RBI reaches for capital controls

By Ajay Shah, on December 19th, 2011
By and large, I have felt that RBI has done a pretty good job of the exchange rate. They doubled currency flexibility twice, in 2004 and 2007. In 2009, they shifted to a floating rate. There were two problems:

  1. They continue to sometimes do tiny blocks of trading on the currency market. In a market of $70 billion a day, a small scale of trading (e.g. $1 billion a month) is irrelevant, so why bother doing it? This has been pointless, but it has done no damage.
  2. They have failed to correctly communicate to the market that the exchange rate is now a float. I cannot recall an RBI governor who used the phase “floating exchange rate”. Many economic agents seem to have got the following message: You’re on your own for small fluctuations, but if there are big movements, RBI will block them. This was mis-communication. The people who hedged against small movements but not against large ones, as a consequence of RBI, have now got burned. This is going to further increase the cost of RBI to gain credibility in the years to come, to come to a point where its words are respected.
Barring these two issues, I have felt that RBI has done a pretty good job of the exchange rate. Until now.
RBI has just announced a batch of capital controls against the currency market. This is a mistake:
  1. When there is turbulence on the currency market, you want greater activity on the currency derivatives market – which is where people protect themselves from currency risk – not less. Recall how the Greek default really damaged the Italians because on that day, the owner of an Italian government bond was told that maybe his CDS would malfunction if an Italian default came about. It was not good for Italy for economic agents to have a reduced ability to manage this risk.
  2. This will merely shift business to alternative venues – the offshore market and the onshore currency futures market. To the extent that shifting to these venues is tedious or infeasible (e.g. FIIs are banned from the onshore currency futures market and don’t have that choice), economic agents will be averse to holding India risk. This is bad for asset prices in India at a particularly difficult time.
  3. In a climate of pessimism about economic policy, it is important to send out a message, through action and non-action every day, that RBI (and more generally the Indian economic policy establishment) possesses top quality knowledge and decision-capabilities in economics and finance. This action of RBI reinforces the gloom about economic policy capabilities in India.
In April, Ila Patnaik and I released a paper titled Did the Indian capital controls work as a tool of macroeconomic policy? Our answer was largely in the negative. RBI’s actions of today are likely to shape up as yet another episode of this larger theme. It might make things worse for the rupee, for Nifty, etc.; to this extent these decisions would not be irrelevant.
Financial regulation should be focused on the problems of consumer protection, micro-prudential regulation, market integrity and systemic risk. It should not be used as a tool for short-term macroeconomic policy. If this is done, it damages market liquidity and yields a less capable financial market. This further damages the limited monetary policy transmission that RBI possesses.



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What in the world is happening to the rupee?

By Ajay Shah, on September 23rd, 2011

The INR/USD rate is now nudging Rs.50 to the dollar. This is a big move over a short period: a depreciation of 12.1 per cent over the 84 days from 1 July till 23 September.

What fluctuations of the INR/USD can we reasonably expect?

After the rupee became a float, so far, it has had average volatility of roughly 9 per cent annualised. Roughly speaking, this means that over a one year horizon, the movement over a year would range between -18 per cent and +18 percent, with a 95 per cent probability. More extreme movements would happen with a 5 per cent probability.

Over a period of 84 days, roughly speaking, we’d have expected this 95 per cent range to run from -8.6 per cent to +8.6 per cent. Compared with that, a 12.1 per cent move is a bit unusual.

It’s only a bit unusual because the historical volatility of the INR/USD, in the period of the float, was rather low. The USD/EUR rate,
which is perhaps the world’s most liquid market, has had an annualised volatility from January 1999 onwards of 10.3 per cent. The INR/USD has got to surely be more volatile than this, given the inferior liquidity of the INR and given the greater macroeconomic volatility in India. Hence, I think we should consider the 9 per cent vol, that was seen in the early days of the float, as relatively unusual. The future will most likely hold bigger values for this vol.

