04 Dec 2012

IMF OK With Capital Controls, Inflationists Shrug

Economics, Federal Reserve, Krugman, Scott Sumner, Trade 65 Comments


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

65 Responses to “IMF OK With Capital Controls, Inflationists Shrug”

  1. Major_Freedom says:

    Inflationists are like train engineers who crash trains in super slow-motion, all the while believing that because they haven’t crashed yet, they are saving the train from destruction.

    • Jason B says:

      It’s the Jon Stewart analogy, sort of, but worse: we have to solve a problem we created by implementing the problem that created the initial problem.

      Essentially their problem is that they can’t recognize the initial problem.

      • Major_Freedom says:

        But Jason, history is over and done with. We have to look forward, not backward. Looking backward will only reveal who is at fault, and that would prevent those at fault from being the new new saviors. That means fly by the seat of our pants and hope it works out, and if it doesn’t, then fly a different route. Never look back. It’s too….cringe worthy, and painful.

        • Jason B says:

          “Looking backward will only reveal who is at fault, and that would prevent those at fault from being the new new saviors”

          The President and the last election cycle immediately comes to mind, so excuse me while I go jump off a cliff. A real cliff, not the fiscal one. Although I wouldn’t mind jumping off that one either. Wait a second, I forgot, it’s a garden……with aphids. Do they have a compost pile I can jump in?

          • Major_Freedom says:

            You mean the Federal Register?

  2. Matt Tanous says:

    Keynes is a hilarious character. Unlike reading Rothbard or Mises, what you get out of Keynes depends on when he wrote it. What he wrote in 1919 is utterly different than what he wrote in 1930, and both are in complete contradiction to what he wrote in 1936. He’s the only person I know of to have read Hayek’s Road to Serfdom and respond with a variation of “I agree with all of that, so we need more government intervention.” That’s like reading Rothbard and concluding that what we need is socialism.

    • Mike T says:

      “What he wrote in 1919 is utterly different than what he wrote in 1930, and both are in complete contradiction to what he wrote in 1936.”

      And then to allegedly come full circle 10 days prior to his death in ’46 with the following admission:

      “I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.”

      • Ken B says:

        Unlike stopped clocks, what time my watch tells depends on when you look at it.

        • Bob Murphy says:

          That’s deep, man. What if C-A-T spelled dog?

          • Ken B says:

            Then you’d be right about Krugman and debt.

            But this highlights one of the things DK nails you on regularly: take two statements made in different circumstances many years apart and yell gotcha!

            • Mike T says:

              Ken B,

              Except in this case it was Keynes addressing himself from years earlier.

              • Ken B says:

                Yeah, and everyone here is treating a change of mind over many turbulent years as evidence of brainlessness or folly. It is not. Keynes could be right or wrong but it’s wrong to construe evidence of an open mind and continuous reflection as a weakness.

              • Major_Freedom says:

                So I take it then that you just explained why you don’t radically change your mind.

              • Major_Freedom says:

                it’s wrong to construe evidence of an open mind and continuous reflection as a weakness.

                It depends on how they presented their initial but now rejected beliefs. If they presented them with fervor, certainty, hostility, and pretentiousness, then it means they do in fact have a weakness, which is a failure to match strength of conviction with strength of justification.

            • Bob Murphy says:

              In case it’s not clear, I was quoting this Keynes passage because I thought it was awesome. My point was, the classical gold standard period was consistent with freedom of capital and human migration. This wasn’t a coincidence.

            • Mike T says:

              “but it’s wrong to construe evidence of an open mind and continuous reflection as a weakness.”

              >> Ken, I attributed no such thing to him. Although, the quote I posted (assuming it’s true and accurately reflected his thoughts at the time) isn’t a mere reflection of say over- or underestimating the impact of the spending multiplier. This is a quote that hits at the heart of his thinking around the time of his work on the General Theory. So, yes it is wrong to attribute weakness to one who may have an open mind. It is also equally wrong to ignore such a fundamental shift in opinion of someone who shaped mainstream economic thought for much of the last century and not at least question why he was having second thoughts in ’46.

              • Ken B says:

                Tanous implied this made Keynes a hilarious character. Hilarious as in absurd, risible, neglible, foolish. I assumed you seconded Matt on this. That’s the inference I am pointing to. If that’s not your intent then my remarks only apply to matt’s comment.
                Sorry for over reading.

