'Run on UK'

Normally when something like this happens there is a currency crisis following close behind.

A silent $1 trillion "Run on Britain" by foreign investors was revealed yesterday in the latest statistical releases from the Bank of England. The external liabilities of banks operating in the UK – that is monies held in the UK on behalf of foreign investors – fell by $1 trillion (£700bn) between the spring and the end of 2008, representing a huge loss of funds and of confidence in the City of London.

Some $597.5bn was lost to the banks in the last quarter of last year alone, after a modest positive inflow in the summer, but a massive $682.5bn haemorrhaged in the second quarter of 2008 – a record. About 15 per cent of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion. This is by far the largest withdrawal of foreign funds from the UK in recent decades – about 10 times what might flow out during a "normal" quarter.
Paranoia that the UK could follow Iceland into effective national insolvency and jibes about "Reykjavik on Thames" will find an unwelcome substantiation in these statistics – which also show that stricken British banks are having to repatriate similar sums back to Britain. This is scant consolation for the authorities, however, as it means the UK and sterling are, like some emerging markets and currencies, suffering from a flight of capital. By contrast some financial centres and currencies – notably the US dollar and the Swiss franc – are enjoying a boost as "safe havens" in a troubled world.

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Although this is over my head. What does it mean when international capital is pulled out of a nation as a general principle.

I saw the reference to the UK becoming like an emerging market, capital starved as well as the total debt of their banking system would collapse their economy and their economy is way to heavily overloaded in financial services...

But I don't really get what's going on in today's global contagion system here, what this implies.

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Not a good sign.

I think quite simply, it means that investors have lost confidence in the valuation of assets (real estate, stocks, bonds, etc. .... sound familiar?)in the UK and they are fearful that the real strength of the UK economy is not strong enough to withstand the stresses being put on their financial system. Of course, this capital flight will further decrease the "wealth" of the UK and will devalue the pound. This will, in turn, increase the price of imported goods which will have further dampening effect on the UK economy. In short, this is the deflationary recession/depression soon to visit us if we don't change course, like immediately.

I was particularly struck by the reporter's reference to "Reykjavik on Thames", which is no small psychological factor. I recently read this remarkable article retelling the cautionary financial tale of Iceland. The UK was very active in this incredible story of hubris and greed. It's long but well worth reading. I think it will give a new perspective to the seemingly insurmountable task of unwinding all the financial nonsense that has gone on for far too long.

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