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Capital Flight

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TheMotorcycleBoy
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Capital Flight

#325926

Postby TheMotorcycleBoy » July 14th, 2020, 4:28 am

Hi folks,

I've recently started reading a book called The Globalization Paradox and I'm coming across the above term from time to time. Despite hearing this before I wanted to understand more about it and learn of examples. I'm curious as to whether private individuals such as consumers and investors, can influence capital flight or whether it is a phenomenon involving bigger actors, for example banks.

So would I be correct in stating that even my investments in US stocks (e.g. Disney and Macdonalds) purchased with dollars on the NYSE market would represent capital flight? Or since these assets are held within a UK wrapper, i.e. my ISA do they not count? In other words would I actually need to open a Bank Account in the US, or go to the States and invest my money directly into a US venture for capital flight to have occurred?

thanks Matt

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Re: Capital Flight

#326075

Postby ursaminortaur » July 14th, 2020, 2:56 pm

TheMotorcycleBoy wrote:Hi folks,

I've recently started reading a book called The Globalization Paradox and I'm coming across the above term from time to time. Despite hearing this before I wanted to understand more about it and learn of examples. I'm curious as to whether private individuals such as consumers and investors, can influence capital flight or whether it is a phenomenon involving bigger actors, for example banks.

So would I be correct in stating that even my investments in US stocks (e.g. Disney and Macdonalds) purchased with dollars on the NYSE market would represent capital flight? Or since these assets are held within a UK wrapper, i.e. my ISA do they not count? In other words would I actually need to open a Bank Account in the US, or go to the States and invest my money directly into a US venture for capital flight to have occurred?

thanks Matt


Here is the Investopedia definition

https://www.investopedia.com/terms/c/capitalflight.asp

This can include

Capital flight can also be instigated by resident investors fearful of government policies that will bring down the economy. For example, they might begin investing in foreign markets, if a populist leader with well-worn rhetoric about protectionism is elected, or if the local currency is in danger of being devalued abruptly. Unlike the previous case, in which foreign capital finds its way back when the economy opens up again, this type of flight may result in capital remaining abroad for prolonged stretches. Outflows of the Chinese yuan, when the government devalued its currency, occurred several times after 2015.

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Re: Capital Flight

#326084

Postby Lootman » July 14th, 2020, 3:15 pm

The mere act of investing in foreign securities is not capital flight. It is simply the act of diversifying away from your own country. You may do that because you have a dim outlook for the prospects of the UK economy and so allocating more funds to non-UK assets would be helpful. But I would not describe that as capital flight.

A recent example of what might have been capital flight was last year when there was some prospect of a Corbyn government, which was widely viewed as being hostile to markets and investors. It was variously reported that high net worth individuals were structuring their affairs so that their net worth could be rapidly exported if Corbyn won the election. In the event of course he lost and so the issue became moot.

If you fear for the future of UK Inc, whether because of Covis, Brexit, civil unrest or a future Labour government then there are three steps you can take to protect your wealth:

1) Allocate away from the UK as I described above. You would still be subject to punitive and potentially windfall taxes on your profits, and be subject to UK financial regulations.

2) Allocate away from the UK and use foreign banks and brokers. You would still be subject to punitive and potential windfall taxes on your profits, although it would be harder for the authorities to know what those profits are or where they were. And you would not be subject to UK securities regulation but rather the regulations of your offshore financial centre.

3) Allocate away from the UK AND use foreign banks and brokers AND remove yourself from UK jurisdiction. This would reduce your risk the most, at least from UK risk.

(2) and (3) above would be examples of capital flight in my opinion.

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Re: Capital Flight

#326085

Postby Alaric » July 14th, 2020, 3:24 pm

TheMotorcycleBoy wrote:So would I be correct in stating that even my investments in US stocks (e.g. Disney and Macdonalds) purchased with dollars on the NYSE market would represent capital flight?


From I assume some time during the Second World War until the Thatcher government abolished it in 1979 as one of its first acts, there was what was termed a "dollar premium". This required a British investor wishing to purchase US stocks to pay over the exchange rate for the necessary dollars to make the investment. I believe the aim of the policy was to require capital to stay in the UK, or what was then "the Sterling area".

https://en.wikipedia.org/wiki/Exchange_ ... ed_Kingdom
https://www.finansleksikon.no/en/Eng_Fi ... emium.html

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Re: Capital Flight

#326087

Postby Lootman » July 14th, 2020, 3:30 pm

Alaric wrote:
TheMotorcycleBoy wrote:So would I be correct in stating that even my investments in US stocks (e.g. Disney and Macdonalds) purchased with dollars on the NYSE market would represent capital flight?