The implied volatility of the INR/USD at the NSE has reared up to values like 14 per cent annualised. That sounds more sensible to me.

What about other currencies?

We tend to do wrong by focusing too much on the bilateral INR/USD rate. In the recent days of distress, as fear has resurged, people
have taken money out of everything under the sun and put it into US Treasury bills. This has given a strong dollar at the expense of
essentially every other currency. Here’s the picture for the INR, against the four major currencies of the world, from 1 July till 22
September:

1 July 22 Sep. Depreciation
(per cent)
USD 44.585 48.821 9.50
EUR 64.804 66.103 2.00
JPY 0.553 0.636 15.01
GBP 71.720 75.481 5.24

The picture of the rupee is much more complex than that implied by simply watching the bilateral rupee/dollar rate.

Can RBI block such a large depreciation?

Let’s think through the steps which would follow if RBI tried to sell dollars in trying to prop up the INR:

  • Global trading in the INR stands at roughly $75 billion a day. If you want to manipulate this market, you need a big stick. Small trades will do nothing. If preventing INR depreciation is the goal, RBI has to go into this with trades of $2 to $5 billion a day, with the willingness to stick it out for the long run. With reserves of $281 billion, there is not much hope here. Specifically, if RBI sells $80 billion in reserves, the market will see that. They will know that further rupee defence is now going to be hard (since $200 billion of reserves is starting to look like a small hoard), and speculators across the world will start betting that RBI’s defence of the rupee will fail.
  • Reserve money is only $275 billion. For each $27.5 billion that RBI sells, reserve money drops by 10%. At a difficult time like
    this, a sharp and sudden monetary tightening will be an unpleasant side effect of defending the rupee. (This trading can be sterilised, but that has its own problems. I just want to emphasise that selling reserves is not easy and is not a free lunch).
  • The rational speculator knows that the exchange rate will eventually find its level. When RBI prevents a large INR depreciation today, they are giving a free lunch to the speculator, who would take a bet that INR would depreciate in the future. Specifically, it would be efficient for domestic and foreign investors to dump assets in India, take money out at (say) Rs.45 to the dollar which is the artificial price, wait for the gradual depreciation to Rs.50 to the dollar, and come back into India to buy back the same assets. This trade generates 11% returns over a short period and is thus very attractive. In other words, a defence of the
    rupee would trigger off an asset price collapse in India.

Meddling in the affairs of the currency market is thus highly ill-advised for a central bank.

Should RBI try to block INR depreciation, even if they could?

Let us play a thought experiment where RBI had $2810 billion, i.e. 10x larger than what’s with us today. In that case, RBI could
play in the currency market, selling $2 to $5 billion a day for a year without serious distress. Is this a good idea?

I would argue that this is not a good idea. When times are bad, the rupee should depreciate. This drives up the profit rates of all
Indian tradeables firms and thus bolsters the economy.

Under a floating rate, in good times, the INR appreciates (which pulls back the exuberance of tradeables) and in bad times, the INR
depreciates (which fuels profits and thus the physical investment in tradeables). This is arguably the only element of stabilisation
in Indian macroeconomic policy.

RBI is playing this mostly right

From early 2007 onwards, the INR has been quite flexible. In particular, after early 2009, RBI’s trading on the market has tailed
off. There have been a few months with minor amounts of trading by RBI. This trading has mystified me, since these small trades can do nothing to influence the price. In practice, the INR has been a float.

A floating exchange rate is exactly the right stance for difficult times like this. In bad times, the best thing that can happen for
India is a big INR depreciation, thus bolstering the tradeables sector.

Let’s evaluate an alternative policy platform: To peg the INR in normal times but to let go in difficult times. Is this feasible?
Yes. But this is very disruptive: if economic agents have been given an implicit promise that the INR will not move, then the large move (which will surely come) would cause pain. It is far better to stay out of the market all the time, and create a trustworthy structure of expectations in the minds of economic agents about what the future holds.

