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.
When central banks with world reservish currencies (Fed, ECB, BoE, BoJ) inflate like crazy, this puts central banks with untrusted currencies in a bind. They can let their own currencies appreciate (which is politically difficult because it temporarily hurts exports and it may ruin their efforts to peg the currencies to the “safe” ones), or they inflate themselves and generate asset bubbles domestically. Or, you can maintain the official peg without inflating yourself, but then implement capital controls because your currency is artificially undervalued. But Krugman and Sumner cannot be bothered with such collateral damage; we need to inflate in order to save global free-market capitalism.
Ah the days of the classical gold standard never looked better…
What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914! The greater part of the population, it is true, worked hard and lived at low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages.
The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighbouring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference.
But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalisation of which was nearly complete in practice… John Maynard Keynes, 1919