Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

IMF Capital Controls Danger for Emerging Market Investors

Politics / Emerging Markets Dec 07, 2012 - 08:18 AM GMT

By: Money_Morning

Politics

Martin Hutchinson writes: The IMF is up to no good again.

On Monday they released a new report on international capital flows which relaxed its opposition to exchange controls.


By doing so, the IMF has now made emerging market investments more risky, especially for retail investors.

What's more, they likely imposed a major new cost on the global economy.

The irony is that the IMF is trying to solve a problem that was caused by foolish global monetary policies. Relaxing its opposition to capital controls is just more of the same.

Removing Federal Reserve Chairman Ben Bernanke and his world-wide sympathizers, and restoring a true free global capital market would work much better.

The IMF does correctly note that capital flows have vastly increased in recent years. That's where the initial problem comes from. It's the solution that's dangerous.

Official foreign exchange reserves have increased to $10.5 trillion in the second quarter of 2012 from $2.2 trillion a decade earlier, a compound growth rate of 17% per annum - when nominal world GDP has grown at less than 6%.

And it's not all official reserves, either - the money in hedge funds, fast-trading schemes, private equity funds, sovereign wealth funds and other pools of fast money have increased much faster than output has.

Naturally, with all this money sloshing around, it can spill into and out of small countries' currencies in overwhelming amounts, making even a relatively large economy like Brazil unable to control its capital accounts and subjecting it to huge swings in capital availability.

Meanwhile, small, relatively poor countries like Vietnam and Mongolia have proved entirely unable to cope with massive foreign money swings, which have played havoc with their "real" economies and caused double-digit inflation.

So now to solve this problem, the IMF proposes to allow countries to engage in "capital flow management" both of "inflow surges" and "disruptive outflows."

But that poses a great danger to investors in emerging markets, not only small ones like Vietnam and Mongolia, but also huge markets like Brazil that are popular destinations for emerging market investment.

Emerging Markets and Capital Controls
If controls are instituted, investors may not be able to buy these markets now without paying an artificial premium. More dangerous, their money may become trapped in the market, with a provision like that imposed by Chile in the 1990s, forcing the money to remain there for a year before being able to exit.

Capital controls are even more damaging if you live in the country that is imposing them.

I have bad memories in that regard. My own native country of Britain had severe capital controls from World War II until 1979.

As a result the British middle class had no alternative but to invest in their own moribund economy. Currently, since I don't like U.S. economic policies, I have most of my money invested in precious metals and Asian ETFs-- with capital controls I would be unable to invest in either.

With the money trapped, the British government was able to run an inflationary monetary policy from 1947-79 that ruined many families.

My great-aunt Nan, for example, invested her retirement savings in British government War Loan in 1947. By the time she died in 1974, War Loan was trading at 30% of its 1947 price - and its value had been eaten away even further by the fivefold rise in British prices over the period.

Being able to get your money out of a country is a key civil liberty, and an important check on looter governments, of which there are all too many.

It's not surprising that the IMF fails to recognize the civil liberties aspect of its recommendations, or to see that anti-democratic governments like China violate their citizens' rights by imposing capital controls, trapping money in the shaky Chinese banking system.

It is, however, no way to operate in a supposedly global economy of free peoples.

The problems of excess capital flows cited by the IMF are real. However, the solution is not more regulations and restrictions on the activities of ordinary investors (which the rich can almost always evade).

Instead, the printing press policies pursued by Fed chairmen Greenspan and Bernanke must be ended, and their counterparts in the European Central Bank, the Bank of England and the Bank of Japan must be equally thrown out of their jobs. Interest rates must be restored to a level safely above inflation.

When this is done, you can expect a huge caterwaul from Wall Street and the big international banks, and a lot of hedge funds and funny money operations will go out of business.

There may be short-term pain for the global economy, but in the long run these giant pools of speculation will not be missed.

Capital controls are simply not the answer.

Source :http://moneymorning.com/2012/12/07/the-im....

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in