From I assume some time during the Second World War until the Thatcher government abolished it in 1979 as one of its first acts, there was what was termed a "dollar premium". This required a British investor wishing to purchase US stocks to pay over the exchange rate for the necessary dollars to make the investment. I believe the aim of the policy was to require capital to stay in the UK, or what was then "the Sterling area".

https://en.wikipedia.org/wiki/Exchange_ ... ed_Kingdom
https://www.finansleksikon.no/en/Eng_Fi ... emium.html

More generally there were exchange controls. There used to be a section in the back of a UK passport where the amount of foreign currency you bought to go on holiday overseas would be entered. There was a limit on how much you could take.

As you say, Thatcher got rid of that anachronism at a stroke. It's hard to imagine that now although there was talk that John McDonnell had considered the re-adoption of capital controls in the event that there was widespread capital flight in response to him becoming Chancellor. Whether it is even possible these days is another matter. Italy and Greece have both tried it more recently, with only limited success.

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Re: Capital Flight

#326132

Postby TheMotorcycleBoy » July 14th, 2020, 5:47 pm

Lootman wrote:
Alaric wrote:
TheMotorcycleBoy wrote:So would I be correct in stating that even my investments in US stocks (e.g. Disney and Macdonalds) purchased with dollars on the NYSE market would represent capital flight?

From I assume some time during the Second World War until the Thatcher government abolished it in 1979 as one of its first acts, there was what was termed a "dollar premium". This required a British investor wishing to purchase US stocks to pay over the exchange rate for the necessary dollars to make the investment. I believe the aim of the policy was to require capital to stay in the UK, or what was then "the Sterling area".

https://en.wikipedia.org/wiki/Exchange_ ... ed_Kingdom
https://www.finansleksikon.no/en/Eng_Fi ... emium.html

More generally there were exchange controls. There used to be a section in the back of a UK passport where the amount of foreign currency you bought to go on holiday overseas would be entered. There was a limit on how much you could take.

As you say, Thatcher got rid of that anachronism at a stroke. It's hard to imagine that now although there was talk that John McDonnell had considered the re-adoption of capital controls in the event that there was widespread capital flight in response to him becoming Chancellor. Whether it is even possible these days is another matter. Italy and Greece have both tried it more recently, with only limited success.

But surely what Alaric exemplifies, is the same thing as me, buying US stocks, except that I don't have to pay an explicit "dollar premium?"

Obviously what I have is done is much smaller scale than the actions that you cited earlier of HNWIs:

A recent example of what might have been capital flight was last year when there was some prospect of a Corbyn government, which was widely viewed as being hostile to markets and investors. It was variously reported that high net worth individuals were structuring their affairs so that their net worth could be rapidly exported if Corbyn won the election. In the event of course he lost and so the issue became moot.

Hmm...

Is the kind of Capital Flight to which you refer one that entails the capital actually being moved into foreign (possibly financial) institutions i.e. banks?

If you fear for the future of UK Inc, whether because of Covis, Brexit, civil unrest or a future Labour government then there are three steps you can take to protect your wealth..

No - to be honest, I'm forever wed to this country, and don't have a massive amount of wealth to protect etc. I'm merely interested in learning more about Capital Flight since it gets referred to a lot in the book I linked in my OP. Particular mention of it was made in the chapter covering the "gold standard" adopted by several countries in the late 1800s. If I understood that part correctly balance of trade differences between countries had to be settled by a physical transfer of bullion, since (apparently) individual states' net worth was pegged by a (preselected) rate against an ounce of gold.

I want to get clear in my mind how this Victorian concept maps into our present day in terms of foreign purchases of goods and financial assets. I assume it is - but it's just obfuscated somehow - behind inflation, exchange rates, bond yields etc possibly.

Matt

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Re: Capital Flight

#326151

Postby 1nvest » July 14th, 2020, 6:31 pm

I'd consider capital flight to be similar to a bank run, but at the country/currency scale. Circumstances induces fear, one starts dumping the currency which prompts others to follow.

