IMF Supports Capital Controls

The IMF reveals their true color.

From Bloomberg, 

The International Monetary Fund endorsed nations’ use of capital controls in certain circumstances, making official a shift, which has been in the works for three years, that will guide the fund’s advice.

In a reversal of its historic support for unrestricted flows of money across borders, the Washington-based IMF said controls can be useful when countries have little room for economic policies such as lowering interest rates or when surging capital inflows threaten financial stability. Still, it said the measures should be targeted, temporary and not discriminate between residents and non-residents.

“Capital flows can have important benefits for individual countries across the fund membership and the global economy,” IMF staff wrote in a report discussed by the board on Nov. 16 and published today. They “also carry risks, however, as they can be volatile and large relative to the size of domestic markets.”

Countries from Brazil to the Philippines have sought in recent years to manage inflows of capital that put upward pressure on their currencies and threatened to create asset bubbles. The new guidelines will enable the fund to provide consistent advice, though rules prevent it from imposing views about managing capital flows on its 188 member nations.

Capital (currency) controls treat the symptoms and not the disease.

The real disease has been the unhinged central banking-paper money system that perpetuates the worldwide bubble cycles. Such unstable system distorts the pricing structure that destabilizes economic balance, promotes high risk taking and encourages reckless yield chasing dynamics, and worst, redistributes wealth to the political elites and their cronies, whom are the first recipients of easy money bubble policies (the latter incidentally operates with an implied guarantee or moral hazard, they are usually beneficiaries of bailouts)

Eventually they all end up in a bubble bust.

Countries with banking crisis exploded coincidentally after the Nixon Shock or the closing of the Bretton Woods gold exchange standard

Previously I warned that the penchant for greater interventionism in response to the recent crisis has sown the seeds of capital controls which risk the headway towards protectionism. 

Capital controls are part of the grand scheme of financial repression policies designed by bankrupt governments to expropriate private sector resources.

Aside from capital controls, other measures include, raising taxes, inflationism, negative interest rates, price controls and various regulatory proscriptions

Capital controls has short term impact and spawns black markets as the price spread between official and unofficial rates widens.

Yet capital controls or exchange rate controls will hardly prevent the inflation of bubbles borne out of internal or domestic policies. The Philippines, which has been cited by the article, should be a good example. Loose monetary policies have been in the process of puffing a property and stock market bubble which has been misconstrued by the mainstream as economic “growth” story.

As Austrian economist Dr. Frank Shostak warned

The idea that capital controls and fixing the external value of a currency can strengthen economic fundamentals is flawed. While capital controls may help boost economic activity in terms of GDP, they cannot lift the real net worth of the economy. On the contrary, capital controls will only add to distortions caused by the monetary pumping and the artificial lowering of interest rates, thereby making the inevitable economic bust much more severe.

Aggressive Interventions from Philippines and Emerging Market Central Banks

Actions speak louder than words.

Central banks of emerging markets including the Philippines have aggressively been intervening in the marketplace signaling an ambiance of heightened instability.

From the Bloomberg,

Just three months after the biggest developing economies sold dollars to support their currencies, policy makers from Colombia to China are moving to weaken exchange rates and revive exports as the International Monetary Fund forecasts the slowest trade growth in three years.

Colombian Finance Minister Juan Carlos Echeverry urged the central bank on Aug. 3 to boost minimum dollar purchases from $20 million a day, saying the country needs “more ammunition” to drive down the peso in the global “currency war.” The Philippines banned foreign funds from deposit accounts and unexpectedly cut interest rates in July as the peso hit a four- year high. In China, authorities lowered the yuan reference rate to the weakest since November, which according to Citigroup Inc. will create “headwinds” for other Asian currencies.

After spending more than $59 billion in foreign reserves in May and June to stem currency depreciation, developing nations are reversing policies as the European debt crisis outweighs the risk of faster inflation. South Korea and Chile may weaken exchange rates to make their exports cheaper, according to UBS AG. The IMF estimates global trade will expand at the slowest pace since 2009.

“Policy makers will become more aggressive,” said Bhanu Baweja, a London-based strategist at UBS. “The currency strengthening is in contrast with the state of the economy. That argues for much weaker foreign-exchange rates.”

Again the elixir of cheap currencies reveals of the deep seated mercantilist dogma espoused by central bankers. ‘Cheap currencies’ to promote exports have signified as the standard slogan in justifying ‘inflationism’. The real concealed reason has been to promote the interests of the elites.

