The American Stock-Flow Trap

Abstract

U.S. economy is about to run into a trap. The jaws of the trap are the growing imbalances between outstanding stocks (or volumes) of financial claims, on the one hand, and flows of interest payments, imports and exports, and consumer spending, on the other. Critical stock-flow ratios are dangerously high. It is impossible to predict just how and when the trap will spring. But it lies ahead, right in the direction the economy is moving. Stock-flow traps are nothing new. Experience all around the world shows that when critical stock/flow ratios become large, players in financial markets first become suspicious and then may very rapidly flee into liquid holdings as they sell off the liabilities of the economy in question. Such flights were at the root of the recent financial crises in Mexico, East Asia, Russia, and Brazil. The fundamental cause of the Mexican crisis was a