We had a large depreciation in the crisis of 2008, and that served India well. In similar fashion, we should welcome the INR depreciation that is accompanying global gloom.

The only element of RBI policy where I have a major disagreement is communication. RBI has never used the words floating  exchange rate. RBI needs to clearly communicate to the economy that the rupee is now a market determined exchange rate, and RBI is no longer in the business of trading in this market. There is greater clarity of thought at RBI as compared with the quality of communciation; the speech writing still suffers from twinges of 1960s economics.

What is the collateral damage of a large INR depreciation?

There are three things that go wrong alongside a big INR depreciation:

  1. Firms who have unhedged foreign currency borrowing get hurt, because they have to pay back more than anticipated. A person who borrowed Rs.100 (in unhedged USD) has to pay back Rs.110, owing to the 10 per cent INR depreciation. The stock market is doing a fine job of identifying these firms and beating down their stock prices.Of crucial importance is the fact that from early 2009 onwards, the INR had already moved to a float with a 9 per cent annualised vol. So CEOs and CFOs knew that the INR/USD rate was going to fluctuate. They were not lulled into complacence thinking that the exchange rate was going to be stable. By avoiding this moral hazard associated with pegged exchange rates, RBI’s decision to float in early 2009 laid a good foundation for the structure of firm borrowing as of July 2011.

    When a country has a pegged exchange rate, you tend to see a big buildup of unhedged currency exposure on corporate balance sheets. When the big depreciation comes, the big businessmen then queue up to the central bank begging for defence of the LCY. Prevention is better than cure: It is far better to have high exchange rate volatility all along, so that firms do not undertake such risks, and the toxic political economy does not come into play.

  2. With an INR depreciation, tradeables become costlier. On one hand, this bolsters the profitability of tradeables firms, and
    thus their investment plans. But at the same time, this feeds into inflation. In recent months, tradeables inflation has been  sleeping while non-tradeables have contributed to the high CPI-IW inflation. We will now see a resurgence of tradeables
    inflation. This will exacerbate the inflation crisis. RBI will need to stay on the project of raising rates in order to combat this
    inflation.
  3. The government’s subsidy program with petroleum products and fertilisers gets costlier when the INR depreciates. So India’s
    fiscal crisis gets a bit worse when the INR depreciates.

This logic is rooted in high levels of de facto capital account openness. Sometimes, policy analysts think that you can have your cake  and eat it too, and try to dodge these arguments by utilising capital controls. This has not worked in India, and the levels of de facto
openness have only grown through the years.

In summary, what should RBI be doing?

RBI should be focused on using the short-term interest rate as a tool to bring CPI-IW inflation under control, without distortions of
interest rate policy caused by trying to meddle in the currency market. This should be accompanied by liberalisation of the Bond-Currency-Derivatives Nexus so as to achieve an effective monetary policy transmission. These are the two things that RBI needs to focus on.

India shifted away from government interference in the currency market, from 2007 onwards but particularly after 2009. This is one of the biggest achievements in India’s economic liberalisation. This is a bigger issue in economic liberalisation than (say) decontrol of petroleum product prices. The INR is now a market. Nifty and INR are the two most important markets in the economy. It is time for all of us to analyse the INR as we analyse Nifty: as the outcome of a market process.

Is RBI back to trading the INR?

We don’t know. The data only comes out at monthly resolution, with a two month lag. But early signs that would show up would be unusual jumps in the weekly data about reserves, reserve money, etc. Greater transparency from their side would help greatly.

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Addressing the Problems of Rupeezone

By Ajay Shah, on May 12th, 2010

While everyone is pondering the ways in which Eurozone is not an optimal currency area, I found myself worrying about the ways in which Rupeezone is not an optimal currency area. In the Financial Express today, I have a column: Addressing the problems of Rupeezone.

