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In finance, hot money is money invested in financial assets (bonds, shares, currencies) seeking short term profit. It is a type of foreign portfolio investment (FPI). It is called hot money because the speed at which it moves can cause an economy to heat up - inflation goes up, currencies appreciate and depreciate when the money is coming in and going out, prices and valuations of securities gyrate wildly, and lots of other interesting happenings. Because it seeks short term profit, it is panicky and subject to herd mentality, the sort of sentiment that fuels economic bubbles.

There is no such term as cold money but if hot money is a type of FPI, then foreign direct investment, (FDI), can be said to be cold or at least cooler money. Because it is investment with a long term plan. Since both types of capital flows have "foreign" in their name, it is obvious that they involve currency being exchanged. And so one way to limit the damage of hot money is currency controls, which is what enabled Malaysia to emerge from the Asian Financial Crisis earlier than the other tiger economies.

Traditionally, hot money is most castigated when it is flowing out of emerging markets. And since it is western money, it has sometimes been alleged that it is part of a western plot to destabilize developing countries in order to disrupt their economic development so that they do not grow rich enough to threaten western dominance. However, given what George Soros did to the UK on Black Wednesday, that plot seems to have escaped and now threatens its originators as well.

Hot money is a relatively recent phenomenon that was made possible by the emergence and widespread use of fiat money, advances in telecommunications and the increasing sophistication of the finance industry. It would not have been possible without any of these factors.

Iron Noder 2020, 25/30

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