Too much money is as bad as too little. Foreign capital inflows can be of poor quality. And emerging financial systems are often unable to absorb the shock of such an influx. They can act as a trampoline, bouncing the cash straight into a domestic spending boom.
One barometer of domestic economic excess - and of the sustainability of growth - is the fundamental balance. Paying attention to this barometer reading could warn when an investment bonanza is heading for trouble.
The fundamental balance is defined as the sum of a country's current account position plus its total net receipts of foreign direct investment (FDI), less any scheduled foreign debt repayments. It represents the long-term demand for a currency.
Because currency values are determined by the interaction of supply and demand, countries that run fundamental surpluses (ie, strong demand) and impose relatively tight monetary policies (ie, limited supply) - such as Japan...