Here are interesting materials on Greece which set the stage for this:

This is an interesting demo of economics happens today: an interleaving between journal articles, newspaper columns and blog posts.



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HR 4248 Free Competition In Currency Act Of 2009

By Trace Mayer, on February 2nd, 2010

On 9 December 2009 Representative Ron Paul introduced H.R. 4248 the Free Competition in Currency Act of 2009.  This Act has the potential to impact the investment world more than any other legislation that has been enacted for decades.  The impact on the bond market, Treasury market, stock market and general economy would be tremendous and disruptive.

The aims of the Act are fairly simple to (1) repeal federal law which currently decrees unconstitutional forms of currency legal tender, (2) prohibit federal taxes on gold, silver, platinum, palladium or rhodium bullion, (3) prohibit States from assessing tax or fees on any currency or monetary instrument used in interstate or foreign commerce that has legal tender status under the United States Constitution, (4) repeal federal criminal code pertaining to gold, silver or other metal coins and nullify any previous convictions under those codes.

Like he has often been when attempting to restore the checks and balances of the Constitution on this issue with H.R. 4248 Dr. Ron Paul is the lone voice in the wilderness and has no co-sponsors.  To my knowledge the only legislation Dr. Ron Paul has introduced that has been approved and enacted is Public Law 99-185 and Public Law 99-61 which require under 31 United States Code 5,112 that ‘the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which’ contain .999 fine silver or fine gold.  When the public wants to buy gold or silver, lawful money, there should be enough!

H.R. 1207 – FEDERAL RESERVE TRANSPARENCY ACT OF 2009

On 26 February 2009 Representative Ron Paul of Texas introduced H.R. 1207 the Federal Reserve Transparency Act of 2009.  Most in the financial establishment chuckled, politicians ignored it and the general public was clueless as to its effect.  But because of rapid education of the public and the political pain they exerted on the politicians the bill now has 317 co-sponsors.

To fully understand the impact of the H.R. 4248 legislation it is important to take a short journey through American legal history.

CONSTITUTIONAL LEGAL TENDER

Under Article 1 Section 8 Clause 5 Congress is given the power to ‘Coin Money, regulate the Value thereof’.  Notice the Constitution does not say what money is only that it is something that is coined rather than printed.  The Tenth Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”  The Constitution operates on the principle that if a power is not specifically delegated then it is prohibited.

In this case, the Federal Government is given no authority to make anything legal tender.  The Federal Reserve Act of 1913 was enacted by Congress creating the Federal Reserve and it would not be the first unconstitutional legislation.  They habitually violate their own laws.

Because Congress does not have the power to declare anything legal tender and because the Federal Reserve was created by Congress therefore it follows that the Federal Reserve cannot declare anything legal tender.  The individual States do retain the power to declare things legal tender but are restricted under Article 1 Section 10 Clause 1 from making any ‘Thing but gold and silver Coin a Tender in Payment of Debts’.   The creature cannot exceed the creator.

The Founding Fathers strongly supported the hard money system.  After all, they had just fought a Revolution after living through the tyranny of King George with the Stamp Act, Writs of Assistance, destruction from the the Continental hyperinflation and implosion of the economy.

Despite the constraints of the Constitution the monetary system of the United States has been perpetually in violation.  For example, the United States Dollar or Federal Reserve Note Dollar went poof multiple times last century including on 5 April 1933 when FDR decreed gold to be a dangerous weapon of mass financial destruction, deemed it a controlled substance and threatened any United States citizen with jail time for owning it,  on 4 June, 1963 and 24 June 1968 when silver certificate redemption was completely ceased and 15 August 1971 during the Nixon shock.

WHAT IS A DOLLAR?

