By John Weeks.
Going the way of buggy whips, wind-up wrist watches and capital controls?
I lived in Britain during 1971-1975. At that time a resident in the United Kingdom could not have a bank account in another country without express permission of the Bank of England (the UK central bank). Perhaps even more shocking to those less than forty years old, a British resident traveling abroad could change only £50 into a foreign currency for each day of the trip, for example, in traveler's checks. Or should I write "cheques"? I suspect it hardly matters because only a fraction of the population can remember them.
In the United States President Kennedy in 1963 introduced something called the interest equalization tax designed to eliminate any gains from buying foreign bonds or stocks (repealed in 1974).
Pretty bad, Big Governments telling you how much and when you can change money, and preventing you from making money by investing abroad. Fortunately those dark days of the oppressive hand of Government limiting the freedom to travel and invest are over.
Or were they so bad? It is certainly true that the deregulation of US and global financial markets had a dramatic impact on capital flows. The chart below shows us two types, the net inflow of funds to the United States to buy shares in US based companies ("equity" purchases), and funds that purchased various types of quickly "maturing" paper assets, such as bonds and the infamous "derivatives", called "portfolio" investment.
The annual average for stock purchases was a paltry $81 billion, compared to $290 billion for the quick-buck stuff in "portfolios" (speculation). This net inflow would seem all to the good, money pumped into America, not flowing out. One of those many benefits of globalization, for sure.
Annual Net Inflow of short term capital to the United States, 1990-2011 (billions of dollars)
Source: World Bank, World Development Indicators database.
Bars show inflows minus outflows. For example, in 2008 the "portfolio" money flowing into the United States exceeded the outflow by over $800 billion.
As you might suspect, a closer look at these numbers is warranted before endorsing such a happy judgment. The next chart gives the money flows in more detail. Here the chart shows quarterly (3 month) net purchases from the United States of foreign assets of all types, and the net purchases of foreigners of US assets of all types (both include so-called derivatives).
The quarterly values for US transactions abroad average minus $32 billion, with a variation from a high of $384 billion in the last quarter of 2008, then down to minus $262 billion just nine months later. Yes, a reversal in less than a year of well over a half-trillion dollars. Foreign transactions in the US were almost as volatile, from $360 billion in the beginning of 2011 to minus 214 billion a year later.
If you ignore the pluses and minuses, the total (gross) comes to only fifteen billion less than a trillion for 2011, and $1.2 trillion for 2012. Plus, the quarterly totals hide the monthly variations (and the monthly hide the weekly, etc), which implies a total across individual transactions that boggles the mind.
Why should anyone other than the mega-rich and the mega corporations concern her/himself about this volatility? The causes of concern are many. First and most obviously, the vast majority of this extraordinary inflow and outflow of money consists of speculation, on currency values, interest rate changes and other financial "products" beyond imagination. This speculation is one of the major vehicles into which the rich package their unproductive gains and redistribute income to themselves from the rest of us. That volatility is financial robbery in real time.
Second, the extreme swings in financial flows is not only the vehicle for concentrating income, it also provides the fuel to speed that vehicle along its anti-social journey to ill-got gains. The volatility of financial flows causes instability in exchange rates, interest rates and commodity prices (among others), and it is to that instability that the financiers direct their speculation. We might call it making money out of making money, also known as robbing the 99 percent to enrich further the one percent.
Quarterly net transactions for foreign assets by US purchasers
and foreign purchases of US assets, 2000-2012 (billions of dollars)
Averages in parenthesis.
It should not surprise us to find out that not just hot and semi-hot money flows out of the United States. The last chart brings some really bad news to working class people. Since the end of World War II the best paying working class jobs have been in the manufacturing sector. For over thirty years manufacturing jobs have declined, from close to 18 million in the early 1980s to less than 12 million today. No prize is awarded for guessing why. In the early 1980s well over 90 percent of US manufacturing investment stayed here. Now the percentage is barely 75 percent. Deregulation of capital flows allows manufacturing investment to go abroad, and we have fewer jobs at home. It really is that simple.
US manufacturing employment (millions, on vertical axis) and
the share of US manufacturing investment that stayed in the United States
(percent, on horizontal axis), 1982-2010
Economic Report of the President 2012.
What can be done about? The answer is as simple as the cause of the problem - those loathsome restrictions on money flows that were so common until the mid-1970s, aka, capital controls. A bit of reflection reveals that these regulations on cross-country money flow of all types proves not loathsome, but very much in the interest of the 99%.
The entry point to understand the benefits of regulating financial flows is that despite being invariably called "capital flow" they are not "capital" at all, but money in various guises. By any meaningful usage, the word "capital:" refers to something productive used to produce something else that is useful. What the mainstream media and economics profession call "capital flow" involves nothing more that the electronic transfer of money. Given the chance to take profits unproductively, capitalists will jump on that opportunity rather than go through the nuisance of producing things people might find useful.
Therefore, reducing volatile money flows across countries and keeping productive investment in the home country first require measures to force capitalists to produce things rather than engage in speculative activities than merge into criminality. That requires tough domestic financial regulation, in effect an updating of the Roosevelt era banking reforms. In the TRNN regular commentator William Black has provided in depth proposals much better than I can, so I focus on the cross-border aspects.
Controls to money flows fall into two broad categories, what economists call "market based" and "quantitative". Kennedy's Interest Equalization Tax provides an example of a "market based" regulation, discouraging money flows by high taxation on any profit gained from cross-border speculation. Another measure, applied in many countries (e.g., Chile) is to tax money flows on the basis of how long they stay in a country. For example, we could charge a ten percent tax on any funds that flow out of the United States within one year of when they entered.
The limit in Britain in the 1970s of how much domestic currency would be converted was a quantitative restriction. The Cypriot government has introduced similar measures in hopes of preventing a "bank run" in which depositors attempt to shift their often ill-got gains to "safer havens" (more on Cyprus in another column). Of course, the most effective measure to prevent money shifting and cross-border speculation by US capital would be nationalization of financial institutions. Much can be achieved short of that.
As for keeping productive investment at home, the measures are well known, though severely out of favor among the global financial elite. Obvious measures would, first, be stricter and higher taxation of the repatriation of profits by US companies, in contrast to the current laws that actually favor investment abroad over investment at home. Second, more public expenditure to foster research with requirements that the products and technologies supported by the expenditure be produced and applied in the United States.
The financial elite insists that such restrictions would be counter productive, undermining growth at home and reducing our competitiveness. When encouraging these self-serving arguments, we should remember what J. M. Keynes wrote in 1933,
I sympathize with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel--these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.
Goods "homespun" and finance "primarily national". Sounds good to me.