The currents of the oceans carry warmth to northern latitudes. The jet stream can be ridden by jets carrying travelers to new adventures. In much the same way, money flows around the world in waves which make nearly every aspect of our economic life possible.
That may be coming to a halt soon, however. The climate change that brings us trade wars also shuts down the financial weather systems which move in a predictable bounded chaos. Our ability to predict the economic future, always right in bulk but rarely precise, may be closing down.
The problem is a simple one. Wealth, as measured with varying degrees of success by various currencies, has been redistributing around the planet very efficiently for a solid generation. The mechanisms feel natural in that they are driven by economic and resource pressures.
Currencies are not actual wealth, however, but simply a gauge of it. The net wealth that they represent is amplified every time they are used to leverage resources as well as by the speed at which they turn over. Slowing down either of those reduced the flow of actual wealth, which is hard to define.
In the process, this reduces the wealth in any one place at any one time.
The process of limiting trade in goods stops the turnover of currency, but it does not stop the leverage. That requires something else, and it becomes more necessary as trade slows. Capital controls, or regulations on the flow of money, prevent currencies from becoming hopelessly out of whack when there is a genuine crisis. And they are rapidly becoming more popular.
The main case right now is in Turkey. Their economy has always been fragile for many reasons, all of them based on the political and humanitarian crises that come naturally at the intersection of three continents. The natural benefit of this position should make Turkey rich as a center of trade, but turmoil makes that elusive. The recent US tariffs on Turkey have been enough to create a monumental crisis of faith in their short and medium term prospects.
What can they do? First, they must stop the bleeding. That means they have to stop capital from leaving the nation through capital controls or limits on how much money people can take away. This mechanism was very effective when China was bleeding cash rapidly, but not as effective for Iran. It sometimes works well, and sometimes does not.
But it’s much more popular overall as turmoil is increased by increasingly reckless US policy.
The implications for the US are potentially dramatic. Right now, the net savings rate in developing nations means that capital has to wind up flowing somewhere else to balance out the system. It’s one of the main reasons why capital continues to be cheap in the US. The flow of money into the US is simply that savings looking for an investment opportunity, ideally a safe one.
Turning off that flow of money means that borrowing has to become more expensive here.
That’s not necessarily a bad thing if it happens gradually and it levels off at a reasonable level. But in the extreme case, an immediate tightening, the US would simply stop functioning overnight. With hardly any savings and a constantly expanding consumer debt the appetite for this cash is indeed what is driving our economy at the moment.
Capital controls are coming and for some very good reasons, all in all. They are a reflection of trade wars. But the economic nourishment that comes like precious rain will be cut off in the process. The systems we have in place all depend on not only international trade, but international cash. As they dry up something like famine is the only reasonable result.
Capital controls are more and more popular all the time for many important reasons. They are an effective way to stop the bleeding and stabilize the situation. But the underlying cause of the bleeding is far more important once that happens, and that has everything to do with instability disrupting the real development of wealth that is better measured by the flow of national currencies, not their stagnant value.
Life is always dynamic, like the weather. So are economies. Making them less dynamic makes everyone poorer, and that is the end effect of capital controls. But they are more popular all the time.