Capital Flight, Capital Controls, Capital Fear | Finance

Long story detailing why Europe matters. Capital flight, capital controls, and currency wars among nations. It's how Depression I began; it's also the roadmap to deflation and Depression II. Decoupling not an option in a global economy. Takes you step by step through the process. We've been here before, muppets.
"The spread of financial contagion - fear by another name - is increasingly evident in Europe at the moment. Interest rates are one measure of fear, representing the perceived risk of default and thus a risk premium. As this perceived risk rises, interest rates go up, but this has the effect of making the debt harder to repay, leading to a further increase in the perceived risk of default, and therefore higher interest rates yet again.
Once a country is trapped in this vicious circle, collective psychology tells us where it will lead - to default. Similarly, austerity programmes force default by making it more difficult to repay loans by forcing economic contraction. Positive feedback loops have an inexorable progression that picks up momentum as they proceed.
Perception of risk drives capital flows - away from problem states and toward safe havens. What happens is that spreads rise. Perception of high risk leads to much higher rates, whereas perception of lower risk leads to falling rates, at least in the early stages of a financial crisis. Safe haven status does not require objective measures of safety or sounds fundamentals. All one has to be is the least worst option. Money goes from where the fear is to where the fear is not, pushing some over the edge, while buying time for others. In either case, large capital flows are destabilizing, and governments will try to use capital controls to prevent them."


Capital Flight, Capital Controls, Capital Fear | Finance