[Digital] Capital Controls

Hi-Speed Digital Dollars
[courtesy Google Images]

Wealth Reporter

“Capital controls are simply laws that regulate and restrict what you are allowed to do with your money by regulating the flow of cash in and out of a national economy. The laws define such things as where you can invest your cash and how you can allocate your assets.

“A major financial news source just published shocking details about a research report by two employees at the Federal Reserve Bank. The 36-page report applauds the use of ‘capital controls’ in global markets.”

Capital controls are intended to regulate or even prevent the flow of currency in or out of a nation’s economy.

So long as the international flow of paper currency is controllable, central banks (like the Federal Reserve) have two mechanisms for controlling their nation’s economy:

1) “Printing” more or less currency to increase or diminish the national money supply. When a central bank prints more currency, the national money supply is increased, causing inflation and economic “stimulation”.  When a central bank stops printing currency, it reduces the money supply.  That reduction tends to cause deflation and the economy is slowed.

2) Raising or lowering the interest rate. If a central bank dropped the national interest rate, the cost of borrowing diminished, more people were inclined to take out loans, the loans tended to spur economic activity.  On the other hand, if a central bank raised interest rates, less people borrowed and the economy tends to slow.

By applying both mechanisms at the same time, it was theoretically possible to “fine-tune” the economy to run faster or slower.

However, these two mechanisms both depend on the fact that the national money supply is essentially “trapped” within the national economy.  Without the central bank’s approval, not much foreign money can flow into a national economy; not much domestic money can flow out of the national economy.

Historically, capital controls weren’t particularly necessary so long as “capital” (dollars) was made of physical gold and silver.  The physical nature of our constitutional money trapped our dollars within the United States.  Physical masses of gold or silver could not be easily, quickly or safely moved from the US to Europe or Asia—if only because of the dangers of a ship bearing gold sinking in the Atlantic or Pacific oceans.

Therefore, when a central bank lowered interest rates in order to motivate people to borrow and spend more, gold and silver “capital” could not easily flee to foreign markets.  As a result, domestic lenders had little choice but to accept the low rates within the domestic market.

•  Today, however, our currency is largely digital and has no physical mass. Thanks to the internet, oceans are no longer sufficient to impede the flow of currency.  Digital dollars can move anywhere on the globe at speed of light.  Because creditors’ capital is no longer physical, it’s no longer “trapped” in any country or region.

Therefore, when a central bank lowers interest rates to spur inflation and stimulate the economy, domestic borrowing and spending, creditors instantly move their digital capital to other countries that pay higher rates interest.  By removing their capital to foreign countries that pay higher interest rates, creditors reduce the money supply in their own country and thereby foster deflation, recession and even depression.

Thus, the highly mobile nature of digital currency deprives central banks of their former power  to stimulate an economy by lowing interest rates and causing inflation.

Lowering interest rates may now be counter-productive and tend to slow, rather than accelerate, an economy.  By motivating domestic capital to flee from the domestic economy, lower interest rates diminish the domestic money supply—a definition of deflation—and thereby contribute to recession and/or depression.

Having lost their capacity change interest rates without also causing capital to flow in or out of a national economy, central banks have only one remaining mechanism to control the economy:  “printing” (or not printing) more digital or paper currency.  Digital currency has diminished the central banks’ power to control the economy.

Where formerly, central banks could control the economy by two means—adjusting the money supply by printing or not printing currency, and by changing interest rates—today’s central banks have only one means: by printing or not printing more fiat currency.

Today, if a central bank lowers interest rates to stimulate borrowing, capital simply flees over the internet to foreign countries that pay higher interest rates.  Net result?  Low interest rates (that might’ve had a positive effect if the currency was physical gold and silver that couldn’t flee the economy) may tend to reduce the nation’s digital currency supply and thereby foster deflation, recession and depression.

•  For central banks to regain their former power to control the economy by adjusting interest rates, they must find a way to both “trap” digital currency within local economies and prevent foreign currency from entering without central bank approval. But in an age of “Bitcoins,” who really believes that the movement of digital currencies can be controlled?

One way that modern central banks might regain their former power to control an economy by adjusting interest rate is to implement “capital controls” that prevent the free flow of digital capital from one national economy to another.  Therefore, it makes perfect sense that the Federal Reserve’s 36-page report (supra) would “applaud” the creation of more powerful “capital controls”

If effective capital controls can’t be implemented, central banks may have to admit that their only real remaining power over their national economies is to control the national money supply by printing or not printing more fiat cash.

