Krugman's "Smoot-Hawley Moment"

I'm constantly amazed at the things Paul Krugman has to say. This guy is on the top of the list of global economic thinkers. He has all of the credentials, and a huge platform to spin his views of what's good and bad, and what should be done next. PK's OpEd in the Times today is another example. (Link)

PK does a summary of Cyprus. I believe he has all of the facts straight, and I agree with him when he says:

Global capitalism is, arguably, on track to become substantially less global.

The broader story of Cyprus is about capital controls. It's not just the harsh new controls on the Island, it's all over Europe. There is not a country on the globe that has not established some form of controls the past few years. America has done it in subtle ways, using ZIRP, QE, Dodd-Frank and the Department of Justice to contain the free flow of money. I think a big clampdown in China on money is right around the corner. This trend scares the crap out of me. Krugman is on the other side of the spectrum. He loves capital controls. He wants to see more of them:

The bad old days when it wasn’t that easy to move lots of money across borders are looking pretty good.

"Looking pretty good?" OMG!

Given that big shots like Krugman want to see more controls of money, its a good bet that more controls will come. I think the likes of Krugman are ignoring the realities of 2013. They are doing so very much at the peril of the global economy.

The CIA keeps track of global cross border debt. The numbers are huge, and growing fast:

- Total World External Debt was $69T in 2012. In 2011 it was $63.6T. In one year it grew by $5.4T. World GDP growth was 3% while cross border debt rose by 8.5%.

- In 2004 World External Debt was $43T, or 65% of World GDP. In 2012 total External debt was 85% of GDP.

- The External Debt numbers for the USA are worth noting. Yes, 1995 is a long time ago, and the world is a different place today. I still find these results troubling:

In his typical style, Krugman establishes what is "true" and what is "false".

The truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.

Krugman's conclusion is that a cornerstone of global activity is a failed experiment and that the solution is to install more capital controls. Mr. K will get what he wants. More controls are coming - that's certain now. The entire house of cards that is Global GDP is at risk. The failed experiment that PK thinks is the rise in external debt, could easily morph into the failed experiment of the global economy.

I wonder if PK (and all the others who are pushing for more controls) are not having a "Smoot-Hawley Moment". In 1929 tariffs and other restrictions on trade were established. A global depression followed. In 2013 the tariffs and restrictions are on money, not goods. But if the result of those controls is a reduction (or even stability) of the external debt numbers, then the global economies will fall with it.

And this is what the world's "smartest" economist is calling for.

Comments

[NoDebt]

So where is that little prick Dr. Paul Krugman?  He's all over every other thread, but not this one.

Not sure whether to come in here and deny this or defend it, are you, Fake Doc?  Don't know quite as much about the real Paul Krugman as you thought, huh?  Cat got your tongue?

I'm sure he's just off saving the world right now.  A little too busy to troll the Hedgies today.

[Ying-Yang]

What is the total for all credit default swaps? Heh

[Muppet Pimp]

While not knowing what the actual plan might look like, it would seem that the controls might be most effective when they deal with duration rather than quantity.  Or maybe speed over substance is a better ananology.  I.E. Bubblenomics as is now practiced by the international financial elite tends to leave a trail of devastated non-finance types in its wake.  The hot money flows in, the bubble or mania develops, the locals not realizing that price means nothing anymore (in our era of endless fungible fiatskis for the well connected) become the greater fool to the international capital which slips off like a thief in the night, and then general chaos ensues as everyone realizes they have been left holding the bag.  The international flow of capital should not be stopped or even limited, however, it probably does need to be slowed down.  If one has capital just aching to visit some exotic locale, perhaps it will have to either stay awhile or stay home.  The current model is international seek and destroy mission followed by a retreat to the safety of the caymans or virgin islands (or Cyprus), sipping mai tai's under the shelter of a beach umbrella, all the while seeking out the next international heist.  Good work if you can get it.

Edit: I just read Krugmans piece http://www.nytimes.com/2013/03/25/opinion/krugman-hot-money-blues.html?_r=0 and we are in agreement on this particular problem (the end must be near).  It is really indisputable.  Many innocent lives have been destroyed by this phenomenon, all over the world.  The effect on locals is really insidious.