Dr. Edwin Vieira, J.D., is the author of the preeminent legal treatise on monetary jurisprudence in American law Pieces Of Eight, holds four degrees from Harvard and practices law before the United States Supreme Court.  I highly recommend reading Dr. Vieira’s entire essay, What Is A Dollar?, which is quoted only in small part here:

2. Do the present monetary statutes intelligibly define the “dollar’”?

Unfortunately, the present monetary statutes do not define the “dollar” in an intelligible fashion.

a. Federal Reserve Notes. Most people associate the noun “dollar” with the Federal Reserve Note (“FRN”) “dollar bill,” engraved with the portrait of President George Washington. This association is mistaken.

No statute defines – or ever has defined – the “one dollar” FRN as the ”dollar,” or even as a species of “dollar.” Moreover, the United States Code provides that FRNs “shall be redeemed in lawful money on demand at the Treasury Department of the United States * * * or at any Federal Reserve bank.”4 Thus, FRNs are not themselves “lawful money” – otherwise, they would not be “redeemable in lawful money.” And if FRNs are not even “lawful money,” it is inconceivable that they are somehow “dollars,” the very units in which all “United States money is expressed.”5

b. United States coins. The situation with coinage is more complex, but equally (if not more) confusing. The United States Code provides for three different types of coinage denominated in “dollars”: namely, base-metallic coinage, gold coinage, and silver coinage.

c. Currency of “equal purchasing power”. The UnitedStates Code provides no answer to this perplexing question. Indeed, it mandates that the question should not even be capable of being asked. For the Code commands that “the Secretary [of the Treasury] shall redeem gold certificates owned by the Federal reserve banks at times and in amounts the Secretary decides are necessary to maintain the equal purchasing power of each kind of United States currency.14

The term dollar is used in Article 1 Section 9 Clause 1 and the Seventh Amendment.  Neither the slave-trade faction nor the right to trial by jury would have accepted these provisions without a clear definition of what the dollar is.

Therefore, their support of these provisions inferentially establishes what a literal reading of them straightforwardly suggests: to wit, that the noun “dollar” refers, not to a mere name applicable to whatever Congress whimsically might decide thereafter to call a “dollar,” but instead to a particular coin so familiar in American experience as to be beyond political transmogrification. … Obviously, Jefferson’s free-market, scientific approach is a world apart from the arbitrary way in which Congress has set up the mutually incompatible and internally irrational sets of silver, gold, and base- metallic coins that exist today.

2) The Coinage Act of 1792. Little more than a year after Hamilton’s Report, Congress enacted its principles into law.

Section 9 of the Coinage Act of 1792 contained the monetary definitions for the United States monetary system and defined

DOLLARS or UNITS – each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.

THE COINAGE ACT OF 1792

It is interesting to see the difference between how the Founding Fathers and the current politicians deal with those who engage in quantitative easing.  For example, on 21 November 2002 at the National Economists Club in Washington DC Federal Reserve Chairman Ben Bernanke said,

A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

Section 19 of the 1792 Coinage Act provided:

SEC. 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.

As David Reilly of Bloomberg reported on 29 January 2010 in Secret Banking Cabal Emerges From AIG Shadows:

Later, when it became clear information would be disclosed, New York Fed legal group staffer James Bergin e-mailed colleagues saying: “I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.”

Think of the enormity of that statement. A staffer at a body with little public accountability and that exists to serve bankers is lamenting the inability to keep Congress in the dark. …

Now, I’m not saying Congress should be meddling in interest-rate decisions, or micro-managing bank regulation. Nor do I think we should all don tin-foil hats and start ranting about the Trilateral Commission.

Yet when unelected and unaccountable agencies pick banking winners while trying to end-run Congress, even as taxpayers are forced to lend, spend and guarantee about $8 trillion to prop up the financial system, our collective blood should boil.

Reuters reported on 8 December 2009 that the Chinese do not put up with this type of financial terrorism:

Yang Yanming was sentenced to death in late 2005 and took the secret of the whereabouts of 65 million yuan ($9.52 million) of the misappropriated funds to his grave, the Beijing Evening News said.

