Project Syndicate
The Art of Capital Flight
Kenneth Rogoff | Professor of Economics and Public Policy at Harvard University, recipient of the 2011 Deutsche Bank Prize in Financial Economics, and formerly the chief economist of the International Monetary Fund (2001 to 2003)
10 comments:
Does the capital take plane or does it have wings?
Capital flight is a metaphor for free flow of capital, that is investing in assets in a country then selling the assets to buy assets in another currency zone. Capital controls prevent this free flow of capital by preventing exchange of a country's currency into other currencies.
Of course the currency received for the asset sold remains in the currency zone and that amount is exchange in the fx market for another currency. This puts downward pressure on asset prices and also the currency of that currency zone.
Since capital controls are aimed restricting free capital flow it is a no-no under neoliberalism, the basic tenets of which are free markets, free trade and free capital flow.
Generally, countries prohibit taking our suitcases full of cash, but that is another matter.
Tom you are more qualified than Rogoff... I guarantee you he could not write what you have written here and if he read it, he would not understand what you are saying...
I seriously doubt that economists don't know that currency stays in its currency zone. What is the fx market for? Surely they don't think it is just about speculation.
The solution is to get rid of the reserve currency system. Use ONLY bilateral trade in the currency of the importer. And only allow investment in the currency of the recipient country. Otherwise foreign banks without access to the fed begin to use USD fractional reserve banking... and that never ends well. Make the exporter at the time of the transaction bear the full financial costs of engaging in that business. Make the foreign investor price in the full financial costs into their investments and loans. Aligns the interests of everyone involved better than the current system and reduces "capital flows" due to financial leverage in the banking system.
"Otherwise foreign banks without access to the fed begin to use USD fractional reserve banking... and that never ends well."
Let those banks fail. Once enough USD losses have built up to counter parties in the US Fed system, they'll start being more circumspect.
The problem is *always* foreign central banks trying to make domestic entities whole in foreign currencies. Don't do that. Make it very clear if you take a foreign currency loan, the CB will let you fail.
"The problem is *always* foreign central banks trying to make domestic entities whole in foreign currencies. Don't do that. Make it very clear if you take a foreign currency loan, the CB will let you fail.'
Interesting comment Neil. I didn't realize this. Thats quite club those CBers belong to.
Of course this aways comes at the expense of someone else further down the food chain. These currency swaps are zero sum are they not?
Foreign banks create USD out of thin air too. It all clears through Euro-dollar banks typically but when the doo hits the fan, the national central bank can not allow their banking system to fail and they can't allow their domestic currency to free fall so they have to step in. Moral hazard. Merchandise traders and investors overestimate financial market liquidity and then look to the banks and banks look to government. Best to do force the foreign investors to take the currency risk so if they decide to pull out of their investment in a crisis, they take the loss rather than a domestic citizen having a foreign currency liability. For merchandise trade, if the importer pays in their own currency, the foreigner can only stop selling or raise prices but they can never squeeze the importing nation because it would hurt the value of their proceeds from trade. When they use USD, the Germans for example can load up a country with USD debt through trade, and wait until markets are tight and then have Deutsche Bank cut off credit and stop rolling over loans if a customer switches to a different supplier. .. It is all about who has pricing power and when in the transactions. Best to design a system that makes risk takers bear the costs of the risks they take and never have power to corner or capture markets.
"the national central bank can not allow their banking system to fail and they can't allow their domestic currency to free fall so they have to step in"
Yes they can. And they must. The domestic currency never 'free falls' because it runs out of settlement liquidity and stops.
You put the banks through administration into a new shell freezing the old one to go through liquidation in the normal manner, then you refloat the new shell using the power of the CB in the domestic currency. Very quickly the domestic part is back on line and the foreign part is dead.
The CB then just clears import deals on a needs rather than wants basis.
The impact is then on the exporters to the country who are the one who can actually fix the situation.
Russia didn't get it all right with the last crisis but they showed the way a little.
In a crisis situation you liquidate.
"When they use USD"
When they use USD the importer isn't in the foreign country. They are in the US dollar zone and should be treated as such. So they are just a US distributor. The actual 'importer' is the one that handles the currency switch - takes payment in the local currency for the supply of goods but purchase goods in another currency.
The problem again is drawing lines at country borders rather than the correct border of the currency zone - with the entities operating in two zones.
You *never* load up a country with 'foreign debt'. You load up the two legged entities, which can then go bust and write out those debts. Having a rapid administration process for such entities is the best approach.
Well said Neil, you have enlightened me. I always had a blind spot on currency flows and overseas debt, much clearer now thanks.
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