              • Matt Tanous says:

                I meant hilarious as in “very funny,” Ken. Not merely because he changed his mind, but because he never actually said he did or why. He never, in any of those writings, said “I was wrong about what I said earlier.” Just utterly ignored it.

                If’s one thing to change your mind over an issue based on an argument presented. It’s quite another thing to leap around rapidly between ideas that you hold fervently and then just as quickly drop as if its irrelevant.

              • Ken B says:

                1919, 1930, 1936. Leaping around rapidly?

                Some of us change wives faster than that.

              • Bob Murphy says:

                Once you enter a union Ken, you can’t dissolve it. Unless you want to get oppressed.

              • Ken B says:

                I suspect in this matter my secessionist credentials are amongst the best on this blog! And if you want to discuss dividing up the debt …

              • Bob Murphy says:

                Must…not…go down…this humor route…

              • Major_Freedom says:

                Hmm, I for one don’t find it all that funny that Ken B supports mass murder to prevent people from leaving a contract signed on their behalf before they were even born.

                But hey, they say laughter kills the pain and is the best medicine, so…

              • Matt Tanous says:

                “1919, 1930, 1936. Leaping around rapidly?”

                Since we aren’t talking about being wrong about, say, government debt, but a complete reversal of economic theory – a complete reversal that was not acknowledged as such, by a man whose “full agreement” with the Road to Serfdom meant he recommended doing precisely the opposite of what the book proposed. Yeah – rapidly.

            • Major_Freedom says:

              Then you’d be right about Krugman and debt.

              He’d also be right about Keynes.

          • Transformer says:

            Then this blog would have a post every Sunday about TAC

          • guest says:


        • Matt Tanous says:

          Unlike clocks, the laws of reality don’t change with the time of day.

          • Tel says:

            Other than the time of day that is.

            • Major_Freedom says:

              Time changes relative to what?

  3. William Anderson says:

    In other words, gimmicks rule. If one trick does not pull the proverbial rabbit out of the hat, try something else. Inflation today, capital controls to deal with the negative effects of inflation tomorrow. The sad thing is that none of this is necessary. Economies don’t need trickery to flourish; they need entrepreneurs, freedom, and capital.

    • Major_Freedom says:

      Since time immemorial, murderous thugs have disrespected private property, and have made a available a source of ill-gotten gains, which then attracted like-minded morally unscrupulous court intellectuals, who were willing to accept money and prestige in exchange for excusing the thug’s behavior and presenting a scientific “rationality” behind it to the public, who are, for better or for worse, influenced by said court intellectuals.

  4. beam says:

    Closer and closer to the wall – that’s what the message means.

  5. CC says:

    So depress the largest economies in the world so some banana republics can export a little more?

    Sorry for being unconvinced.

    • Bob Murphy says:

      Thanks CC, I was afraid some people might think I was being unfair in my post title.

    • Tel says:

      Speaking as someone from an exporting banana republic (well banana monarchy to be more precise), I would probably support the new protectionist wave if it was keeping me in a job.


      Mind you, I doubt we will ever see protectionism for computer programmers, and gradually every other industry will also be subject to global forces. In effect throttling international trade (and capital controls) are an admission that the current system is broken.

      I’m not going to trade with someone if I feel there’s a good chance I might get ripped off on the deal… so national governments come to the same conclusion.

      • Lord Keynes says:

        “In effect throttling international trade (and capital controls) are an admission that the current system is broken.”

        Capital controls on speculative money flows do not throttle international trade. Far from it. They actually promote stability and increase the likelihood of trade.

        In the post-WWI period, nations had the discretionary capital controls, yet international trade boomed.

        • Tel says:

          If you actually read the article I linked to, they are directly blocking trade. Protectionism given a new name “anti-dumping”, as simple as that.

        • Major_Freedom says:

          All investment is speculative.

          International trade boomed despite the capital controls.

          You are inferring post hoc ergo propter hoc on the basis of a faulty theory of markets.

  6. William Anderson says:

    OK, folks, we now know capital controls are a good thing. Why? Paul Krugman has endorsed them:


    • Bob Murphy says:

      Actually Bill what is Krugman saying in this?