The report added that Yang was the first person working in China’s securities sector to be executed. …

Conscious that the growing gap between rich and poor could generate resentment, China is battling corruption and stock trading abuses. It has used the death penalty as a deterrent in serious cases.

It will be interesting to see if there is swing in the political attitude of the people towards the Federal Reserve engaging in quantitative easing.  As Dr. Ron Paul was the lone voice in the wilderness with calling for an audit of the Federal Reserve, is currently a lone voice about competing currencies and while he is joined by an increasingly shrill chorus condemning the bailouts he may yet become a lone voice in championing in introducing stiff legislation as a deterrent instead of rewarding the nefarious behavior with bailouts.  If legislation like the 1792 Coinage Act were to be passed then there would likely be a lot of rounding up to do.  Financial criminals, whether engaged in something large like unconstitutional legal tender or something small like a potential Monex fraud, should take heed.

CURRENCY CONTROLS

Many currency controls are in place which support the FRN$ by hindering its competitors such as gold, silver, platinum, palladium or rhodium.  H.R. 4248 intends to remove these barriers.  More may be implemented and holders of FRN$ may their usefulness and velocity frozen.

For example, there are ‘qualified intermediary’ rules the Infernal Revenue Service require foreign banks to follow even where legislation protects bank privacy.  The PATRIOT Act allows for ’sneak and peak’ warrants along with the ability to confiscate cash at will and in secret.

A particularly insidious but scarcely mentioned currency control was implemented by the United States Mint on 14 December 2006 which provided:

The United States Mint has implemented regulations to limit the exportation, melting, or treatment of one-cent (penny) and 5-cent (nickel) United States coins, to safeguard against a potential shortage of these coins in circulation. … Prevailing prices of copper, nickel and zinc have caused the production costs of pennies and nickels to significantly exceed their respective face values.

“We are taking this action because the Nation needs its coinage for commerce,” said Director Ed Moy. “We don’t want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer. Replacing these coins would be an enormous cost to taxpayers.”

Specifically, the new regulations prohibit, with certain exceptions, the melting or treatment of all one-cent and 5-cent coins. The regulations also prohibit the unlicensed exportation of these coins, except that travelers may take up to $5 in these coins out of the country, and individuals may ship up to $100 in these coins out of the country in any one shipment for legitimate coinage and numismatic purposes. In all essential respects, these regulations are patterned after the Department of the Treasury’s regulations prohibiting the exportation, melting, or treatment of silver coins between 1967 and 1969, and the regulations prohibiting the exportation, melting, or treatment of one-cent coins between 1974 and 1978.

The new regulations authorize a fine of not more than $10,000, or imprisonment of not more than five years, or both, against a person who knowingly violates the regulations. In addition, by law, any coins exported, melted, or treated in violation of the regulation shall be forfeited to the United States Government.

Better be careful with the amount of pocket change you take across the border into Mexico to buy gum.  You may find yourself unjustly criminally liable and headed to jail!

ECONOMIC IMPLICATIONS

The Federal Reserve Note is a bill of credit, a debt instrument.  As Murray Rothbard observed on page 18 of his 1963 America’s Great Depression, “It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market.  But since contraction causes no positive malinvestments, it will not lead to any painful period of depression and adjustment.”

Mr. Rothbard continues the observation that government policy can hobble the adjustment process by: “(1) Prevent or delay liquidation, (2) Inflate further, (3) Keep wage rates up, (4) Keep prices up, (5) Stimulate consumption and discourage saving and (6) Subsidize unemployment.”

H.R. 4248 would hasten the liquidation of the FRN$ credit instruments and hobble the government and central bank’s ability to inflate further.  Because the monetary metals are safe stores of value it would encourage savings.  The cascading effect this would have on wage rates, prices and the inability to subsidize unemployment would allow the country to recover from this greater depression much quicker.

