Start the conversation
Comment on This Story
Or to contact Money Morning Customer Service, click here.
This site uses Akismet to reduce spam. Learn how your comment data is processed.
When central banks start realizing they're not actually in control, it's time to get especially vigilant.
As currency volatility gyrates like a sine wave, central planners are becoming increasingly desperate. We've already seen the advent of negative interest rates in a number of nations.
Yet growing talk of possible capital controls is not only emerging, but gaining steam.
It's a disturbing trend that could blindside investors who stand unprepared.
Capital Controls and Their Prevalence
What are capital controls? According to Investopedia:
Any measure taken by a government, central bank or other regulatory body to limit the flow of foreign capital in and out of the domestic economy. This includes taxes, tariffs, outright legislation and volume restrictions, as well as market-based forces. Capital controls can affect many asset classes such as equities, bonds and foreign exchange trades.
Keep in mind that measures can also include restrictions on bank withdrawals, buying and selling of foreign currencies, and even taxes on bonds and equities.
Okay. So now that we all know what they are and how draconian they sound, you'd think they're pretty rare.
Not so.
Capital controls are actually pretty common. Right now, they're being used in Argentina, Venezuela, Ukraine, Iceland (it's been six years already), India, and China, to name a few. Even Russia recently instituted "soft capital controls," by instructing a number of state-owned exporters to sell their foreign currency reserves to help support the ruble.
But given the problems being faced by the European Union's southern members, some of those could well be next to take such drastic measures.
Confused Central Bank Policies Are Causing Wide Fallout
Greece may have made a deal with its reluctant lenders, but it's nothing more than an extension guaranteeing more negotiations within the next four months.
That's also spurred is massive capital flight out of this Mediterranean tourist haven. Greeks and Greek companies have headed for their banks' exit doors in droves. In January alone, 12.2 billion euros flowed out, leaving total cash holdings at 148 billion euros, the lowest since August 2005.
Moves like this conjure up thoughts of Cyprus, and for good reason.
Cyprus, an EU member, decided to introduce capital controls back in March 2013.
The island nation was in the throes of a bank run as the terms of a 10 billion euro bailout were being "negotiated." All of this stemmed from Cypriot banks holding too much public and private Greek debt. A massive write-down of Greek debt in 2011 wiped out a large portion of the value of those bonds.
As part of the country's attempt to deal with its financial system's meltdown, the central bank put capital controls in place nearly two years ago. And they're still in effect today. With Cypriot euros stuck in the country, this makes them arguably worth less than a Dutch euro, for example, which benefits from a lack of restrictions.
Central planners like to boast about a liberalized, global economy, but sadly the state of sovereign finances is such that capital controls are looking more likely, not less. In just the last few weeks, the Swiss National Bank's Governor Thomas Jordan has broached the topic.
A quick refresher is needed. He's the same guy who, two days before removing the Swiss franc's peg to the euro (causing currency volatility most traders cannot recall in their entire careers), had his vice chair Jean-Pierre Danthine affirm the currency cap would remain the cornerstone of SNB policy.
Bloomberg recently asked Jordan if Switzerland would resort to capital controls, to which he carefully replied, "It's not a measure that is at the forefront at the moment." (Emphasis mine.)
Shortly after which Zurcher Kantonalbank's (Switzerland's No. 4 bank) CEO Martin Scholl told a Zurich newspaper that implementing capital controls may be "dramatic," but was "certainly possible." Then on Feb. 20, the Danish Krone had its biggest intraday drop against the euro since 2001.
Why? While commenting on the central bank's currency peg to the euro, the head of Denmark's Economic Council remarked "If it takes restrictions on free capital movement for a period to defend the fixed exchange rate, I assess that the central bank would be willing to go that far."
Could the U.S. be next?
The Contagion Reaching Our Shores
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.
The fed started this mess and now they cannot get out of it. Capital controls would just about do it for the U.S. The fed's macroeconomic models obviously have little to do with the realities of money velocity and debt. The Fed has proven it cannot deal with the world economies today and should be eliminated. Give Congree the job so we can throw off the yoke of the international banksters that make up the fed.
A question for Peter Krauth ….. (or anybody, really):
Is this 'Cappital Controls' thing the same as another term that I've
seen recently being thrown about ……. Bail-in (as opposed to 'bail-out').
Where my money in the bank …… is no longer mine?
After the financial crash, many banks were bailed-out. Effectively they were recapitalized using taxpayer's funds. Cyprus was chosen as the experiment for the new bail-in policy. Cyprus is a small country, therefore it was considered that any unrest could be contained. Originally they planned to give all depositors a 10% haircut, which would probably have caused widespread unrest, but the final plan involved a much larger haircut, but only to amounts over EUR 100,000. This is now the blueprint, not just for the EU but for most Western countries. This means that where you thought you had a secured deposit at a bank, you are instead treated as an unsecured creditor. So if your bank gets into difficulties, your deposits may be confiscated to recapitalize it. To avoid widespread unrest, my guess is that if it becomes necessary they will ignore small depositors as in Cyprus. A sensible precaution is therefore not to keep too much money in any one account or bank – spread your funds.
Capital controls are something different. They could take many forms. Often countries try to limit the export of funds and/or the availability of foreign currency. In a country such as Venezuela with inflation running at over 60%, nobody wants to keep there funds in local currency. This would likely not apply to the US in the foreseeable future, as capital is currently flowing into Dollars. This is because the Dollar is perceived as the least worse option at present. At some point in the future, there may be a currency crisis in the US. Common sense would seem to suggest that we cannot keep printing more and more Dollars backed by nothing without some consequence being inevitable. History would suggest that the likely outcome would be not that Dollars are controlled or unavailable, merely that they buy progressively fewer goods and services. If there are capital controls at that point, it would probably be to prevent people from exchanging Dollars for gold and silver, or any other currency which may appear to retain value at that time.
Dear Sirs,
Surely US instigating capital controls would be the final nail in the US dollar´s status as the
world reserve currency. When that status is gone the US would have to learn to live
like the rest of the world. Greece´s fate would not be far off with that amount of national
debt…
It is hard to believe that there are so stupid people in Washington.
Dear Peter,
Regarding your capital controls article. You did not highlight the US capital controls. FATCA has in essence enacted capital controls on Americans. Have you tried to open a foreign account lately? Many foreign banks don't want the hassle and won't take new US clients.
Just try and transfer cash to an account somewhere and buy some foreign real estate. It is not as easy as it used to be.
Tom
How hard do you think it will be to get a recent inheritance of $100k out of the USA?