows into the United States Ahead of the Great North Atlantic Financial Crisis

Abstract

Brad Setser finds that, first, sectoral imbalance in the United States shifted from the government sector to the household sector from 2004 to 2007; second, the available supply of Treasuries failed to grow in line with the enormous increase in central bank reserves, which incentivized more complex forms of financial engineering; third, after 2006, central bank flows fail to cleanly register in the U.S. data; fourth, the growth in private flows into the United States that coincided with record official reserve growth reflected the increasingly complex chains of financial intermediation needed to fund the U.S. deficit; and fifth and finally, some of the “missing” central bank flows—the gap between the growth in dollar reserves implied by the IMF’s data and the visible inflow into Treasuries and Agencies—likely was lent to European banks, both directly and indirectly, through the cross-currency swap market.