Investing overseas isn't flight as the dividends are being repatriated, as might the capital at some point. Much of the UK economy is based upon such. 8 trillion of UK investments by foreign, 7.2Tn of foreign held by UK investors, but where typically the yields made by UK investors is greater than what foreign earn from the UK such that it broadly balances. The UK's high credit rating is a part of that.

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.

A large part of the ending of the UK being on a gold standard in 1931 was due to money and gold being exchangeable at a fixed rate and where repeatedly money was being redeemed in gold and the gold being removed out of the country. When on the gold standard it made more sense to hold gold in the form of money/currency, where that money was deposited earning interest. In effect the state paid you (assuming money was invested in Gilts) for it to securely store your gold for you and where at any (reasonable) time you could convert the money back to gold.

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Re: Capital Flight

#326155

Postby 1nvest » July 14th, 2020, 6:59 pm

When on the gold standard - money backed by something finite/tangible such as physical gold, you can't just create new money, at least not without having the gold behind that. On a Fiat currency money isn't backed by anything other than faith/trust. Each new note printed/spent devalues all other notes in circulation, could be considered as a form of micro-taxation. So why do we still have/pay taxes? The BoE could just print enough money and hand it to the Treasury for deployment as per how the Treasury currently spends without the need of armies of tax collectors/managers and massive tax rules books.

There were rules to prevent abuse by those in the privileged position of being able to print money legally. They were set down as part of coming off the gold standard and as conditions set by us (world) agreeing to adopt the US$ as the primary reserve currency. That's been thrown out of the window however now, where Congress for instance only recently opened up permission for the Fed to print up to $8Tn to buy up to 70% of each/any bond series. Having a big bond buyer in the market induces investors rebalancing out of bonds after price rises, into stocks, which pushes stock prices higher. Much of that is a consequence of irresponsible Euro/EU, that has printed to buy up government bonds, then junk bonds, now stocks ... and could if continued further lead to buying up all houses. When the legal counterfeiter isn't reigned in the skies the limit. The ECB had to print 2Tn in order to bail out massive bad German bets (debts) after the 2008 financial crisis. Bad German debts were exchanged for ECB debts (rest of EU bailed out Germany - massively so). Greece's debt in contrast was a drop in the ocean, but Germany prevented Greece from being assisted. Similar to how prior to 2008 banks were playing a big bets heads we win, tails the taxpayers bail us out gameplay, but expanded to be at the country level. As the ECB print more Euro's so others have to follow (US$, £ ...etc.) otherwise that in effect would permit the EU to export its problems onto others.

If the EU does continue printing to buy up assets in a unlimited way, then sooner or later others might opt to drop the Euro (sell Euro's to buy whatever other currency). That would be a capital flight event, and often such events tend to be very rapid. Once a sniff occurs there can be a rapid rush for the exit. Is the EU too big too fail? As some banks were considered too big to be permitted to fail during the 2008 crisis. Maybe/maybe not. The UK distancing itself is a good de-risking exercise. Reducing Euro's based investments held by the UK is also another good de-risking exercise.

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Re: Capital Flight

#326161

Postby 1nvest » July 14th, 2020, 7:14 pm

Banks used to be Custodial, they'd securely store your money/certificates in return for a fee. Your money remained segregated, yours, not theirs. Nowadays when you deposit money in a bank you give the bank that money, in return for a IOU. You deposit £10,000, and the bank lends that to Alice who buy a car from Dave and Dave deposits the £10,000 in the bank ... and the bank lends Carol that £10,000 ... etc. That's all fine until both you and Dave want their money back at around the same time. Even then its fine, but if enough people all want their money out of the bank at the same time then the bank fails.

When you buy gilts for the interest they pay, then you're lending to someone who sets the rates and can revise inflation. More often the government can be generous to encourage such lending. Sometimes however such as since 2008 that generosity vanishes to instead turn around to look to raid those that have lent to it. But that has to be managed carefully as if its too aggressive then capital flight can occur.

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Re: Capital Flight

#326171

Postby TheMotorcycleBoy » July 14th, 2020, 7:28 pm

Many thanks for your above posts, 1nvest. I'm gradually working my way through them.

