The flight of capital to the US

Monty L. Donohew:
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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.
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Some economist have struggled to understand the U.S. stock market.  Investment in U.S. domestic and multinational companies is at an all-time high.  Investment advisers worry that valuations of companies don't reflect well the amount invested and warn of a bubble.  Some are surprised daily that the bubble hasn't burst.  "It just keeps going up!"  After all, "what comes up..." 


If, however, the U.S. economy generally, and the U.S. stock market, particularly, is seen as a safe haven, the appreciation resulting capital flight is understandable, rational, and beneficial.  More, it may mean that the bubble risk isn't dire; a bursting bubble means that capital has suddenly flown elsewhere, and in a world of a multitude of choices, capital is always free to flee where it is best employed by its owners to produce wealth.  But, what if the risk of flight is just too high?  Capital might be expected to stay where it is safe, especially if that safety endures, and other opportunities for safe investment with reasonable return do not materialize. 



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. 


Not all capital flight winds up in the U.S., of course, but it’s safe to say that a good percentage is winding up here.  Simple economics: more money chasing the same goods or investment opportunities causes prices to increase. With share prices high, companies can grow, expand, modernize, and invest. The investment increases the value of companies, generates returns for investors, and generates revenues for the U.S. government.  
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Capital flight to safety in the US is telling and it also does not require the burden of refugee flight.  It also gives an incentive to places like Turkey to change their policy.  If Turkey had a rational leader that is what it would be doing.  Instead, it has a faith-based leader who thinks Islam is the answer to all adversity.   It may require a new government for Turkey to change course.

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