•  Arguably, the past five or ten years of money printing by the Federal Reserve, Bank of Japan or European Central Bank may be evidence that the central banks’ only remaining economic control is the “printing” of currency.

Yes, in conjunction with printing more fiat currency under QE, central banks also lowered interest rates.  But what good did that do for their respective economies?  Japan has remained stalled in a depression for most of 20 years, even though their interest rate was virtually zero.  Even though trillions of dollars have been given by the Federal Reserve to major US banks, the US interest rates were so low that US banks were reluctant to lend to US borrowers (at low interest rates).  Instead, US banks tended to loan to “emerging markets” that paid high interest rates.  Result?  The US economy was only slightly stimulated by the trillions printed by the Federal Reserve but “emerging markets” enjoyed a three-year long, economic boom caused by the influx of freshly-printed US dollars.

Artificially low interest rates may be great for borrowers, but they’re terrible for creditors.  Therefore, whenever a modern central bank lowers domestic interest rates, creditors tend to move their digital currency over the internet to foreign countries paying higher interest rates.  Even though low interest rates should be great for borrowers, they’re not all that great since they also tend to shrink the supply of currency available to be loaned.

Sure, if you’re a borrower, a zero-percent interest rate is a fantastic deal.  But if the banks won’t lend money at that rate, what good does it do you?

Whether it’s even possible to install capital controls sufficient to restrict the flow of digital capital over the internet remains to be seen.  In fact, it might even be argued that modern “currency wars” between various fiat/digital currencies of the world may be an expression of a crude attempt at “capital controls”.

In any case, you can bet that the world’s central banks want digital capital controls in order to restore their former power control economies by adjusting interest rates.

But, unless and until those [digital] capital controls are established, it may well be that the biggest threat to the power of central banks to control national or even global economies is ability of private creditors to move their capital to foreign countries.

Why move your capital to foreign economies?

One primary reason:  In order to achieve some social engineering objective, the central bank in your country has done something sufficiently stupid to defy economic reality (like setting interest rates near zero) and thereby motivate domestic capital to flee to foreign countries that pay high rates of interest.

Faced with the probability of being robbed by inflation and/or zero interest rates, private creditors will move their capital to foreign countries.  Some will claim that these private financial moguls are unpatriotic when they export their capital.  But, what is anyone’s “patriot duty” to allow themselves to be robbed–even by their own government and/or central bank?

The truth may well be that the “greedy S.O.B.s” who move their currency to whichever economy pays the highest rates of interest may be doing the world a great service.  By moving their currency to the nations that pay the highest interest rates, the private speculators may be undermining and even destroying the central banks’ (and New World Order’s) capacity to rule individual nations and the globe.

If so, we can expect one or more of the following:

1)  The central banks will collapse;

2)  The central banks will fight for their survival by somehow devising capital controls that prevent private speculators from moving capital around the world;

3) Digital currency (which makes money movement almost impossible to stop) will be eliminated (that’s certainly unlikely)

4)  Private speculator access to digital currency (which makes money movement almost impossible to stop) will be eliminated or restricted to a maximum of, say, $10,000 per transaction or per day;

5)  Faced with what may be a mortal threat (private creditors moving their digital currency around the world), central banks may react by launching a crusade against private creditors which causes those private creditors to be vilified, charged criminally and imprisoned.

It might be argued that the primary purpose of “FATCA” (Foreign Account Tax Compliance Act of A.D. 2010) is to take a preliminary steps towards establishing capital controls relative to the US. Under FATCA, digital currency can’t easily leave the US or enter the US without being reported and subjected to taxes high enough to discourage the movement of capital.  FATCA hasn’t stopped the outflow of US currency, but it has restricted that outflow.  By establishing reporting requirements for capital that moves outside the US or is earned by “US persons” outside the US, FATCA lays the foundation for later capital controls.  First, the gov-co discovers where the capital is located and how much more capital is being earned.  Later, based on those reports, the government may establish genuine controls that prevent the movement of known capital kept outside the country.

One way or another, you’ll see capital controls in your future.  If there aren’t, you’ll see central banks fail.

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