Matt

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Re: Capital Flight

#326203

Postby dspp » July 14th, 2020, 9:49 pm

TheMotorcycleBoy wrote:Many thanks for your above posts, 1nvest. I'm gradually working my way through them.

Matt


Back in the Victorian era there were exchange controls, and there was the gold standard, both now gone. So you can no longer explain a historical term in the old ways

In the limit this all comes down to sovereign power. Ask yourself who can (if they unilaterally decide to) take your wealth (your capital) from you, and you will be answering the question of a) who might you be fleeing, b) how well are you doing in evading them and c) why might they be after your wealth (ordinarily to pay for bread, circuses, mismanagement, and profilgacy).

In the limit the only way to fully flee is to do so (also) physically oneself. Otherwise they just put you and your family in jail or worse, until you repatriate the wealth. In the middle are various shades of grey. The more you can say 'no' to instructions to comply, the more clearly you have "committed" capital flight

Those who say the EUR is uniquely bad are being guilty of politicking. There is nothing uniquely different in the limit between the group of provinces called china, or the states called America, or the counties called England, or the states called the EU . But that is an aside to respond to their smear tactics.

Regards, dspp

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Re: Capital Flight

#326205

Postby ursaminortaur » July 14th, 2020, 9:57 pm

1nvest wrote:Banks used to be Custodial, they'd securely store your money/certificates in return for a fee. Your money remained segregated, yours, not theirs.


That has pretty much never been the case. Although they charged fees for deposits even the earliest "banks" operated a system which included loans and interest payments which meant that the wealth used for those activities was not segregated.

https://en.wikipedia.org/wiki/History_of_banking

In Babylonia of 2000 BCE, people depositing gold were required to pay amounts as much as one sixtieth of the total deposited. Both the palaces and temple are known to have provided lending and issuing from the wealth they held—the palaces to a lesser extent. Such loans typically involved issuing seed-grain, with re-payment from the harvest. These basic social agreements were documented in clay tablets, with an agreement on interest accrual.

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Re: Capital Flight

#326216

Postby 1nvest » July 14th, 2020, 11:14 pm

https://www.tytoncapital.com/
custodian banks do not engage in issuing loans. They are not in the business of taking on various forms of risk in exchange for charging interest. Custodian banks simply perform various administrative and asset protection services
.
.
a custodian bank focuses on the more boring and simple functions that a bank may provide. The most common and arguably the primary function of the custodian bank is the holding and safeguarding of financial assets.

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Re: Capital Flight

#326260

Postby ursaminortaur » July 15th, 2020, 9:53 am

1nvest wrote:https://www.tytoncapital.com/
custodian banks do not engage in issuing loans. They are not in the business of taking on various forms of risk in exchange for charging interest. Custodian banks simply perform various administrative and asset protection services
.
.
a custodian bank focuses on the more boring and simple functions that a bank may provide. The most common and arguably the primary function of the custodian bank is the holding and safeguarding of financial assets.


Obviously such institutions exist my comment was more aimed at your statement that at some point in the past that was all that banks did whereas the truth is that they have been involved in making loans and charging interest since ancient times.

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Re: Capital Flight

#326357

Postby TheMotorcycleBoy » July 15th, 2020, 3:06 pm

To clarify my OP a little, it seems that the book refers more to the concept of "capital flows" (movements). I guess that capital flight is merely an extreme case of such a flow, where the capital is leaving the country probably en masse. Anyway for some context here are a couple of paragraphs from the chapter "Financial Globalisation Follies".

The Bretton Woods Consensus on Capital Controls
It would be difficult to overstate the strength of the consensus in favour of capital controls in the immediate aftermath of WWII. As one American economist put it in 1946: "It is now highly respectable doctrine, in academic and banking circles alike, that a substantial measure of direct control over private capital movements, especially of the so-called 'hot money'[1] varieties, will be desirable for most countries not only in the years immediately ahead but also in the long term as well". The Bretton Woods arrangements fully reflected this consensue. As Keynes himself would make clear, the agreement gave every government the "explicit right to control all capital movements" on a permanent basis. "What used to be heresy," [2] he said "is now endorsed as orthodoxy".

There was almost complete convergence of views among economists and policy makers of the day on the need for capital controls. That this consensus was a significant departure from the gold standard-era narrative on the benefits of free finance was well recognised. Moreover, capital controls were not viewed as simply a temporary expedient, to be removed once financial markets stabilised and returned to normal. As Keynes and other others underscorec, they were meant to be a "permanent arrangement".

