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Capital Flight

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1nvest
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Re: Capital Flight

#326452

Postby 1nvest » July 15th, 2020, 11:09 pm

As part of promoting trade, countries agreed to peg their currency to a set/fixed amount/price of gold and then periodically they'd tally up the trade figures and have the bars of gold moved between the segments within the vaults. Money was gold (finite, tangible), and money (coins/notes) are just a more convenient way to be carried around. Similar to how a sovereign gold coin has a face value of one pound, but where the actual physical gold was being handed between buyer and seller rather than being tallied up on paper and then having gold moved around the vaults.

2p coins used to be around 2p of copper value, but when the price of copper spiked and 2p copper coins were worth 3p in raw copper value, they switched over to using copper plated steel when minting 2p coins (in around 1992 IIRC). It's illegal to damage legal tender, but even still if its costing 3p to mint a 2p something had to change. In the case of sovereigns however, people wont give you one as a payment of £1 value, when the gold value is worth £350 or whatever. Nor a Britannia that has a face value of £100 as a legal tender coin, but has gold value of £1500.

Prior to coins that were worth their weight, people used the likes of tally sticks. Where a stick of wood would have scratches made across it and then it would be split down the grain/length so that both parties had a distinctly matching partner part where the grain would match when pressed back together again and if the scratches (that indicated value) were tampered with, such as another scratch having been added to say you owed them more that could easily be contested as the additional scratch on their half wouldn't be evident on your half. Awkward swapping such sticks around however between multiple individuals, let alone across countries, so a coins worth their metallic value/gold standard helped promote easier international trade/transactions.

dspp
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Re: Capital Flight

#326487

Postby dspp » July 16th, 2020, 8:12 am

TheMotorcycleBoy wrote:Hi 1nvest,

1nvest wrote:When on the gold standard the gold vaults in London involved moving segregated gold bars from one part of the vault to another, each labelled by the country names according to the trade flows/movement of money. A flight in that context is where bars are increasingly being moved out of one countries segment.

I'm trying to get my head around the practicality of international trade during the days of the gold standard.

Suppose I wanted to buy $500 worth of American timber from a US supplier. Would I require US$ to pay them? Presumably I would. So would I then need to approach a UK bank and exchange the equivalent quantity of my £s for, I guess a Bank Draft for this amount, and in doing so would the Bank then have to, as you say, move $500 worth of gold from the UK to the US section?

Then, if my presumption is correct, at some future clearing time each country will tally up the differences, since other countries may have bought UK goods, and reconcile each nation's gold pile.

Does this sound about right?

Thanks Matt


When my Chinese clients wish to buy UK product from me, priced either in EUR or USD, before they place the order they obtain permission from the Chinese state to do so who verify that there is a good enough reason to be using precious hard currencies to import 'stuff' into China. When the invoice falls due they have to show the Chinese state the original permissions, plus our invoices, plus the various bills of lading etc, and only then is the "hard currency" forex released by the Chinese state acting through the People's Bank Of China (the national bank) who authorise the relevant commercial bank to transfer the hard currency forex funds out of China and to us in the UK. This is how the system still works in many other countries who still have capital controls, specifically in order to manage capital flight, and to manage hard currency forex, as both are 'risks'. There are some other countries I deal with that have similar systems in place to this day, for exactly the same reasons.

i.e. this is not a new issue, and is still very much a live issue.

regards, dspp

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Re: Capital Flight

#326520

Postby NeilW » July 16th, 2020, 9:54 am

There is no such thing as capital flight in modern monetary economies with free floating currencies.

Since the capital is always exchanged, not converted, all that happens is that it changes hands and stays exactly where it is.

Germany can drain capital from Greece. England can drain capital from Scotland, but the Eurozone cannot drain capital from the UK.

In a modern economy if an "investor" sells a currency they are saving for another that's likely stimulative for the economy since the person buying the currency has a higher marginal chance of being a spender rather than a saver.

Savers are a pain. Ideally you don't want anybody holding your currency at all. You want them to spend it instantly. That way more people earn an income and make profits.

GoSeigen
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Re: Capital Flight

#326590

Postby GoSeigen » July 16th, 2020, 12:59 pm

Matt, I'd think about it this way: as an extraction of equity from a political geographical location (i.e. a country/state). What do I mean by extraction of equity?

I mean we are talking about people moving their net wealth to a location where it is no longer subject either to changing laws or continuing erosion of value due to conditions in the previous location.


