An increasing reliance on capital controls

Article Highlights

  • Historic experience suggests that bad economic times all too often spawn beggar-my-neighbor policies.

    Tweet This

  • The global economy is already facing difficult economic times, and there is every reason to believe it will get worse.

    Tweet This

  • The odds are high that the global economy is now entering a prolonged period of weak growth and high unemployment.

    Tweet This

Historic experience suggests that bad economic times all too often spawn beggar-my-neighbor policies. Sadly, the global economy is already facing difficult economic times. And there is every reason to expect that those bad economic times will get materially worse in the years that lie immediately ahead.

The European economic periphery is presently in a deflationary spiral as a result of excessively pro-cyclical fiscal policies within a euro straitjacket. This spiral is fueling a widespread anti-austerity political backlash in Europe, which raises the very real risk of a disorderly unraveling of the euro. Meanwhile, U.S. public finances are on a clearly unsustainable path; Japan is facing a ticking demographic time bomb that will highly complicate the financing of its government; and incipient political instability in China could place that country on a very much slower growth path than it has enjoyed over the past decade.

As Guido Mantega, the Brazilian finance minister, does not tire of reminding us, the industrial economies are already engaged in a global currency war in response to their sluggish domestic economies. The United States, the United Kingdom, and Japan are all resorting to aggressive quantitative monetary policy easing that has the effect of artificially cheapening their currencies. At the same time, the European Central Bank has vowed to do whatever it takes to save the euro, and China continues to manipulate its currency with a view to keeping it artificially undervalued. These trends have already forced emerging market countries such as Brazil that are faced with massive capital inflows to resort to inward capital controls. Even the International Monetary Fund now concedes that there are circumstances where inward capital controls are justified.

The odds would appear to be high that the global economy is now entering into a prolonged period of weak economic growth and persistently high unemployment. In such circumstances one must expect an increasing reliance on capital controls, especially were one to get a disorderly unraveling of a major currency bloc as is the euro.

 

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

Love people, not pleasure
image Oval Office lacks resolve on Ukraine
image Middle East Morass: A public opinion rundown of Iraq, Iran, and more
image Verizon's Inspire Her Mind ad and the facts they didn't tell you
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Event Registration is Closed
Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.