Money On Fire?

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Dear, readers. Long time no see!

Even though March is already slipping away, the wind is still cold these days. Be careful not to catch a cold in this capricious weather.

Today I brought a topic “hot” enough to warm you up!

hot_money

Recently there has been some talks on “hot money”. This term is widely used in financial markets and the word “hot” came from the special characteristic of this kind of money. Hot money refers to capital flows that have a speculative purpose of earning short-term profits from differences in interest rate or exchange rate between two countries. Since this kind of capital flows show a relatively quick movement compared to other regular capital flows, which is why it is said to be “hot”, they create some negative effects in the economy.

To understand the mechanism of hot money as simply as possible, let’s just first think about regular capital flows among countries. Not only goods and services but also does capital move around trying to find places where it can be invested. Also capital moves around places where it can earn profits out of itself. For example if one country has higher interest rate compared to other countries, capital flows into that country in order to earn profits from the differences between interest rates, which means people with surplus capital try to put their money into the bank of that country because the bank provides higher interests.

Hot money works by the same mechanism and its purpose is to speculate. It flows in suddenly and after earning short-term profits, it swoops out of the financial market abruptly. Moreover, since hot money is mostly from developed countries that have a large amount of surplus capital, effects from this money speculation on the targeted country, usually developing countries, can be severe. Some of the expected effects are as followed:

– Inflation occurs when the large amount of money flows into a market.

– Exchange rate fluctuates with inflows and outflows of hot money.

– All the effects can lead financial markets to crash.

To sum up, sudden inflows and outflows of a big lump of money, which is a typical behavior of hot money, make financial markets unstable and it can lead one country’s economy to crash, just like what happened in Korea, 1997. This is why Financial Services Commission (FSC) along with Ministry of Strategy and Finance monitor the financial market of Korea carefully. It is a critical time these days, since large amounts of capital has been created by the global trend of quantitative easing policy.

This is all I have for this posting, I hope everybody finds this interesting!

See you soon. 🙂

From Ha Eun Kim (tmxkgirl@gmail.com)

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