The Myth of Capital Flight
Any author can attract readers by using this word in his title: myth. It is almost as good as this word: end.
What do I mean: "the myth of capital flight"? I mean that capital doesn't fly.
Well, once in a while it does. Maybe somebody can carry some gold coins in an airplane flight across a national border. But he would be unwise to try. The TSA may relieve him of his coins before he gets onto the plane.
A lot of writers use the phrase, "capital flight." As long as they know what they really mean, and as long as readers know what they really mean, this is harmless. But I don't think they know what they really mean, and I don't think their readers know, either.
Let me give you an example. We speak of the sun as rising in the east. But we know that the sun really does not rise in the east. The earth rotates, and this provides the illusion that the sun rises in the east. Everybody knows this, or least almost everybody does. So, we can safely speak about the rising of the sun in the east. But prior to the 16th century, when people said that the sun rose in the east, they really meant it. They really believed that the universe circled around the earth. Our language reflects this older usage, but our astronomy had better not.
I begin with this premise: capital does not fly. Then what are we talking about when we speak of the flight of capital?
We are speaking about a transfer of ownership. Capital does not move. Ownership, a legal relationship, is transferred.
A TRANSFER OF OWNERSHIP
Let me give an example that is easy to understand. Real estate in the United States is cheaper than in any other rich, industrial country. It is also easier to buy and sell than in almost any other country.
So, foreigners buy real estate in the United States. American owners sell it to them. Is this a flight of real estate out of the United States? No. Real estate does not move across borders. Ownership of real estate can be transferred across borders. We can also speak of a flight of money out of China. This money is used to buy real estate in the United States. Some people would say that this flight of capital is significant in terms of what is going on inside China. I would say that it is simply a way for rich Chinese residents to diversify their portfolios. So, I would not use the phrase "capital flight" to describe an investment in American real estate by Chinese nationals.
We are also told that governments inaugurate capital controls. There are no capital controls. There are people controls.
Capital controls are like price controls. There are no price controls. There are people controls.
If we use the language of control, we should always have in the back of our minds this fact: governments seek to control people. Assets have value, and therefore they are worth controlling, but only because people impute value to them. Governments interfere with people's ability to transfer ownership. These are not capital controls; these are people controls. We need to have this clear in our minds before we start speaking of price controls, capital controls, or the flight of capital.
We hear about the flight of money across the border. But most money is digital. It stays inside computers. It is part of the banking system.
Each banking system is regulated by the civil government of the country in which the bank is legally established. The money does not leave the national banking system. Ownership of digits can be transferred. Somebody can transfer ownership from bank A to bank B. But because digital currencies are used almost exclusively inside a national border, because the banking system is inside the border, money does not flee the country. Individuals own money inside a banking system, which is inside a particular national border. Sellers of these digits find buyers who live on the other side of the border.
We need to understand this. When we speak of "a flight out of the dollar," or "a flight into the dollar," this is like saying that there is "a flight out of the stock market." No, there isn't. Not in the aggregate, there isn't. For every seller, there has to be a buyer. For anyone trying to sell a stock, there has to be someone who wants to buy the stock if there is going to be a sale. For every share of stock, there is an owner. There can be no flight out of stocks. For everyone trying to flee out of stocks, there has to be somebody else who wants to flee into stocks.
When we talk about a flight out of the stock market, we mean that sellers cannot find buyers at yesterday's prices. They also cannot find buyers at the day before yesterday's prices. Prices are falling, but that is because lots of people are buying. They simply are not buying at yesterday's prices.
There is no more a panic move out of the stock market then there is a panic move into the stock market. There have to be a buyer and seller . . . at some price.
I realize that we try to make sense of markets by speaking of the flight out of a particular asset. But there has to be a flight into that asset, assuming that the asset has a price above zero. If it is zero, there is no flight out. The asset just sits there, dead.
When somebody speaks of "the flight out of the dollar," he means a flight by today's owners of dollars into another currency. But most sellers do not move geographically. The money also does not move geographically. What moves is legal ownership of the money. Someone sells dollars in exchange for some other digital currency. Somebody who owns the other digital currency exchanges this currency for dollars. There is always a flight into the dollar when there is a flight out of the dollar. What changes is ownership. What changes is the exchange rate.
A FLIGHT OF CURRENCY
There can be a flight of paper dollars across a border. This goes on all the time. Most physically printed pieces of paper with dead American politicians' pictures on them are transferred outside the United States. They are sent by workers inside the United States to relatives back home. This is why you don't have much money in your wallet. You have credit cards or debit cards in your wallet. How much currency do you actually carry?
