Conversation with a ‘Capitalist’: Capital Controls

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Pfh007

Capitalist you are being a bit selective.

“….not RBA monetary intervention …”

Agree with that in spades, but unless you impose some form of capital controls you are simply replacing RBA monetary intervention with Fed Reserve monetary intervention.

Note – ‘some form of capital control’ not complete restriction on foreign capital investment in the land called Oz.

I appreciate that this requires some judgment and subjectivity and a departure from a purist position – but we can work on that over time.

Capitalist

@Pfh007 The exchange rate is adjusting to the Fed’s monetary policy and the RBA’s monetary policy. Right now, RBA rate cut predictions are being pushed out to next year while Fed QE tapering pedictions are also being pushed out to next year. The AUD and other currencies are reflecting that.

Capital controls will create more problems than they solve, like all government controls. The price mechanism of exchange rates need to be free so that inflows are limited.

What you are advocating is similar to what emerging markets have tried to do with a fixed exchange rates and that has ALWAYS ended in tears. Click here to see my post further down.

Pfh007

I agree with you that currency pegs are not a great idea but they are not the same (or similar) as managing capital flows by placing controls and limits on certain types of capital transactions.

The main concern about capital controls is the one you will no doubt be quick to make, they prevent capital flowing from areas of abundance to areas of shortage etc etc.

I appreciate that but take the view that the damage from capital flows driven by monetary manipulations are far more damaging to the fabric of an economy than things like mercantalist trade policy which is often of benefit – assuming we see no strategic need to make TV’s or T-Shirts.

Whilst foreign Central Banks are frigging around with the price of money on a massive scale care needs to be taken to limit the damage those policies can cause.

After all, we have our hands full with the monetary manipulations of our own central bank.

Capitalist

Devaluing the currency only drives up imported goods and while there may be a temporary boost to exports, it is negated by inflation of the money supply leading to higher prices in conjunction with higher import prices. There’s also the loss of investor confidence and sovereign risk.

The problem with capital controls is that the government is picking winners and losers. I guarantee even if this policy option was available, they would boost capital flowing to housing investments. Remember the RBA and government are complicit in driving prices higher because they believe it will sustain growth in the future.

They might allow more capital to the inefficient car industry or other politically connected lobby groups. This is exactly why I don’t want the government gaining more powers and especially the power to pick and choose which industries or sectors receive capital.

I don’t trust the government with anything and neither should you.

Pfh007
Capitalist,

‘. ……,,there may be a temporary boost to exports,……’

Temporary is clearly a matter of degree.

The QE policies of the US, UK, Japan etc don’t fit with my concept of temporary nor I suspect those companies (local accumulations of capital) that are no longer trading due to ‘temporary’ trading conditions.

Sure when temporary proves to be temporary new flowers may bloom but that process is an unnecessary cost on our economy imposed by much larger competitors who can wear the impost more readily than we can.

As for picking winners – requiring foreigners who want exposure to local residential real estate to do so directly or via RMBS ( non guaranteed) is a tilting of the table that I am comfortable with.

But yes I don’t trust the pollies beyond some discrete and specific areas either.

Capitalist

So yes it is temporary because normalising rates, reverses the gains made during the cheap money and currency debasement period. Take a look at what GBP/USD has done in the past 3 month as UK data continues to strengthen. Yes at some point they will be forced by the markets to normalise rates because either the currency loses value or asset bubbles emerge in property or the share market, which leads to instability in the future.

If foreign investors want exposure to Australian real estate, owning RMBS doesn’t do that. RMBS are just bundled mortgages, they aren’t linked to the property market rising in value or rising rents.

Capital controls will just reduce the investment pool available to businesses and increase their financing costs.

Pfh007

We are back at square 1.

You say never trust a pollie.

You say don’t intervene in markets.

You acknowledge US, UK, Japan are doing it on a massive scale and may not stop and if they do no one knows when.

But then conclude it does no harm and we should lie back and think of England rather than take any steps to limit the impact of those massive distorting policies on our economy.

That is the problem with your purist position – it cannot cope with the short term or the ability of large players to do massive damage to small open economies that is costly to recover from assuming recovery happens at all.

Fixed v Floating v controls on capital flows.

Controls on capital flows will affect the exchange rate without intervening to fix it.

Sure the price you pay are higher interest rates but those cheap rates don’t come for free either.

Plus if you want lower interest rates – the solution is simple, encourage people to save more. Or more accurately, stop discouraging them from saving.

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