Capital Flows

Intl-Capital-Flows 2

 

Introduction

The Evolution of the Global Economy

Cap-Flows

The economy is like a child. It grows, matures and evolves. Perhaps the greatest problem we face in attempting to reform our political-economy and move forward, has been the assumption that we are in control. We only to see things in our domestic political-economy and make our investments and policy decisions based upon this myopic domestic perspective. We assume governments are in control even though we do not understand what they are doing. They try desperately to influence what we think and do realizing that we actually respond to what we believe will happen in anticipation.

Yet the economy is far more complex and sophisticated. Everything is actually connected precisely as it is in nature for we are part of nature and that same grand design. The global economy is much like a rain forest with billions of lifeforms all depending on another. To analyze and model this kind of complex environmental and societal economic system requires research that views the system both as a whole and its component parts to reveal the interconnected data that lies hidden beneath the surface.  This allows for the combination of small influences to cascade into larger global trends just as removing one specie in a rain forest will set off a chain reaction since it is either a predator or the prey in relation to other species. This is why we need to see the flow of capital between all the players for linking the global data for the analysis reveals the whole complex system, and not just a subset of all the interesting operations and processes of the system.

We cannot reduce the trend to a single cause and effect. The global economy is akin to a rain forest with countless species interacting with one dependent upon another. Remove one, and you begin a chain reaction with unintended or knowable circumstances. We are incapable to constructing a rain forest because we do not understand all the subtle interconnections. Australian learned that lesson by importing one specie to accomplish one goal that introduced a predator altering the environmental balance. Likewise, altering taxes, trade regulations, and investment regulations alters capital flows that can be extremely destructive.

PlazaAccord

The Plaza accord starting the G5 (now G20) to manipulate the dollar down by 40% in order to reduce the US trade deficit, created the 1987 Crash and sent capital rushing back to Japan that they did not understand creating the 1989 Bubble.  The capital flow chaos unleashed by the G5 was devastating.

CapitalFlow-Japan87-89(2)

 

The G5 caused the capital withdraw from the USA and the 1987 Crash on a panic the dollar would decline by 40% and that set off a capital concentration back into Japan. As the yen rose and the Nikkei, that attracted foreign investors creating the Bubble in 1989. Capital then fled Japan and moved into South East Asia.

THLAND-Y

 

The capital then flows to South East Asia and created the peaks in 1994. That was the precise low in the S&P500 back in the USA. Capital then began to shift toward the US and European markets and this flow intensified because of the expect launch of the Euro in 1998. That led to the Currency Crisis of 1997.

1994 SP500

 

The turning point in 1994.25 marked the precise low in the US share market and the shift in capital flows out of South East Asia. Every single thing is connected on a global scale. We must come to understand that the economy has matured and evolved in ways we have ignored and remain oblivious to their development. In many ways, we still assume the world is flat economically. We fail to grasp the global economic evolution all around us because it confronts our politicians, economists, and the central bankers who prefer the limited domestic economy view in which they can be masters of the universe.

The evolution of our global economy is challenging the very ideas and theories of economics that deprives them of the power they desire as interventionists. If the economy is malleable, then they can control it. If the economy is interlinked, then we are all in this together and we cannot control the economy with raising taxes to create “social justice” without endangering the entire system.

Fish-Bowl-Economy

This basic assumption of a domestic economy within the grasp of government is what I call the Fish Bowl Economy entirely self-contained.  All economic theories are predicated upon this concept and justify government intervention to alter domestic trends that may be set in motion externally.  This domestic myopic view that supports centralized panning and governmental power was the foundation of communism that crumbled to dust. Government, assuming variable degrees of power, has been unable to prevent any crash and always seeks greater power in the aftermath with each event claiming they will prevent the next. They cannot see the global economy for it is beyond their power. This view of a domestic Fish Bowl Economy, excludes the possibility that a fish can leap from one bowl to the next. Therein lies the flaw in economic theories that justify government control.

(Full Work to be Published by 2014)

CapFlow-07-12