Sunday, April 25, 2010

Capital Flows...

...the instruments for re-balancing are not very elegant. I italicize "re-balancing" because this assumes that there is some equilibrium that serves as a panacea for global instability and poverty. There is no such thing in reality. We see in the graph I attached above the natural state of balance of payment accounts where the developed world consumes while investing in developing and emerging markets while at the same time providing order. (both militarily and by establishing rule-sets that act as treaties)

Yes, saving rates will increase in the developing world, but let us hope that a temporary re-balancing will not upset the established order. Because if it does, much more conflict and instability will ensue. A project for the reader here would be to look up current account data from earliest inception dates for all countries. You will notice that "equilibrium" is optimal only in the minds of myopic economists. Who, with serendipitous timing, have commissioned a report stating that capital controls are warranted in this situation.

(Bloomberg) -- Capital controls are a “legitimate” tool in some cases for governments facing surges in investment that threaten to destabilize their economies, an International Monetary Fund study said.

The IMF’s study comes as some Asian countries have said they’re studying capital controls to protect against asset bubbles and currency appreciation. Brazil introduced taxes on overseas investors in its stocks and fixed-income assets in October after the real rallied almost 33 percent.

“Even when flows are fundamentally sound, it is recognized that they may contribute to collateral damage, including bubbles and asset booms and busts,” the IMF research department said in a report released today. “Capital controls on certain types of inflows might usefully complement prudential regulations to limit financial fragility and can be part of the toolkit.”

The IMF and the World Bank are warning that asset bubbles may be forming in some emerging economies, particularly in Asia. China’s central bank last week took the second step in a month to restrain inflation and damp asset prices, ordering lenders to set aside larger reserves.

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