UNAVOIDABLE COLLAPSE

The current unconstitutional monetary system will collapse.  It is not a matter of if but when.  Tremendous resources are being mashelled in an attempt to stop the collapse but it is about as effectual as a lone man putting forth his arm to stop the might Amazon from flowing or some costumed King named Cnut decreeing that the tide should not rise.  Economic law will takes it course.

As Ludwig von Mises predicted decades ago in chapter 20 of Human Action, ‘The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. … But then finally the masses wake up. … A breakdown occurs. The crack-up boom appears.’

The fiat currency system with the Federal Reserve Note dollar as the world reserve currency is in the process of and will eventually completely breakdown and fail.  There is no easy solution.  The more capital is misallocated through bailouts the more painful the liquidation and correction will be.

Dr. Ron Paul’s legislative prescription to the monetary ailments is like taking a drug addict off drugs; the simplest, most ethical and most likely solution to put America back in a position to generate freedom, peace and prosperity.  To ignore H.R. 4248 and continue with the current monetary system is like giving an alcoholic a stolen bottle of whisky to cure his headache; while it may mask the pain in the short term it causes more damage, is immoral to steal the whisky and will lead to a worse headache later.

CONCLUSION

With unlimited greed, insatiable and imprudent desires in Wall Street and Washington it must be that the whole operation must combine and climax in an unsustainable debt bubble that either implodes in a depression or erupts in hyperinflation.  But in the grand design, gold and silver’s primary role are not as economic tools, insurance against depression or hyperinflation, but guarantors of liberty when actually used in ordinary daily transactions.

Gold, silver and the other precious metals protect against confiscation through inflation which is a form of taxation without representation or due process of law.  These shiny metals are not mere barbaric commodities but essential checks and balances in the American political machinery.

Thus, the fight over of competing currencies is about more than just wealth.  It is a fight with only two destinies:  freedom of choice or coercion.  To realize the first and vanish the second will not have too high a price because without it you will have paid the ultimate anyway without a return.

Dr. Ron Paul’s H.R. 4248 the Free Competition in Currency Act of 2009 would return America to a Constitutional monetary system, lay the foundation for freedom, peace and prosperity and clear up the unintelligible federal law in these regards.  For these reasons I endorse this legislation.

Disclosures: Long physical gold and silver with no interest in the problematic SLV or GLD ETFs or the platinum ETFs.



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China’s Currency Policy and Yuan Revaluation

By Rok Spruk, on December 4th, 2009

The Economist published a thorough discussion (link) of China’s currency policy and reasons why yuan is unlikely to re-valuate any soon.



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Hawala Banking And Currency Controls Part I

By Trace Mayer, on November 18th, 2009

On HowToVanish many people have been asking questions in response to an article I posted about hawala banking. It is a great topic and one that I enjoy talking about so I thought I would respond by fleshing out what kinds of transactions take place in a hawala system and then answer the biggest question by far; how do I find a hawaladar?


HAWALA BANKING TRANSACTIONS

There are a few archetypical transactions that most hawala transactions will resemble. The first is the most common; remittances. For example: a person from very poor country X is working in country Y. He sends home $100 USD of purchasing power to his family twice a month. The cost to bank wire this amount is $10 USD or more and costs him a large percentage of his minimal remittance amount. It is difficult to save up and send larger sums on a less frequent basis because banking is unreliable at best in country X and large amounts of cash are not safe to store with his elderly parents, wife and children who are living alone. An exchange through two hawaladars will efficiently facilitate such a transaction on a regular basis at a much lower cost.

The second situation is that of the transactional broker. For example, I want to buy options on a certain stock but I do not have enough money in my trading account to meet the margin or liquidity requirements. My good friend is planning on purchasing options on the same stock so I give him some money and he buys a few extra options which he will pay me for when I want to cash out. My friend has acted like a hawaladar for the exchange.