      • Major_Freedom says:

        From what I can tell, Krugman said that what the IMF just did “brings back memories” of the Asian crisis, when he wrote an article that contained this passage:

        “But I also concluded that the threat of further capital flight would prevent Asian economies from simply reflating, that is, increasing public spending and cutting interest rates to get their economies growing again. And so I found myself advocating temporary restrictions on the ability of investors to pull money out of crisis economies–a curfew, if you like, on capital flight–as part of a recovery strategy.

        While Krugman didn’t explicitly come out and say he supports this latest IMF move, if his reasoning remains consistent (don’t laugh!), then he should be lead to saying that this IMF move is a good one, if it helps increase aggregate spending.

        • Tel says:

          So one week the treasury market is in good shape, because interest rates are low and there’s nothing to worry about from “bond vigilantes” … then the next week we need to repress the movement of capital because people might get some silly idea into their heads to invest elsewhere.

        • Bob Murphy says:

          It’s tough MF. On the one hand Krugman discovered how to think about a liquidity trap during the Asian crisis. On the other hand, he was very skeptical of fiscal stimulus during the Asian crisis…

          • Lord Keynes says:

            “On the other hand, he was very skeptical of fiscal stimulus during the Asian crisis…”

            Just like any conservative New Keynesian of the Gregory Mankiw and Assar Lindbeck type.

            You seem unaware that the “New Keynesians” were, and still are, a heterogeneous bunch, neoclassical at heart.

            The most neoclassical of the “New Keynesians” were and are skeptical of fiscal policy.


            “As Greg Mankiw (1991), one of the leading New Keynesians, stated, New Keynesian economics could have been as easily called New Monetarist economics.20 New Keynesian work became associated with partial equilibrium models that explained price rigidities, such as menu costs and implicit contract models. Thus, New Keynesian economics was soon interpreted as being New Classical economics with price rigidities.”

            David Colander (ed.), Post Walrasian Macroeconomics, p. 66

            “there is no unified new Keynesian view of the role of fiscal policy although new Keynesians do give much greater weight to the stabilizing role of monetary policy compared to the old Keynesian view “

            Brian Snowdon and Howard R. Vane,
            Modern macroeconomics:
            its origins, development and current state, p. 364.

            • Major_Freedom says:

              New Keynesianism, Neo Keynesianism, Post Keynesianism, etc, etc, etc…

              This is called trying to salvage garbage theory.

        • Jonathan M.F. Catalán says:

          In the latest edition of The Return of Depression Economics I don’t remember Krugman explicitly arguing in favor of capital controls to restrict outflows. He does talk about it, but if I remember correctly he goes a different route. He argues that fiscal/monetary austerity leads to an output gap, which in turn causes investors to leave the country anyways. Essentially, he writes that countercyclical policy is more effective than catering to investors.

          That Krugman suggested capital controls against capital flight is strange; you’d think he think of the possibility that a developing market with a history of capital outflow controls wouldn’t attract as many investors as other developing markets.

    • Jason B says:

      Isn’t this the same guy who praised Iceland over the last year or so for devaluing the Krona? Yeah, that’s working out well.

      • Bob Murphy says:

        But if they had tied their currency to gold, they would now be engaged in cannibalism. Krugman FTW.

        • Jason B says:

          “they would now be engaged in cannibalism.”

          It would be worse than that, Republicanism.

      • xgsmmy says:

        It not clear where “Trading Economics” is getting their numbers from as I can’t find any news reports indicating Iceland has entered a recession. The IMF has Iceland’s GDP at 2.9% for 2012 and 2.6% for 2013.

        I had a similar experience with their data on Argentina which had growth over 5 percent points lower each year in 2010 and 2011 than other sources.

        The only recent news I can find suggests Iceland’s export growth has slowed as a result of the troubles in the rest of Europe not from anything they’ve done.

        • Matt Tanous says:

          “The IMF has Iceland’s GDP at 2.9% for 2012 and 2.6% for 2013.”

          The other data is in quarters. And I have no idea how the IMF has a GDP growth rate for a year that hasn’t even started yet….

          • Bob Murphy says:

            I think because the earth spins from west to east.

          • xgsmmy says:

            The other data is in quarters.

