A simple point about capital controls

John Dizard writes:

Capital controls turn into trade controls, as the locals attempt to find ways to turn hard assets or non-banking services into foreign exchange. At some price, for example, you can buy a boat in Cyprus with post-haircut, capital-controlled local deposits, sail it to Lebanon, and then sell it for real, usable money. The same with antiques, jewellery, or anything else you can think of. Even capital goods such as fork lifts can be motored off in the middle of the night.

Here is a long Cardiff Garcia post on capital controls, excellent throughout.  From Garcia, there is also this:

Reinhardt, Rogoff and Maduff did a meta-analysis in 2011 on prior studies of capital controls. The only uncontroversially (though mildly) successful use of controls on outflows they found was Malaysia in the aftermath of the Asian financial crisis. Even then, the controls were accompanied by aggressive counter-cyclical spending, bans on short-selling the currency and trading it offshore, and defending the ringgit against speculators by fixing it to the dollar.


How do you have "currency controls" in the Eurozone other than controlling very large transactions--sales of businesses, withdrawals of large amounts of money, etc.

Imagine California imposing "currency controls" on dollars in California with California sharing the same currency as the rest of the United States.

What you are really talking about is controls over the withdrawal of currency from banks.

Yep - but this concept is just a bit too hard to understand for some.

To carry your example a bit further - imagine a California bank went bankrupt, back in the not exactly far in the past days when banks were restricted to one state. Or better, a series of California banks, with the state government itself in very straightened financial circumstances.

Would (could) California then impose capital controls? And would then some enterprising individual get around those controls by selling construction equipment in Arizona?

The banks in Cyprus are by and large bankrupt - the capital controls are as much about keeping the collapse from getting worse as anything else. Possibly even accepting a variety of not exactly tricky ways to get around such controls - as a matter of fact, not so long ago, Cyprus would have been able to help structure such banking services.

Almost makes one wonder if capital controls will be more oriented, on the part of the EU/EZB, to watching how the money flows than preventing it from flowing. After all, roughly 10 billion euros of it will stem fairly directly from the EZB. The IMF plays a role, of course, but likely that money will flow through some very crystalline channels (or not, depending on one's degree of cynicism and/or realism ).

I owe Bob $100, but I don't have a $100 when Bob shows up to collect. So I tell Bob I am going to declare bankruptcy and lower the amount I owe him to $80. Bob says, fine, and demands the $80. I say I am imposing capital controls on him for an indeterminate period of time and he will have to come back later.

Am I solvent or not after my bankruptcy declaration and restructuring?

'I owe Bob $100, but I don’t have a $100 when Bob shows up to collect'

So you are bankrupt, just like banks in Cyprus.

'Am I solvent or not after my bankruptcy declaration and restructuring'

If you are Cyprus, and the ECB says you are, why yes, you can be considered solvent. If you meet the ECB (and/orIMF) conditions, that is. This is a certain specialized banking center being shut down, however - that will cost a number of people more money than they expected. And very few people in the EU have any sympathy for them as a group of money launderers, and tax evaders, and drug and arms dealers, etc.

Staying apparently true to its Bundesbank roots, the ECB seems determined to make bankruptcy painful.

Ooops - the end should read 'determined to make bankruptcy painful' - for criminals, at least.

Nicely evaded.

How evaded? This is how the deal is cuurrently going down - if Bob, err Cyprus, can find someone to back the debt, then they are not insolvent, at least in the eyes of the people they owe money to. If the ECB (or less probably, the IMF, or even less probably, the Russians) stand behind the debts, Cyprus is not insolvent. And even now, the Germans, oops, the ECB, stand behind eurozone debts. Admittedly, on German terms. (Contrast this with Iceland, where the Norwegians, with their oil wealth, ensured Iceland could continue to operate in international markets, though without burdening themselves with past Icelandic debts.)

In other words, if Bob's guarantor of solvency ensures 90% of the money is paid back as long as Bod meets the conditions of this guarantor, is Bob insolvent or not?

Like with Reserve Primary Fund imposing capital controls, filing for bankruptcy, and liquidating over the next two years.

The bankruptcy and liquidation were a total Federal government takeover required by the US Constitution, with Federal government technocrats running the redistribution of wealth.

To prevent other mutual funds from suffering the same fate, the US Treasury, Federal Reserve, and FDIC put up trillions of dollars to back the funds, with capital controls imposed system wide. The capital controls were not activated because of the probably misplaced confidence in the money market funds solvency thanks to the Federal government commitment of trillions of backing.

Did TC get any sleep tonight, or pull an all-nighter reading so we MR readers could stay informed? TC will be cranky today I predict.

Tyler Cowen is a collective of many individuals.

TC sets posts to appear later in the day.

Tyler Cowen is a chatbot composed of several A.I.s.

How does the currency-sniffing dog approach to capital control in today's Argentina fit?

Legal if the dog is sniffing the outside of a car, not legal if the dog is on the country's porch.

I suspect Reinhardt might let's say "object" to that summary of her work, given that she's spent the past few years writing about the "era of financial repression." On the plus side, if that reading *were* an accurate summary of her work, it would imply that all the complaints (from TC included) about the untenability of a return to Breton Woods-era international financial stability based on outdated capital controls are all bunk, and we can happily return to those glory days because the capital controls didn't do anything anyway, right?

because the capital controls didn’t do anything anyway, right?

The descriptions of using trade to get around capital controls is not the same as having no effect. Indeed, it's not even close to the same.

In fact, it's so not the same that it's the opposite: capital controls inevitably lead to trade controls as well, because otherwise they would not work.

So much for Cardiff Garcia. Will we get to hear the views of Llanelli Garcia and Aberystwyth Garcia?

Here I thought Cardiff Garcia was Third Division football team. Or an obscure flavor of ice cream.

Why am I being overlooked?

"The same with antiques, jewellery, or anything else you can think of"

So... the devaluation of the capital-controlled local specie results in a sudden spurt of export of anything "you can think of". Sounds like mission accomplished.

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