This about-face had its roots in the turbulence of global finance during the interwar period. As we saw in chapter 2, private capital flows had played a destabilising role during the 1920s and 1930s. Countries that had gone back to gold found their currencies wildly fluctuating and moving in directions not always consistent with underlying economic developments. Countries on gold faced rapid capital outflows [3] at the slightest hint of trouble, which required high interest rates and endangered their governments' ability to maintain fixed parities. Stability on the foreign exchanges clashed with the goal of full employment. These financial market pressures ultimately condemned Britain's return to the gold standard to failure. Once markets' dynamics became intertwined with domestic politics, there was no hope that a world of smoothly functioning, self equilibrating finance would lie within reach.

Keynes identified another, more fundamental problem. Unfettered capital flows undermined not only financial stability but also macroeconomic equilibrium - full employment and price stability. The idea that the macroeconomy would self-adjust, without help from domestic fiscal and monetary policies, had been buried by the experience of the Great Depression and the chaos of the 1930s. Even in periods of relative calm, the combination of fixed exchange rates with capital mobility enslaved a country's economic management to other countries' monetary policies. If others had tight money and high interest rates, you had no choice but to follow suit. If you tried to reduce your interest rates, you would experience a massive outflow of private capital [4]. If on the other hand, you wanted tighter credit than in other countries, higher interest rates at home would trigger a massive inflow of foreign money, leaving your economy flush with credit and undoing the effects of your own policies. Keynes argued...


[1] Earlier on the author describes this as "portfolio flows". e.g. would that mean our fore fathers buying foreign shares?
[2] This, I believe, is a comparision with the earlier economic liberalism of the Victorian to which he alludes in the next paragraph
[3] Capital flight?
[4] More capital flight?

Hopefully this context clarifies some of the areas I'm currently reading up.

Matt

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Re: Capital Flight

#326361

Postby TheMotorcycleBoy » July 15th, 2020, 3:23 pm

1nvest wrote:Investing overseas isn't flight as the dividends are being repatriated, as might the capital at some point. Much of the UK economy is based upon such. 8 trillion of UK investments by foreign, 7.2Tn of foreign held by UK investors, but where typically the yields made by UK investors is greater than what foreign earn from the UK such that it broadly balances. The UK's high credit rating is a part of that.

Sure. A balanced net position.

A large part of the ending of the UK being on a gold standard in 1931 was due to money and gold being exchangeable at a fixed rate and where repeatedly money was being redeemed in gold and the gold being removed out of the country.

Apparently Churchill wouldn't give ground to pressure to revalue the basic sterling to ounce gold rate. That is what my book says in an earlier chapter IIRC.

When on the gold standard it made more sense to hold gold in the form of money/currency, where that money was deposited earning interest. In effect the state paid you (assuming money was invested in Gilts) for it to securely store your gold for you and where at any (reasonable) time you could convert the money back to gold.

Sorry I didn't quite get this. Do you just mean "in those days, i.e. the G.S. days, one could have savings in gilts, and then a later date, liquidate them into *real gold* whose weight would be more than the equivalent gold quantity prior to your gilt investment?"

Each new note printed/spent devalues all other notes in circulation, could be considered as a form of micro-taxation. So why do we still have/pay taxes? The BoE could just print enough money and hand it to the Treasury for deployment as per how the Treasury currently spends without the need of armies of tax collectors/managers and massive tax rules books.

I see QE (printing) as being quite different from taxation. Isn't taxation merely a form of targeted redistribution and hence re circulation of *exactly the same* earlier supply of money, where as printing actually *increases* that supply?

That's been thrown out of the window however now, where Congress for instance only recently opened up permission for the Fed to print up to $8Tn to buy up to 70% of each/any bond series. Having a big bond buyer in the market induces investors rebalancing out of bonds after price rises, into stocks, which pushes stock prices higher. Much of that is a consequence of irresponsible Euro/EU, that has printed to buy up government bonds, then junk bonds, now stocks ... and could if continued further lead to buying up all houses. When the legal counterfeiter isn't reigned in the skies the limit. The ECB had to print 2Tn in order to bail out massive bad German bets (debts) after the 2008 financial crisis. Bad German debts were exchanged for ECB debts (rest of EU bailed out Germany - massively so). Greece's debt in contrast was a drop in the ocean, but Germany prevented Greece from being assisted. Similar to how prior to 2008 banks were playing a big bets heads we win, tails the taxpayers bail us out gameplay, but expanded to be at the country level. As the ECB print more Euro's so others have to follow (US$, £ ...etc.) otherwise that in effect would permit the EU to export its problems onto others.

