Foreign Exchange Controls Coming?

John Dizard of the Financial Times thinks foreign exchange restricitons will soon be upon us. Those who function in the real economy find it hard to live the with exchange rate uncertainty and volatility, but Dizard reminds us that efforts to dampen it down will help speculators.

Dizard also provides an off-topic human interest story at the end of his article, which I have included.

From the Financial Times:

Within the stream of coded language and doubletalk coming from officialdom these days, you can find louder signals of preparations for exchange control regimes in the developed world. This is bad news for almost everyone, but in particular for the investment community. When exchange controls – no doubt in another name – are imposed in Europe or the US, the official targets will be “speculators” or financial manipulators lurking in the shadows. In reality, speculators and traders will be among the few beneficiaries; there will be a lot of money to be made by working out ways, legal and ethical, to get between the rules.

The most recent, and most serious indication that controls on the international movement of funds are on the agenda came from Joaquín Almunia, the European Commissioner responsible for Economic and Monetary Affairs. In remarks to the European Parliament, he made the customary references to exchange rate “volatility”, which is Euro-code for denouncing the effects of the cheap dollar. (After all, if the euro now was set at $1.48, say, with no change over the next year or two, would this “non-volatile” exchange rate be satisfactory for the maintenance of European prosperity?)

More significant was Mr Almunia’s comments on sovereign wealth funds. “There are situations that are quite striking when the investor is a sovereign fund, a foreign state. This requires transparency, it requires knowing what the governance criteria for those funds are . . . we need to set out certain principles, European principles, because we can’t fulfil [the] internal market . . . if each state has different principles when it comes to its approach to investment by sovereign funds.”

Sovereign wealth funds are a convenient bogeyman to call up in imposing political controls on international capital. The image being painted is that of some half-concealed Bond villain slowly stroking a big white cat and plotting world domination. The reality is just another office full of harried people trying to find relatively safe places to stick hundreds of millions or billions of dollars each month.

These bureaucrats, like other investors, don’t want to get their money caught behind a barrier of “governance criteria” and “certain principles”. Bad for the career. As such criteria and principles get closer to being turned into law, they’ll slow and perhaps reverse some of their investments in euro-area assets, but maybe not quickly enough to avoid having their money, or, rather, their country’s money, being locked up.

Still, the rise of the SWFs, and China’s funds in particular, highlights the single most important cause for the huge increase in international capital flows: China’s one child policy. Since Chinese parents could no longer ensure support in their old age by having several dutiful children, they had to accumulate security with physical and financial capital accumulation.

Bernard Connolly, Banque AIG Financial Products’ global strategist, says: “These precautionary savings, in part a consequence of the one child policy, are the key to the whole problem. They’ve been channelled into the reserve accumulation that European politicians blame for the strong euro. No one actually believes the SWFs are the problem. The problem is the dollar is falling because of the [prospective] collapse of the global Ponzi scheme.”

However, since officials in the “advanced” countries were complicit in that scheme, it would never do to call it for what it is.

When contemplating widespread abdication of responsibility, we should remember how much of our civilisation depends on those people, including official people, who embrace their responsibilities at considerable risk. They don’t necessarily have exalted titles or get great rewards, but without them the world would be a much bleaker place.

One such official is Saad Eskander, the director of the Iraq National Library and Archives. He was honoured this month in New York with the Archivist of the Year award. Mr Eskander lives in Baghdad, where he has been re-establishing Iraq’s national records. He has a British passport, meaning he could live safely in Europe, but he spends much of his time caring for his staff, which has suffered five “unlawful” deaths, 69 unlawful deaths of relatives, four kidnappings, 10 kidnappings of relatives, and 121 displacements (ethnic cleansings) and death threats. Not one’s stock image of librarians.

As Stanley Cohen, founder of the award, says: “Dr Eskander . . . badgers the different ministries in person and on Iraqi television and irritates the Americans with his repeated requests to release seized documents to his national archives so that accountability will become a standard feature of Iraqi society.”

So when people (such as journalists) denounce abuses of officialdom, we should also consider how much we depend on officialslike Mr Eskander. Without people who preserve our collective memories, tragedies such as the Iraq war would be even more common, and harder to prevent.

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  1. Independent Accountant

    I don’t think we will get foreign exchange controls until measured inflation is much higher. If we get forex controls that will call into question the current CPI and core inflation numbers.

  2. Peter Principle

    FX controls in the developed world?? I’m certainly no expert, but I have to think that slapping controls on any of the major currencies would immediately collapse the whole vast derivative pyramid of currency swaps, forwards, structured notes, etc. etc. Who in their right mind would maintain a position that he/she might or might not be able (or allowed) to make cash settlement on? The markets would be completely blindsided.

    I know Eurocrats like to fulminate about currency speculators from time to time — anyone remember when the French Finance Minister threatened to guillotine them? But it’s kind of a leap to conclude that FX controls are right around the corner.

    It’s one thing when a country like Malaysia does it; something else entirely when the custodians of one of the world’s reserve currencies does it. It would be like mutually assured destruction. Are the European really that desperate? I don’t think so.

  3. Yves Smith

    Independent, Peter,

    I think Dizard did himself a disservice by not defining terms. Being able to take only $10,000 worth of cash into the US is a currency control, although that isn’t its primary goal.

    He said the objective was to curtail speculation, which by implication means that well drafted regulations should not affect routine commercial transactions, and should also only impinge on a subset of financial transactions. What sort of rules that might entail is beyond me.

  4. dearieme

    I can remember a British Labour government that wouldn’t allow us to take more than £25 out of the country. I can also remember how many of us somehow accumulated private reserves of Deutschmark notes at home. How to criminalise a middle class, eh?

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