Stocks and Capital Flight – Old and New

Courtesy of Bruce Krasting.

 

In my time I’ve watched a bunch of countries go south. In the 80’s it was all of South America. Poland, Yugoslavia and South Africa also hit the skids during those years.

 

There was an observable pattern as events unfolded. The early stages of a crisis were always marked with capital outflow by the financial elite in the country.  The wealthy families bought real estate properties outside of the country; they increased their ownership of foreign (mostly US) financial assets. They used whatever local currency they had (or could borrow) to buy hard assets in the country. In this case, hard assets meant  companies (or farms) that produced stuff that could be exported, and thus be a source of hard currency earnings. Two minor examples:

 

– In Ecuador there was an explosion of shrimp farming. The expenses of production were all in Sucres (the local currency). The shrimp were sent to the US and sold for dollars. (This was a great business – ecological disaster however.)

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