The Philippine’s Bangko Sentral ng Pilipinas has been no exception.

From the same article,

In the Philippines, the central bank tightened rules on capital inflows last month by prohibiting foreigners from parking funds in so-called special deposit accounts. Policy makers also cut the benchmark interest rate by a quarter- percentage point on July 26 to a record 3.75 percent, a move that Deputy Governor Diwa Guinigundo said will help “temper” peso gains. The currency’s 4.6 percent advance versus the dollar this year is the best performance in Asia. The peso fell 0.2 percent yesterday.

There are many ways to skin a cat as the old saw goes. This means that should foreigners decide to put in money here, they can do so through many law circumventing options such as padding of local export receipts or transfer pricing and etc…, so the BSP’s action can be seen as superficial and symbolical.

None the less, given that the risks of a global economic slowdown seems to be intensifying, home bias has been the natural response resorted to by foreign investors. The possible exception would be from the capital flight dynamic in response to the Euro debt crisis.

All these inflationism resorted to by global central bankers will distort the real economy through the pricing system. This only means that boom bust cycles will be global and will intensify.

The Coming Age of Capital Controls?

Bureaucrats in Brussels have been floating trial balloons on capital controls

The Daily Mail reports

EU finance chiefs today admitted holding contingency ‘discussions’ about possibly putting limits on Greek cash machines to stop mass withdrawals if Greece quits the euro.

European Commission officials also discussed imposing border checks and capital controls in a bid to stop a possible flight of funds.

‘There are indeed discussions, and we are asked to clarify what is foreseen in EU treaties,’ said Commission spokesman Olivier Bailly following a raft of press reports claiming this had happened.

He refused to reveal the precise details of the talks but admitted some of these ideas had been discussed under ‘disaster scenarios’.

He said the commission is ‘providing information about EU laws regarding treaties,’ that mean capital ‘restrictions are possible’ on the grounds of ‘public order and public security.’

However, he stressed that the commission was not planing on the basis that Greece would leave the euro depending on the outcome of elections on Sunday.

More from Simon Black at the Sovereign Man

Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy’s bank regulator. No ATM withdrawls, no bill payments, nothing. Just locked out overnight.

In Greece, the government has taken to simply pulling funds directly out of its citizens’ bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being releived of their funds without so much as administrative notification.

It’s no wonder why, according to the Greek daily paper Kathimerini, over $125 million per day is fleeing the Greek banking system.

Capital controls are part of the grand scheme of financial repression policies designed by bankrupt governments to expropriate private sector resources.

Aside from capital controls, other measures include, raising taxes, inflationism, negative interest rates, price controls and various regulatory proscriptions.

Simon Black lucidly explains the nitty gritty and the moral issue of capital controls,

capital controls are policies which restrict the free flow of capital into, out of, through, and within a nation’s borders. They can take a variety of forms, including:

- Setting a fixed amount for bank withdrawals, or suspending them altogether

- Forcing citizens or banks to hold government debt

- Curtailing or suspending international bank transfers

- Curtailing or suspending foreign exchange transactions

- Criminalizing the purchase and ownership of precious metals

- Fixing an official exchange rate and criminalizing market-based transactions

Establishing capital controls is one of the worst forms of theft that a government can impose. It traps people’s hard earned savings and their future income within a nation’s borders.

This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation… both of which soon follow.

The thing about capital controls is that they’re like airine baggage fees; ultimately, all governments want to do it, they’re just waiting on the first guy to impose them so that they can shrug their shoulders, stick it to the people, and blame ‘industry standards’.

Moreover, capital controls were a normal part of the global economic landscape for most of the 20th century, right up to the 1970s. It’s been a long time coming for governments to return to that model.

A return to capital controls would extrapolate to deglobalization and protectionism whose likely outcome would be the Great Depression of the 21st century. I hope and pray that these parasites will not succeed.

Use Cash for Freedom

I had a gruesome first hand experience on how governments disdains the use of cash.

Sadly this has not been an isolated experience, but a deepening troublesome political trend around the world, particularly in developed economies.

Governments would like to confiscate more of the public’s resources to finance their lavish ways. So the compulsion to transact through their institutional accomplices, the politically endowed banking system.

Through stricter unilateral regulations or immoral laws, governments through the banking system place the public’s hard earned savings under intense scrutiny, and criminalize the actions of the innocent, whom have been uninformed by the rapid pace of changes in manifold regulations covering a wide swath of social activities through the banking system.