A third situation is that of the repatriation or expatriation of wealth. Real estate is a good example because, regardless of legal restrictions, you cannot take real estate away from or add it to a country, with the exception of Iraq, California which is going to fall into the ocean and Dubai whose palm tree shaped coastline is not a natural phenomenon. If you own real estate in country A but live in country B you cannot simply tuck it into your pocket like a gold coin and repatriate that wealth. You will need to find a buyer of that property to convert the wealth into mobile wealth that can be taken out of country A and brought into country B. Once the wealth is more liquid then it can be transferred to someone acting like a hawaladar for the transaction.

HOW ACCOUNTS ARE SETTLED

The main characteristic of a hawala transaction is that they are informal exchanges made relying on the trust of the parties and generally outside of a structured banking system. In each of these scenarios there must be some settlement made for the transactions. The remitting and receiving hawaladars will maintain a tally of the total amount owed between them and settle their account at a later date. Almost all hawaladars destroy the records of the individual transactions once they are completed.  They can then wire the money all at once, or they may simply offset the balance against another account between the two.

What if the debtor on the tally sheet does not have cash to pay the debt? Because this is a private transaction, they may settle the debt using any value they wish. The hawaladars remitting and receiving money might both have sufficient wealth in both countries and will be able to settle their debts with each other through the intra-national exchange of the amount in cash. In addition they might choose not to settle in cash.  The hawaladar in poor country X may accept payment in chickens or vampire squids rather than in cash. The friend who bought the option for you might settle what he owes by buying gold for you or a nice steak dinner. The real estate purchaser may not have the cash for the property but gives you his sailboat which is at a slip near your home.

HOW DO I FIND A HAWALADAR?

These situations and a combination of them are representative of most hawala transactions. Now remains the biggest question that I recieve about hawala banking:  how do I find a hawaladar?

For a person who is not already part of the culture where hawala banking takes place, finding hawala services is not easy but here are a few suggestions.

BECOME A PART OF THE RIGHT COMMUNITY

The main use of hawala is to remit money to the home country of an immigrant worker.  Thus you can find where these people are, befriend them and ask to be connected to a hawaladar.

Remember that hawala is the formal name given to an informal system so they might not even know what the word hawala means.  Simply look for someone offering the kinds of services you want.  Some good communities to look for would be people from Mexico, which receives more money in remittances from the United States than any other country. Middle Eastern countries, East African countries, and South and South Central Asian countries have a long history of hawala practices.

I have had rather good discussions with one person in particular about the cultural barriers to interacting with these kinds of communities.  If direct interaction is out of the question, you may need to hire a private courier or messenger to be the intermediary for your search for a hawaladar.  My new friend came up with a great idea of hiring a bellhop or a taxi driver because they can move easily in and out of the complex social structures.  Another suggestion for those living in a foreign country would be to find a westerner who has a local spouse.  The local spouse will likely have more access to these kinds of communities than westerners.

SEARCH ADVERTISEMENTS

Sometimes hawaladars will advertise their services in the local ethnic newspaper.    Of course if you do not speak the language of the paper, you may want to hire a translator.  A website like Craigslist or other discussion forums might even list some of these kinds of services.  It is probably a good idea to look for the exact services you want rather than the word hawala or hawaladar.

UTILIZE YOUR NETWORK

Ask people you know.  Given the financial incentives that may come with the transaction, many people are willing to use their network of friends to engage in these kinds of transactions, especially if it is to help another friend or family member.   I have used this method numerous times for all kinds of transactions.  A good person to ask might be a friend with a liquid cash position such as a pawn shop owner or a rich uncle.

CONCLUSION

There are significant benefits to hawala banking in many kinds of transactions. Although for many westerners finding hawala services from hawladars on demand may be difficult, the need may become more acute because of the exacerbation of current currency controls and it is likely that these kinds of hawala services will become much more commonplace. In the meantime, it is good to be prepared and have access to those services.



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