Any decision carries inherent risk. America could become hedge funds’ favored domicile for carry trades, just as Japan once was. When the Fed begins to raise rates after nearly seven years of ZIRP, foreign institutions in Europe and elsewhere can borrow at home and earn higher rates in the U.S. That could create all sorts of distortions, frustrating the ability of European QE to work while draining funds as European investors flock to more attractive high-quality Treasurys.
If the U.S. became the recipient of massive capital inflows, debt could decline and there would be a major shrinkage in collateral. But that potential problem is far away on the horizon.