Outflow of Capital

You are a stunningly deep sleeper. One day, you fall asleep on the beach just before the tide comes in. When you wake up (covered in seaweed and surrounded by flopping fish), you find that everything you brought to the beach has washed out to sea. Your towels. Your beach umbrella. Your cooler with the mango juice and the cups made out of coconuts. And your wallet, with that stack of cash you brought for vacation.

Capital outflow in a nutshell. Well, in a coconut shell.

Real-life capital outflow involves the same concept...only on a national level. Assets move out of country. Investors pull their money out of one place because they think their cash will be better off somewhere else.

You're an investor in a sumac farm in the small Mediterranean nation of Shlobania. The king dies and his dopey son takes over the throne. Uh-oh. You’re sure the new king’s policies will run the country’s economy into the ground. So you close down your sumac farm and buy another one in a neighboring country with a more stable future. Capital outflow out of Shlobania and into its neighbor. Capital outflow doesn’t just involve foreigners moving money from one overseas investment to another. Citizens of a country might move assets out of that nation if they think they’ll be safer somewhere else.

Take China. A country with a restrictive government and not a huge respect for the rule of law. If you’re a rich person in China, you’ll want to get as much of your money out as you can. Move it somewhere else. You want to get your capital to a safe harbor against your own government.

You take what cash you can and look for investments elsewhere...outside of the restrictive rules in China. You buy an apartment in Paris. Or a castle in Scotland. Or a cotton candy factory in Iowa. Or...maybe you start looking at a sumac farm along the Mediterranean.

Just not in Shlobania.