            And in two and a half quarters Trading Economics has -4.3 GDP growth for Iceland. I can’t find anything like that number anywhere else.

            And I have no idea how the IMF has a GDP growth rate for a year that hasn’t even started yet…

            Fair enough, but I wonder why they’d have such an optimistic projection if Iceland’s economy was in a recession.

          • xgsmmy says:

            Edit, sorry, I’m not sure the exact number for 2012, but it’s likely a bit worse than -4.3, possibly as bad as -6.2.

            Their chart has five numbers for 2011, the first and last overlap 2010 and 2011, I’m guessing into half quarters. So I’m guessing the 1.9 for the first “half quarter” is divided somehow between 2012 and 2011.

            • xgsmmy says:

              Edit again: the last “half quarter” of 2011 overlaps the first half quarter of 2012.

          • xgsmmy says:

            Ok, last one. It’s possible Iceland had sharply negative growth in the last “half-quarter” of 2011 and sharply positive growth in the first “half-quarter” of 2012 in the Trading Economics chart to get something like the IMF number for 2012.

            It seems more likely however that it’s an unreliable source, but perhaps they’re the Nate Silver of economics data.

            • Jason B says:

              It says in the heading they receive their stats from Statistics Iceland.

              Supposedly they are in another housing bubble because of, wait for it…….capitals controls.

              • Jason B says:

                Ok, so I went over to Statistics Iceland. Trading economics is looking at seasonally adjusted quarterly growth. I guess with the inflation, capital controls, and the tanking of their volume index you get some poor growth.

              • xgsmmy says:

                Well, I need to learn how to read. Thanks.

                It is strange that their economy could contract over six points in one quarter and it gets seemingly no coverage.

  7. Tel says:

    Slightly off topic but here’s a chart of Australian government spending and revenue (as percent of GDP), showing the skyrocket during the Whitlam years and later governments unable to bring it back under control.


    • Lord Keynes says:

      (1) government spending as % of GDP rises in recessions and falls in booms. So this graph is NOT necessarily showing you increases solely due to spending increases.

      (2) The graph shows government spending as a % of GDP increase from just 19% to about 24% under Whitlam. Even if we were to assume that is due solely to spending increases, that is not “skyrocketing” at all: it’s a comparatively mild increase.

      The average for government spending as a percentage of GDP in OECD nations is somewhere between 40-45%.

      Australia is – and historically was – well below this.

      • Major_Freedom says:

        <i.government spending as % of GDP rises in recessions and falls in booms.

        Only if they do not decrease spending during recessions, or increase spending during booms.

        Even if we were to assume that is due solely to spending increases, that is not “skyrocketing” at all: it’s a comparatively mild increase.

        Only to those who think government spending is a good thing. For those who don’t, it’s skyrocketing, the same way theft or murder rising from 19 to 24 per 100 people, is considered “skyrocketing” to those who are against such behavior, while it is “meh” to criminals.

  8. Lord Keynes says:

    “But Krugman and Sumner cannot be bothered with such collateral damage;”

    And you’re just begging the question by regarding capital controls as “collateral damage”. For everyone it’s sensible move that helps these developing nations.

    And no doubt people in the developing world would just *love* the Austrian alternative solution of mass liquidationism in the US and Europe. Why, I’m sure they’d love to see their export sectors destroyed and export markets gutted as they all plunged into depressions as well!

    “Ah the days of the classical gold standard never looked better”

    No, they don’t:





    • Major_Freedom says:

      You’re begging the question by regarding capital controls as “not collateral damage.”

      For everyone it’s certainly not “a sensible move that helps developing nations.” (As if nations, as opposed to individuals, even need developing)

      For those who understand economic science, capital controls only hurt some people and benefit others in the short run, while they hurt everyone in the long run.

      And no doubt people in the developing world would just *love* the Austrian alternative solution of mass liquidationism in the US and Europe. Why, I’m sure they’d love to see their export sectors destroyed and export markets gutted as they all plunged into depressions as well!

      We now have a 4 going on 5 year depression because of you crazies. The Austrian solution would have been painful yes, but shorter.

      No, they don’t:

      Cool, love it when you cite problems of national banking acts, fiat money experiment fallouts, and other government interventions.

      You are a caricature of Keynesianism.

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