Not wishing to get too country specific here, but aren't we all just as "guilty" in modern monetary policy here? Weren't "we" (i.e. the financial institutions of the developed nations) all eager to jump aboard the "property values always rise" bandwagon (especially subprime) back in the early noughties? The printing/asset buying/devaluing exercise was basically a *collective* response to the subsequent economic cataclysm, if I remember it right.

Matt

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Re: Capital Flight

#326362

Postby Alaric » July 15th, 2020, 3:28 pm

TheMotorcycleBoy wrote:Hopefully this context clarifies some of the areas I'm currently reading up.


I think a key point is that the capital controls were combined with fixed exchange rates. Apart from currency mergers such as the Euro and currencies that track the Euro or Dollar, exchange rates have been floating for almost fifty years. Capital controls still existed in much of the EU until around thirty years ago.

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Re: Capital Flight

#326382

Postby 1nvest » July 15th, 2020, 4:48 pm

Hi Matt
TheMotorcycleBoy wrote:
When on the gold standard it made more sense to hold gold in the form of money/currency, where that money was deposited earning interest. In effect the state paid you (assuming money was invested in Gilts) for it to securely store your gold for you and where at any (reasonable) time you could convert the money back to gold.

Sorry I didn't quite get this. Do you just mean "in those days, i.e. the G.S. days, one could have savings in gilts, and then a later date, liquidate them into *real gold* whose weight would be more than the equivalent gold quantity prior to your gilt investment?"

In effect yes. You simply held money, invested in Gilts and accumulating interest, and where that higher amount of money could be swapped out for more gold given that the price of gold was fixed/constant. Whilst during the time of holding gilts it was like the state securely storing your gold for you.

If you factor in that during World Wars you'd probably be best placed by holding portable real assets, art, silver ... suchlike, given the uncertainties, and you also factor in that pre 1932 you'd have been better placed holding short dated gilts rather than physical gold, excepting during WW1 years; And that from 1932 up until 1971 when the US$ was still pegged to gold, such that holding free floating silver was more appropriate, but swapped out silver for free floating gold from 1972 onwards ... then 50/50 stock/'gold' (with the above caveats) held up remarkably well. Broadly as good as all-stock average rewards, but with less volatility/greater consistency (better risk adjusted reward). But the cycles can be long. 50/50 stock/gold for instance was better during the 1970;s and again since 2000. 1980's/1990's however saw stocks providing great gains such that even whilst 50/50 stock/gold provided OK rewards it likely would have felt uncomfortable for many to be repeatedly reducing shares to buy more ounces of gold to only see the price of gold continue further downwards, and whilst all stock was making a killing by comparison. If you persisted however, then at the end of the 1990's you would have accumulated many multiples of ounces of gold being held, the ounces of gold expansion rate more than offset the declines in the price of gold. Over full cycles, 1970 through to recent that incorporates both cycles of stock/gold leading/lagging similar overall rewards are apparent, but where rewards were more consistent.

US data (similar) for 1972 to recent ... https://tinyurl.com/ybclazzm

Image

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Re: Capital Flight

#326422

Postby TheMotorcycleBoy » July 15th, 2020, 7:40 pm

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

Alaric
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Re: Capital Flight

#326440

Postby Alaric » July 15th, 2020, 9:54 pm

TheMotorcycleBoy wrote: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.


I believe that's how it worked. There was also a pile of gold in the USA, New York presumably. The price of the gold between New York and London could only vary by the cost of shipping, from which the term arbitrage is derived, allegedly. The point being that if the price varied, it would be possible to profit by shipping from one to the other.

Before Keynes, if we're talking pre 1914, financial theory didn't exist in its current form, For example I believe that the UK Government having sold long Gllts to finance the war, felt obliged to increase the coupons on existing issues when the cost of borrowing increased.


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