Private transactions which does not conform with the goals and the interests of the political authorities risks confiscation. Worst is the trauma of being labeled a criminal. Increasingly desperate governments have wantonly been in violation of the property rights of their citizenry.

A vote against government is to use cash transactions, that’s because cash, according to Charles Goyette at the LewRockwell.com, represents freedom

Mr. Goyette writes, (bold emphasis mine)

Governments hate that cash gives you anonymity. And they are often very anxious to track it and to control your use of it. They often attempt to criminalize the use of cash or at least criminalize having too much of it around.

Right now, 7% of the U.S. economy is cash-based. Across the Eurozone, it's a little bit higher, 9%, but in Sweden cash transactions are falling by the wayside. You can't use cash for buses there. A growing number of businesses are going entirely cashless. In fact, only 3% of all purchases in Sweden are transacted in cash. And some people think that 3% is too much.

Now, there are things you give up when you go cashless, and privacy is only one of them. Because you also give up a piece of every transaction to the facilitating financial institution, a state-approved financial institution that is going to take a cut one way or another of every purchase that it processes. And that cut will be paid by you.

In the United States, the government has implemented increasingly punitive and burdensome measures for those who use cash. Banks, for example, are required to file reports on the use of cash in certain circumstances, including suspicious persons reports for some cash activities. In fact, if you seem to be trying to transact in cash below the reporting threshold, that alone can trigger a suspicious persons report on you. Like a lot of the states' heavy-handed measures, this was all targeted at getting those drug dealers.

As earlier pointed out, governments has used all sorts of "noble" excuses like money laundering, tax evasion, the war on drugs and etc… to justify their confiscatory actions which in reality represents no more than financial repression.

And as governments tighten the noose on the public, people will intuitively look for ingenious alternatives to outflank such oppressive policies.

In the US, the liquid detergent Tide appears to have emerged even as an alternative to cash.

Writes Professor Joseph Salerno at the Mises Institute.

As has been widely reported recently, an unlikely crime wave has rapidly spread throughout the United States and has taken local law-enforcement officials by surprise. The theft of Tide liquid laundry detergent is pandemic throughout cities in the United States. One individual alone stole $25,000 worth of Tide detergent during a 15-month crime spree, and large retailers are taking special security measures to protect their inventories of Tide. For example, CVS is locking down Tide alongside commonly stolen items like flu medications. Liquid Tide retails for $10–$20 per bottle and sells on the black market for $5–$10. Individual bottles of Tide bear no serial numbers, making them impossible to track. So some enterprising thieves operate as arbitrageurs buying at the black-market price and reselling to the stores, presumably at the wholesale price. Even more puzzling is the fact that no other brand of detergent has been targeted.

What gives here? This is just another confirmation of Menger's insight that the market responds to the absence of sound money by monetizing highly salable commodities. It is clear that Tide has emerged as a subsidiary local currency for black-market, especially drug, transactions — but for legal transactions in low-income areas as well. Indeed police report that Tide is being exchanged for heroin and methamphetamine and that drug dealers possess inventories of the commodity that they are also willing to sell.

As governments stifle people’s social and commercial activities through tyrannical laws, expect the use of more cash, local currencies or commodities (such as Tide) as alternative medium of exchanges, as the informal or shadow economies grow.

Most importantly, real assets will become more valuable and may become an integral part of money, as sustained policies of inflationism, as Voltaire once said, will bring fiat money back to its intrinsic value—zero.

Money which emerges from the markets will be emblematic of freedom.

Currency Controls: My Nightmare at the Airport

Not only has government paranoia almost cost me and my family a vacation, worst, I had to endure a traumatic episode from bureaucratic harassment from local officials.

My basic mistake was to leave my wallet and instead brought my peso cash allotted for our travel expenditures packed into a white business envelope.

At the immigration pat-down, I was asked what the lump in my left front pocket of my pants was which I promptly disclosed.

The inspector told me to step aside from the line and wait for the immigration official, stating that I had exceeded the maximum amount cash (P10,000) allowable for each local citizen to bring abroad, who would decide on my case.

The immigration official arrived and lectured me on my supposed offense. And the officer further said that in breach of the regulation, I was subject to penalty in accordance to the regulations of the Bureau of Customs.

I replied that I DID NOT know about any disclosure procedures, or of any currency exports regulations by individuals.

