Capital Flight -- The Strategy Behind Trump's Sanctions

American Thinker ^ | 08/13/2018 | By Monty L. Donohew

[SeekAndFind]

When there is war, conflict, or instability, vulnerable human beings flee, seeking refuge in safer countries. Everyone is familiar with the plight of refugees, and the challenges refugees create for surrounding nations. People need and deserve support, and it requires resources to meet this need.

When there is war, conflict, or instability, vulnerable capital and wealth also flee. The "problem" of fleeing capital is different, however. Because capital and wealth are not as encumbered and physically restricted as are human beings, especially in the modern electronic age, capital moves far from the source of instability. Capital flight makes support of human refugees even more difficult, as capital often flees nations burdened with obligation of support, nations in close proximity to the underlying cause of flight.

Unlike human refugees, who consume resources and capital, fleeing capital is welcome with inviting arms by safe havens. Capital and wealth must "go somewhere," and if they land in the banks and markets of a particular nation, that nation reaps the reward of that investment. Banks can lend at lower interest rates. Businesses can grow, expand, modernize, and invest. There is great reward and little cost to a recipient nation, especially if that nation has already invested heavily, historically, in the safety and security of the investment, by, for example, modern economic protections, strong security, a stable political system, and reasonable taxation.

The recipient nation does not have to reduce or compromise taxes, regulations, environmental protections, workers' protections, and the like, in order to be more "competitive," in the global market, all costs to capital investment, because these costs are easily accepted and paid in exchange for safety and security. In other words, when confronted with high risk of loss, those who invest capital and wealth will accept higher investment cost, and lower ultimate returns.

[SeekAndFind]

Turkey provides an excellent example of capital flight, and insight into Trump's economic and foreign policy strategy.  The Turkish lira is plummeting.  It is plummeting because the Trump administration announced that it would "review" Turkey’s duty-free access to the U.S. market, after Turkey hit the U.S. with tariffs on U.S. goods in response to American tariffs on steel and aluminum.  President Trump also hit Turkey with sanctions over the country’s hostile detainment of an American pastor.  The result is that capital is fleeing Turkey, because according to the Wall Street Journal,  investors are alarmed  by the amount of control Turkish president Erdogan holds over monetary policy. Analysts bluntly told the Journal that improving relations with the U.S. and raising interest rates would help stabilize the country’s currency.  Turkey has refused to do either. Capital flees Turkey because Turkey is unsafe.

[SeekAndFind]

Consider the many causes of the flight of capital in recent years.  Are competing markets as strong and stable as they were seven years ago, and more importantly, are they as strong and stable as is the U.S. market?  Capital is fleeing Canada.  Capital is fleeing China (strange -- people who  command wealth get a bit skittish when several hundreds of their kind simply disappear).  EU instability has caused capital to flee Europe (link behind subscription wall). Capital has flown from India. Capital has flown from Russia, although early indications are that new Trump sanctions may not encourage additional capital flight.  Capital is fleeing Latin America.  There are a multitude of examples, but the point is, too, that capital is NOT fleeing the U.S. 

[cpdiii]

Turkey provides an excellent example of capital flight, and insight into Trump's economic and foreign policy strategy

Reagan defeated the Soviet Union without firing one bullet. He did it via the economic might of the United States and oddly Saudi Arabia. The Soviets total economy was based on oil exports. The Saudis produced oil at a stupendous rate and drove the price down to 15 dollars in inflation adjusted dollars about 31 dollars today. The Saudis did this because Reagan told them to do it and it was also in their self interest.

The Soviet Union then collapsed due to economics. Reagan was brillient. Bush the first, Clinton, Bush the second, and Obama wasted this grand opportunity. Today Russia is a potent advisary in nuclear might. Economically they are a basket case. The GDP of Russia is on a par with Italy and less than my great state of Texas.

Trump is a businessman and lives economics. He is kicking their ass but the media refuses to tell us.

[logi_cal869]

Excellent post. However, the term “risk” is more accurate than “unsafe”.

To be an unacceptable or high risk prompting capital flight, “unsafe” needs not yet exist as a condition.