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Capital Flight - What to do

by John Yu

You have just overthrown the government, your far left party has just won a landslide election, or your vast coalition of civic, labor, and religious institutions have simply decided to come together and ignore the existing government. Capitalists are fleeing your country in their private jets. Investors have pulled out all their money. Foreign banks run by capitalists suddenly decide they are no longer willing to make any loans to your "rogue" nation. The former dictator has packed up all his suitcases full of gold, jewels, and cash from your national treasury, and is now nowhere to be found.

Now what?

Economic collapse? Mass unemployment? Depression and starvation? No, of course not.

Wealth is not to be found in currency, in the so-called "precious" metals, in paintings by long-dead painters. None of those are needed to survive. Wealth is found in food, in warmth, in health care, and in the things necessary to produce them. All the land is still yours. All the labor is still yours. Even factory equipment remains, despite the flight of "capital" - that is, the loss of things that represent wealth, but are not wealth themselves. In fact, very little has been lost and virtually all of the productive capacity of your nation remains. All that has changed is the accounting.

Your nation may still have in its treasury the remnants of the capitalist financial structure - gold, other precious metals, paper money from nations around the world. Spend it - as soon as possible. Buy commodities - those things you need to survive and buy any equipment you need to produce the goods you need. That is the real wealth to people who actually have to do the work.

What happens in the rest of the world as the people of your nation are suddenly flooding it with various currencies and "precious" metals, while snapping up real goods? The supply of those currencies and "precious" metals go up, while the supply of real goods go down. These goods become more and more expensive, while "money" becomes more and more worthless. Thus, there is all the more reason to exchange your money as soon as possible for real goods you will need.

When all the old money has been spent, you are free to live, work, and produce the things you need. Self-reliance is the only secure form of wealth. Trade with other nations can still be conducted, but do not hold on to their money - money is mere promise of future wealth, promises that can be broken whether from malice or from inability to fulfill them. Exchange any money for real wealth as soon as you can.

Money within your own economy should be based on real wealth. When farmers produce a bushel of grain, let them issue a paper note representing that bushel of grain. Since that paper note can be redeemed for precisely that amount of grain, there is no inflation between the notes and the grain. These paper notes can be collected by larger farmer organizations that then reissue new notes based on a diversified index of what they produce. While the value of money issued in this way may fluctuate with respect to goods not on the index, it will not change with respect to the goods that back these paper notes. This is the first step to currency stability.

However, be warned that these notes are still only as good as the institutions that issue them. Either you trust that they can always be redeemed, or you redeem them as soon as it is convenient. This is especially true of money you receive from other nations that is supposedly backed in the same way. Distance makes people bolder and less hesitant to break promises. Ultimately, however, convenience would probably mean you will place your trust in an organization of like minded people who will help each other ensure that what you have is really what you have - although you should make sure there are alternatives should you decide to change your mind.

People can probably be trusted when times are easy and when prosperity reigns, but when times are tough, promises are much easier to break than the laws of survival. This is what makes self-reliance of an economy important. This is why local industry and agriculture should be protected. Productively ability is the real source of wealth of the nation.

However, natural disasters also occur. While the world as a whole may be fairly stable, the area around you is much more prone to random fluctuations of climate and geology. Thus self-reliance is not the entirety of a secure economy, but merely the supporting structure. The secondary source of security is prosperity in other geographical locations. The more prosperous others are, the more likely they will come to your aid in times of trouble. The more they have to thank you for their prosperity, the more likely they will come to your aid. Again, merely being creditors to their debt is not enough. Nations are sovereign, whether anarchist or authoritarian. They can break their promises - they can ignore any legalistic claims to debt. It is the general goodwill that can be fostered between two nations or people that will be your salvation in case your own self-reliance fails.

In the end, captial flight isn't really capital flight. Real capital - the people, natural resources, and equipment needed to produce real goods - cannot be packed up in a bag when the capitalist skips town. They will require a lot of labor if they truly want to escape with real capital. What remains when the capitalists are gone are merely the people who are doing the work, and the means to do it.

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Last updated: January 31, 2001

The Wealth of Nations
Originally written for Everything2
Sat Nov 22 2008 at 7:44:36

When people are concerned about their future economic security, they often do a lot of thinking over the question of how to preserve their wealth. It is during times of inflation or currency collapse that calls for returning to a gold standard become increasingly common.

However there are alternatives to both gold and fiat currency.

You could have a grain-standard, where paper notes were backed by grain, but grain is perishable... though it wouldn't go as quickly as a fruit-backed currency.

You could have a technology-standard, where paper notes were backed by computers, televisions, and cars, but all of those lose value because technology advances and old models are thrown out.

You could have a housing-standard, where paper notes were backed by places to live, but homes deteriorate over time as well.

If you wanted a currency that was by definition not going to inflate or deflate, then you would back it with the basket of goods used to calculate things like the consumer price index... of course, those goods are all perishable to some degree. If you then decided to build in a natural devaluation to the currency you issue, then you're not really preserving the wealth you supposedly got.

Organizing a gl0d-strike.

If you had some indestructible material that was lightweight and easy to recognize (say gl0d), then you might use that as currency - but it is purely a social construction. If one person accumulates vast amounts of this "gl0d" and the rest of the population resented him and were vindictive, they would simply organize a gl0d-strike and stop accepting it as money, thus effectively rendering that person broke.

The wealth of nations.

Ultimately though, you have to look beyond personal finances to the big picture of how what you consider to be wealth gets to you. If you want food, you have to ensure there are enough food producers. If you want LCD monitors, you have to ensure there are enough LCD monitor producers. Because humans have become so economically specialized, each person can no longer produce everything he wants by himself. Like it or not, if you want to be wealthy, it has to be collective wealth. You have to ensure the people around you can produce the things you need. This may be at a community level, maybe a national level, maybe a global level. You have to stop worrying so much about how much gl0d you can gather, but how you can help the people around you to produce the things you want. You'd have to get them access to resources, technology, knowledge, equipment, etc, but not only that, you also have to make sure they're relatively happy. If they're a bunch of pissed off producers, that makes it less likely for you to get access to the things you want.

Capital versus Cash
Originally written for knol
July 9, 2009

Traditional definitions of capital include cash, raw materials, land, machines, etc. Only the "cash" part I submit isn't real wealth. By "cash" - I mean dollars, gold, currency, any medium of exchange.

Cash only has value as long as other people are willing to trade stuff for it. You don't use the cash itself for anything - you only use it as a substitute for other things. For example, you don't build a house out of cash - you have to first trade the cash for building materials. You don't eat cash, you have to first trade the cash for food. Thus the value of the cash isn't intrinsic - rather, it's social. It is only good if other people are willing to trade stuff for it. If everybody in the world disappeared and all you had was a lot of cash, it would be useless. If everybody in the world disappeared and instead of cash, you had food, equipment, a home, raw materials, etc, none of that is useless. If everybody disappeared and you had cash, food, equipment, etc - everything but the cash would be useful to you. Thus the value of cash is only social value.

So let's say all the capitalists (ie. "entrepreneurs" as some call them) fled the country with their cash. What has your country really lost? All your country's real productive ability remains (which Adam Smith refers to as the Wealth of Nations). Your country can continue to produce stuff and trade the output of their production with other nations, if they want to. What else can they do? If each country simply decides to stop accepting the cash they used to use, and issue new cash for their trade, then it basically renders those who hold a lot of the old cash completely broke.

Thus there really isn't much to fear about capital flight.