Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Elliott Wave Crash Course - 3 Ways the Elliott Wave Principle Enhances Your Trading - 28th July 16
Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure Debt Deflation? - 27th July 16
Monetary Zika - The Insidious Nature of Credit Expansion - 27th July 16
Gold and Pork Bellies - 27th July 16
Silver Is Insurance Against The Worst Part Of This Depression - 27th July 16
Don’t Buy The SPX Hope Stock Market Rally! - 27th July 16
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

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

© 2005-2016 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

Catching a Falling Financial Knife