Look at my situation as an example. I have net wealth of (say) £1m, based in the UK. Then I bought assets in a foreign country worth £0.2m. What effect does this have? Imagine both locations are a closed system. The new location now has £0.2m more equity in sterling equivalent (because I moved actual valuable assets there), while the UK has £0.2m less equity.

The way this is expressed in assets and asset values might be that the total value of real estate in the new location has risen by £0.2m: a fraction of a percent to be sure, but it has increased because, whilst everyone else was happy with their asset allocation (it didn't change), my allocation to real estate increased by £0.2m. Alternatively, the extra equity was expressed by a rise in the local currency value because everyone adjusted real estate values to be the same value as before in local currency, but the currency appreciated to reflect my investment in the economy as a whole. In reality these are probably extremes in the way the new country'sequity might change: in reality the effect ripples into a wide range of assets altering their values slightly. e.g. retail shares up slightly because I've physically moved to the property and will provide further profit through my spending.

The same effect happens in reverse in the UK. The aggregate value of UK net wealth drops by the amount I've extracted. This may ripple through to individual asset prices or to the currency level as a whole. But in the final equilibrium the UK is (temporarily) poorer.

Think of it like a rock thrown into a pond. The moment the rock is below the surface the average level of the water has risen: the location of the rise initially is hard to determine and changes for a protracted period as ripples spread, interrupted by logs, reeds and islands, until finally all around the pond's edge there is a tiny rise of the water against the banks. Likewise when a rock is removed from the bottom of the pond.


Capital flight is noticeable when many wealthy people simultaneously do the same thing. The adjustment of net wealth of a country becomes a noticeable fall in the value of particular assets or the currency as a whole, and might tend to accelerate the flight through a feedback effect, as people fear the losses in their equity value and join the flight to protect themselves.

One point: obviously certain immoveable assets like land, property, minerals etc cannot normally be removed: what happens is that people exchange those assets for financial assets and them remove the latter, thereby driving down aggregate values (and therefore prices) of both the immovables as measured in financial terms AND the value of the financial assets themselves.

In summary: it helps to think about the effects on aggregate net asset values of each country. That's my take on it anyway.


GS
P.S. You can take it I disagree fundamentally with the NeilW/MMT view. :-) It's nonsense that capital cannot move. People can move: they are human capital. Moveable assets can physically be moved. Financial assets can definitely be moved, same as carrying a lump of gold over a border is moving capital. Even immovables can be moved -- if the country is invaded and taken over by another country!

1nvest
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Re: Capital Flight

#326601

Postby 1nvest » July 16th, 2020, 1:35 pm

GoSeigen wrote:One point: obviously certain immoveable assets like land, property, minerals etc cannot normally be removed: what happens is that people exchange those assets for financial assets and them remove the latter, thereby driving down aggregate values (and therefore prices) of both the immovables as measured in financial terms AND the value of the financial assets themselves.

But ownership can flow. Take two companies, UK.plc and EU.plc where UK.plc kindly subsidises EU.plc which means EU.plc can make/sell the exact same products for less. After say 4.5 decades of such subsidies EU.plc will have done relatively well and will likely own much of hard/immovable assets within UK.plc such that dividends from those assets flow into the EU.plc's books. In the real world, the UK now has the likes of its rail network, utilities ..etc. all being predominately foreign owned, as though those hard assets had actually left the country.

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Re: Capital Flight

#326615

Postby GoSeigen » July 16th, 2020, 2:25 pm

1nvest wrote:
GoSeigen wrote:One point: obviously certain immoveable assets like land, property, minerals etc cannot normally be removed: what happens is that people exchange those assets for financial assets and them remove the latter, thereby driving down aggregate values (and therefore prices) of both the immovables as measured in financial terms AND the value of the financial assets themselves.

But ownership can flow. Take two companies, UK.plc and EU.plc where UK.plc kindly subsidises EU.plc which means EU.plc can make/sell the exact same products for less. After say 4.5 decades of such subsidies EU.plc will have done relatively well and will likely own much of hard/immovable assets within UK.plc such that dividends from those assets flow into the EU.plc's books. In the real world, the UK now has the likes of its rail network, utilities ..etc. all being predominately foreign owned, as though those hard assets had actually left the country.


Well you expressed that in the subjunctive which I think implies you agree that it is merely an illusion. All it takes is for the government to seize those assets and the dividends dry up for the foreign owner. Or the government could implement capital controls preventing export of dividends. Almost the same effect.

Thus if I feared capital controls and/or nationalisation I'd opt to sell the asset and move the entire capital abroad.

GS


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