Capital Flight

In June the U.S. dollar reached a 17-month low, sparking fears of a flight of capital from America. Speculation became rife that investors will begin to shun United States financial assets.

The dollar’s loss could become the euro’s gain as the new currency’s value continues to appreciate in the wake of the greenback’s decline. There is a real prospect of a new phenomenon rising in the marketplace as pundits predict that the euro will find par with the dollar by the end of the third financial quarter this year. Should the euro edge in front of the dollar, the risk of capital flight from the dollar to euro-backed investments could turn the global market on its head by the new year.

For the past decade, economists and financial analysts have warned that the global economy is flying in unchartered territory. For the first time in post-war history, not only are we faced with the reality of a change in the geopolitical balance of power, but the world also faces a great change in the balance of global economic and financial power.

The U.S. can ill afford a cash drought under prevailing conditions, as it needs more cash than any other major economy to offset its monolithic current account deficit. This deficit represents the money the U.S. must borrow overseas to pay for the goods and services that Americans import as well as to finance investment that is not covered by U.S. savings.

The current account shortfall reported by the U.S. in June was a whopping $107.5 billion. Despite this gloomy picture, Americans continue to borrow to pay the interest on their outstanding credit bills—a sure recipe for impending disaster. The piper will, eventually, have to be paid!