Look at the figure for currency in circulation. It is $1.3 trillion. There are approximately 100 million families in the United States. So, dividing $1,300,000,000,000 by 100,000,000, we get the figure of $13,000. There is no way that you have $13,000 cash in your possession. Then where is it? Most of it is outside the United States. Most of the percentage that is inside the United States is probably being used for drug deals.
There has been a flight of physical dollars out of the United States. But this has nothing to do with a crisis inside the United States. This has everything to do with the fact that immigrants have come to the United States, either legally or illegally, and they are working for cash. They send much of this cash home to their families. The United States dollar has functioned as an alternative currency around the world for a generation. That is not because the United States is bordering on a collapse. That is because the United States is the most desirable nation on earth to live in, and millions of immigrants, legal and illegal, have come into the United States over the past generation to get a piece of the action.
So, if we're talking about a flight out of the dollar, we're also talking about a flight into the dollar. The physical dollars are serving as currency outside the United States. There is not a flight out of the dollar; there is a flight into the dollar. People in foreign countries have created an alternative system of exchange that is based on physical dollars.
THE ALMIGHTY DOLLAR
We hear about a flight into the dollar. The dollar is rising in international value. The same analysis needs to be applied to this process.
People around the world, and even inside the United States, are selling digital foreign currencies, and they are buying digital dollars. This means that somebody is selling digital dollars in order to buy foreign digital currencies. The exchange rate has dropped for the foreign currency, because more people are attempting to buy dollars and sell foreign currencies, than the number of people who are willing to buy foreign currencies and sell dollars. But the economist always ads these crucial three words: "at some price." At some price, there are buyers of foreign currencies and sellers of dollars. In recent months, this dollar-denominated price of foreign digital currencies has been rising. People still want to sell dollars, at some price. People still want to buy dollars, at some price. This price has been rising.
When it comes to major currencies and international exchange, there is no flight out of any currency. Goods and services cross borders, and they cross borders only because somebody is buying one currency and selling another currency. Inside the borders of a particular country, unless it is a Third World country with physical dollars as a shadow currency, people buy and sell in terms of a domestic currency. Anybody from outside the nation who wants to buy something or sell something has to do so on the basis of a purchase or sale of that foreign currency.
If I buy a new Japanese car, I pay dollars at a local dealership. These cars are not imported. That is because Japanese cars are produced inside the United States. The owners of the Japanese automobile manufacturing company live in Japan. They take the money that they have made through the profit of the sale of the cars, and maybe they hold dollars inside an American bank. This is a good way to diversify out of the sinking Japanese yen. Or maybe they exchange the dollars and keep the yen. But there is not a flight of dollars into Japan. There have not been exports of cars out of Japan. The cars are made in the United States.
Names are associated with Japanese cars, because Japanese cars used to be physically exported across the Pacific. But that has not been true for a generation. In the 1950's, there was a flight of Japanese cars out of Japan, and a flight of American dollars out of the United States into Japan. But we don't speak of it this way, because this language confuses us. In any case, the cars were sent on ships, not airplanes. There was not a flight of Japanese cars out of Japan. Japanese cars sailed out of Japan. But the dollars did not sail in.
Sometimes our language confuses us. When it comes to currencies, there is not a flight out of a currency. There is an increasing quantity of a particular currency that is being offered for sale to buyers, who offer a foreign currency in exchange. The dollars are located inside banks that are inside the United States, or at least they are governed by the laws of the United States. A branch bank can be located in a foreign country, but it is an American bank. It is governed by American law. The Federal Reserve System provides the monetary base for the bank to operate. Similarly, a foreign bank may have a branch in the United States. It must operate in terms of United States law. But it is owned abroad. The digits stay inside the legal entities that we call banks, and these digits are stored on hard disks that are owned by specific banks.
CONCLUSION
As long as we know what we're saying, we can use familiar language.
There really is a flight of dollars out of the United States, but these are physical dollars. They do not indicate panic on the part of American sellers of dollars. These dollars are being transferred to owners outside the country. This is not done with digits.
Digital dollars stay inside the legal system of the United States. They are locked up inside the legal boundaries, and in most cases, they are locked inside the geographical boundaries of the United States. The money doesn't flow out. The money stays here. Ownership is exchanged. To exchange ownership, there has to be a buyer of whatever a seller is trying to get rid of. There may be panic by existing owners to get out of the dollar, but they have to find willing buyers who want to get into the dollar.
There has been increasing demand for dollars, and this is reflected in the rising price of dollars. I don't think it's smart to talk about this as a flight out of the euro, or as a flight out of the yen. In any case, for every buyer, there was a seller. It takes two to tango.