Peter Coy — China’s Capital Flight

"Capital flight" means the bleeding foreign reserves.

What Xi is running up against is what international economists call the trilemma, or the impossible trinity. It says that a country can’t have all three of the following things at once: a flexible monetary policy, free flows of capital, and a fixed exchange rate. They fight one another. As soon as China started allowing free (or at least freer) flows of capital, it was inevitable that it would have to give up on one of the other two objectives. If it wanted to keep the yuan from falling, it would have to raise interest rates higher than is good for the domestic economy, essentially giving up on setting an appropriate monetary policy. Or, if it wanted to set interest rates as it pleased, it would have to allow the yuan to sink.

Drop the dollar peg and let the yuan float, like Russia did.

Bloomberg View
China’s Capital Flight
Peter Coy

See also

Bloomberg Business
China Wants a Reserve Currency and Control, But Can't Have Both

Steve Randy Waldman — Tangles of pathology

Trilemmas are always fun. Let’s do one. You may pick two, but no more than two, of the following:

• Liberalism
• Inequality
• Nonpathology

By “liberalism”, I mean a social order in which people are free to do as they please and live as they wish, in which everyone is formally enfranchised by a political process justified in terms of consent of the governed and equality of opportunity.

By “inequality”, I mean high dispersion of economic outcomes between individuals over full lifetimes. [1]

By “nonpathology”, I mean the absence of a sizable underclass within which institutions of social cohesion — families (nuclear and extended), civic and religious organizations — function poorly or at best patchily, in which conflict and violence are frequent and economic outcomes are poor. From the inside, a pathologized underclass perceives itself as simultaneously dysfunctional and victimized. From the outside, it is viewed culturally and/or morally deficient, and perhaps inferior genetically. Whatever its causes and whomever is to blame, pathology itself is a real phenomenon, not just a matter of false perception by dominant groups.

This trilemma is not a logical necessity. It is possible to imagine a liberal society that is very unequal, in which rich and poor alike make the best of their circumstances without clumping into culturally distinct groupings, in which shared procedural norms render the society politically stable despite profound quality of life differences between winners and losers. But I think empirically, no such thing has existed in the world, and that no such thing ever will given how humans actually behave.

I would call it "tangles of asymmetry." The problem is reconciling social liberalism given asymmetry of status, political liberalism given asymmetry of power, and economic liberalism given asymmetry of wealth in a liberal society where individual freedom is a foundational principle. That foundational freedom leads to asymmetries that undermine liberalism is a paradox of liberalism. Or is it an inherent contradiction that cannot be overcome?

What SRW calls "pathology" is actually narrow self-interest and group-interest. The foundational freedom of liberalism is freedom to pursue self-interest as one sees fit within the law. But the law is determined by social, political and economic asymmetries that favor some over others. Are these others actually free, or is this just a justification of a human version of the law of the jungle manifesting as social Darwinism? Is governance just a euphemism for "civilizing" the law of the jungle by justifying institutionally the "law" of the stronger?

Interfluidity
Tangles of pathology
Steve Randy Waldman

Senexx — Have We Forgotten the Trilemma?

This is lifted from the Modern Money Primer blog by Randall Wray and is now available as a book from Amazon.

"According to the well-known trilemma,government can choose only two out of the following three: independent domestic policy (usually described as an interest rate peg), fixed exchange rate, and free capital flows. A country that floats its exchange rate can enjoy domestic policy independence and free capital flows. A country that pegs its exchange rate must choose to regulate capital flows or must abandon domestic policy independence. If a country wants to be able to use domestic policy to achieve full employment (through, for example, interest rate policy and by running budget deficits), and if this results in a current account deficit, then itmust either control capital flows or it must drop its exchange rate peg.

"Floating the exchange rate thus gives more policy space. Capital controls offer an alternative method of protecting an exchange rate while pursuing domestic policy independence.

"Obviously,such policies must be left up to the political process—but policy-makers should recognize accounting identities and trilemmas. Most countries will not be able to simultaneously pursue domestic full employment, a fixed exchange rate, and free capital flows. The exception is a country that maintains a sustained current account surplus—such as several Asian nations. Because they have a steady inflow of foreign currency reserves, they are able to maintain an exchange rate peg even while pursuing domestic policy independence and (if they desire) free capital flows.

Modern Money Mechanics — MMT simplified
Have We Forgotten the Trilemma?
Senexx