And prior to the pat-down all I did was to fill up a form where I affixed my signature which DID NOT contain any information about required disclosures.

The immigration departure document looked like this.

Looking back I found the said regulation from IATA’s website

Residents and Non-residents: local currency (Philippine Peso-PHP): up to PHP 10,000.-. Exceeding amounts require authorisation from the Central Bank of the Philippines. foreign currencies : up to USD 10,000.-, or its equivalent. Amounts exceeding USD 10,000.-, or its equivalent must be declared.

Information must be furnished on the source and purpose of the transport of such amount. Violation will be subject to sanctions under Philippine customs law and regulations.

This means I have to apply with the central bank for any amount exceeding 10k pesos to bring abroad! Gadzooks, what onerous red tape!

Back to the airport, the officer suggested that to circumvent the regulation, I could go out of the area and have my (slightly) excess pesos changed into US dollars or other foreign currencies.

However, because of time constraints, doing so risks that we could miss our flight, which would translate to financial losses on our flight tickets compounded by the psychic losses from our frustrated plans.

I pleaded to the officer that the marginally excess pesos (less than 5,000 per head) had been meant for my mom, who is an overseas resident, as a Christmas present. After a few minutes, the officer relented and allowed us through.

Of course, I am thankful to the officer for his ‘generous’ gesture in spite of the hassle.

But such event only reinforced my understanding of how unilateral or arbitrary laws corrupt a system.

-I became an alleged offender for bringing my personal property without knowledge of any breach of the law, and importantly without aggressing upon anybody else (except in the eyes of the enablers and implementers of the regulation, again whose regulations I didn’t know).

-For not enforcing the law, the officer can be construed as being remiss of his duties and equally culpable transgressor.

Yet he did so perhaps in the understanding of the law’s unreasonableness, in my opinion.

The officer knew such law has been repressive, selective in enforcement and would hurt citizens in good faith, thereby perhaps conscience dictated the tolerant decision.

Or it is possible too that the officer has seen enough of our mental and emotional anguish.

-The officer offered an alternative to go around the system (change excess pesos into US dollars), again for the same reasons.

-I was lucky to have that particular officer attend to me. For the outcome would have been different if someone else with malice adjudicated my case. Such regulations could have been used to mulct and extort on us.

And come to think of it, just how can one enjoy a vacation with only 10,000 pesos (USD 227 @44 pesos per USD) in the pocket, especially when visiting a country whose cost of living has vastly been higher than ours?

And considering the millions of local travellers abroad annually, I am quite certain that such regulation have hardly been implemented except for a few instances.

The implication is that such currency control regulation has not been only repressive, selective and arbitrary in implementation but also impractical.

Yet to whose benefit these regulations accrue?

One the political class.

By imposing capital controls, the political class does not want people to vote with their money, or for the markets to expose on their abuses to their constituencies.

The attempt to restrict money outflows, in the guise of preventing money laundering (applied mostly to political opponents rather than to the incumbents and their clients) and blame-the-speculators (not the policies of local politicians and bureaucrats) signify as symptoms of government repression, who coldheartedly would penalize the innocent for their upkeep.

Two, the banking class.

Obviously putting restrictions on cash movements has been designed to bring transactions to the politically privileged banking and finance industry, which have been under the ken or supervision of the political class.

Yet the unintended consequence has been to foster more underground activities, using loopholes (e.g. change to US dollars) or etc., while simultaneously breeding corruption of the bureaucracy.

Let me add that I brought spare cash as insurance from the untoward experience I had 5 years ago, where the failure to access my bank’s overseas ATM network almost left me helpless.

And I have to admit while I have some credit cards, I am an averse or an infrequent user where my credit cards have been meant for emergencies.

Yet another possible unintended consequence would be if there would be an emergency while in another country (say natural disaster), without enough CASH or access to credit cards or ATM, one will be left to suffer an undeserved fate because of such feckless regulations.

I have been reluctant to travel mostly because of my aerophobia, but now I have developed a new phobia: fear of bureaucracy-bureauphobia.

Argentina’s Currency Controls Spurs Capital Flight

Each time government attempts to control the markets they usually end up having the opposite effect from what has been intended.

In Argentina capital controls have been implemented to stem capital flight.

From the Washington Post, (bold emphasis mine)

Argentine President Cristina Fernandez has placed strict controls on the foreign-exchange market and forced oil, gas and mining companies to keep their export earnings in the country.

