Capital flight occurs when investors en masse pull their assets out of a country due to diminished confidence in its financial system. Historically, the phenomenon was mostly limited to emerging economies, as witnessed in Asia and Latin America during their financial crises over the past decades. The past several years, though, have seen massive capital flight from developed economies – including Southern European countries such as Spain and Greece – in the wake of speculation on devaluation of their currency.
As a result of quantitative easing, the value of US currency is at risk, and we, too, are no longer immune to capital flight. We haven’t hit the financial state of the euro zone, but the magnitude of our economic crisis is already unlike anything America has ever experienced.
Some analysts estimate the central bank could print as much as $2 trillion to pay for this open-ended plan – more than doubling the amount of US currency currently in circulation. Such a flood of new money will likely drive down the value of the dollar relative to other currencies and assets.
The dollar has already weakened significantly against other currencies. During an earlier round of quantitative easing (QE2), when the Fed purchased $600 billion in bonds, the value of the dollar fell 18 percent compared to a market basket of currencies. In the months leading up to QE3, the dollar fell 6 percent. And with the Fed now set to pour $40 billion into our banking system every month for the foreseeable future, we can expect even greater devaluation.