Capitalism's Achilles' heel
Asian markets were rattled yesterday when the Thai government decided that heavy inflows of capital from foreign speculators had made the baht too strong.
To slow the flow of foreign capital, the Thai central bank declared on Monday that foreigners effectively would be able to invest only 70% of money they transferred into the country. The other 30% was to be held in reserve by financial institutions, and any attempt to pull the money out within a year would result in a loss of 10% of the total.
To nobody’s surprise, the response was an immediate plunge in the Thai stock market, and a ripple effect in other Asian markets. Benchmark indexes in Malaysia and Singapore dropped by about 2 percent, whole those in India fell 2.5 percent and Indonesia posted an almost 3 percent decline, and the Thai market fell 15%. And yes, the government's decision had the desired effect on the baht: it dropped 2.2%
Taken aback by the immediate flight of foreign investors, the government quickly relented. Finance Minister Pridiyathorn Devakula announced today that the government is now examining ways to control investors choices. "Yesterday, after the market closed, we got together with stock market brokers and the private sector to discuss how to prevent flows from the stock market to bond market,” he told the Wall Street Journal.
Unfortunately, naïve governments that
presume to outwit millions of individual investors and consumers are the rule
in history. The Southeast Asian market turmoil brought back memories of the
1997 currency crisis, when
Ah, the endless trade war, all fueled by different rates of money creation in countries
around the globe. Governments and their central banks
continuously manipulate the monetary and trade game, increasing or decreasing
the speed of currency creation, adjusting interest rates, pressing for trade
advantages by raising tariff barriers against imports, or by subsidizing
exports, all the while ranting about the beggar-thy-neighbor policies of other
governments. The result is the very volatility that makes currency traders
salivate, and economies flounder.
In his 1997 book, The Rules of the Game: International Money and Exchange Rates, Ronald McKinnon identified generalized financial volatility as “capitalism’s Achilles’ heel.” Hypothetically, international volatility is restrained by a set of (mostly unwritten) rules, but everyone bends the rules. Unfortunately, investors and capitalism get the blame, not government printing presses.
What could solve the problem of
international economic volatility? History suggests only one thing: a return to
the gold standard. For evidence, consider McKinnon’s tally of volatility in
long-term interest rates in Great Britain and the U.S. under the gold standard from 1879 to 1913 (Britain, 0.03: U.S., 0.03),
the dollar standard, when the dollar was considered as good as gold from 1950 to 1970 (Britain, 0.09: U.S., 0.08), and
floating rates from 1973 to 1994 (Britain, 0.34: U.S., 0.26). Under the regime of fiat, floating currencies, a ten-fold increase in volatility in interest rates compared to the gold standard.
The bottom line? Handing the power of money creation to governments and central banks is akin to handing car keys and alcohol to teenagers. It’s a guarantee of endless volatility and economic crashes.
What’s the message to sovereign individuals? Stop dreaming that the central bankers will ever succeed in stabilizing the world economy. They are the cause of volatility, not the cure. For your own safety, put your trust in a gold standard. Create your own. Always keep a significant portion of your wealth in gold. It’s the ultimate defense against capitalism’s Achilles’ heel.
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