why does capital flow from one country to another, according to general sense capital has to move from capital rich economies to capital scarce ones. but that doesnt seem to be the case. money is flowing to the U.S which is the largest economy from relatively capital scarce economies like Thailand, China, India and many other developing nations. then what really drives capital flows? the most important consideration would be the marginal return on the capital invested. this would be the case in a deregulated market. in the present scenario asian central bankers are willing to invest in the U.S without considering the return but for other benefits. the U.S is making the best possible use of international financial market by raising huge sums of money with almost nil savings. but this has created global imbalances of sizes which have no precedent. is the U.S deficit itself a problem for the global economy or the correction steps that might be taken.

Capital is flowing into the United States for a number of reasons: (i) people think that the complementarity between capital and technology makes investments in the U.S. highly profitable; (ii) foreigners think that U.S.-located assets would be a wonderful thing to have in the event of "political instability" in their home countries; (iii) foreign governments think an undervalued currency and huge exports are a wonderful thing to have to avoid "political instability" by maintaining full employment; (iv) foreigners are overoptimistic about investments in the U.S.; (v) America's budget deficit means that we are printing lots of Treasury bonds which must be sold to somebody; (vi) the Federal Reserve's low-interest rate policy (which I don't think was a mistake) pushed up housing prices, made Americans feel rich, and so they looked around for people to borrow from to turn their home equity into liquid cash--and foreigners are a convenient source of funds.