The moves are designed to shore up foreign-currency reserves and discourage citizens from sending their assets abroad. But they have set off alarm bells among her critics, prompting comparisons to the heavy-handed economic tactics of Venezuelan President Hugo Chavez.

The result of which has been to accelerate capital flight. From the same article (bold highlights mine)

Until last week, the peso was depreciating at a 7 percent yearly pace, according to Boris Segura, a Latin American analyst for Nomura Securities. The peso today trades at 4.26 to the dollar; a year ago, it traded at 3.9 to the dollar.

The decline has prompted an uptick in the number of Argentines seeking to exchange pesos for dollars.

To discourage such demand, the Fernandez government on Oct. 30 began requiring people seeking to exchange pesos for any foreign currency to enter their national identification numbers into a database to show they aren’t tax scofflaws.

The government also sent 4,400 tax agents to exchange houses across the country to implement the verification system.

Meanwhile, Mrs. Fernandez is trying to keep foreign currencies in the local exchange market by requiring oil, gas and mining companies to cash in their export sales at home. The country’s central bank estimates this will keep some $3 billion in U.S. dollars in the exchange market.

Bloomberg News reported Wednesday that, as Argentina has put limits on foreign exchange purchases, nervous investors are withdrawing their money in anticipation of further controls, and Argentine dollar deposits are heading toward their first annual decline in a decade. Dollar deposits have fallen by about $300 million since the Oct. 31 decree.

“In the past, these sorts of moves have been preludes to quite severe changes to the rules of the game, such as freezes and devaluations,” said Joseph S. Tulchin of Harvard University’s Center for Latin American Studies during a phone call from Cordoba, Argentina. “That’s why this has been setting off alarm bells.”

Argentina’s statist government has been feeling the impact of their profligacy (e.g. 4,400 tax agents), local investors are finding safe haven or diverting capital elsewhere.

Basically, capital controls applied by the Argentine government is sister (corollary) to inflationist policies. This goes hand in hand with the censorship on reporting real inflation rates.

From another Washington Post article

Facing government sanctions, most continue to calculate their own inflation figures. But they do it quietly, their findings used mainly in private reports issued to clients, economists sanctioned by the government said in interviews.

“I feel that I am carrying out serious research and providing an alternative to the government pricing index, which is not credible,” said Bevacqua, a mathematician whose group, GB Consumer Price Index, is nonprofit.

For the first time since 2007 — when statisticians and field workers at the National Institute of Statistics and Censuses were replaced with political appointees and the official inflation rate started to fall — the once-hot-button issue of inflation in Argentina is fading from the front pages, said Victor Beker, director of the Center for Research on the New Economy at the University of Belgrano.

“What the government set out to do was to suppress alternative statistics,” Beker said. “The objective is to ensure that the consultancies stop publishing and that the official numbers become the only statistics.”

Bottom line, if the current political trends persist, Argentina, like their model Venezuela, will be hot candidates for another episode of hyperinflation, in the fullness of time.

China Takes Steps to Relax Currency Controls

Amidst the political demand for higher taxes, more government spending, bailouts and centralization schemes by the US and Europe, China seems going on the opposite way and appears to be making a step in the right direction: by relaxing currency controls

From Bloomberg,

Chinese Vice Premier Li Keqiang unveiled the biggest package of measures supporting Hong Kong’s economy since the 2003 SARS epidemic, allowing more two-way investment in shares and sparking a rally in brokerage stocks.

China will start an exchange-traded fund based on Hong Kong equities, Li, the front-runner to replace Wen Jiabao as premier in 2013, said at a forum in the city today. He also pledged a 20 billion yuan ($3.1 billion) quota for qualified companies to invest in domestic Chinese securities and said sales of yuan bonds in the city will be expanded.

The plans relax restrictions on investment flows, bolstering the city’s role as a financial hub and aiding an economy that shrank in the second quarter for the first time since 2009…

Making the announcements in person, with the heads of the central bank and commerce ministry, was “a symbolic demonstration of Beijing’s commitment to Hong Kong,” said Kwok. The quota for qualified foreign institutional investors is a yuan-settled version of an existing program settled in dollars, she said.

China will expand its companies’ offshore bond sales and support the use of yuan for foreign direct investment in the nation, Li said. The city’s status as a financial center “is crucial for Hong Kong’s development,” he said.

I hope to see more of this not only for China but for the rest of Asia, including the Philippines.