Author: Kevin O’Rourke

International capital flows are supposed to be good for two reasons. First, they divert capital to where it can be invested most productively, enhancing efficiency and growth. Second, they help diversify risk. As regards the first benefit, helping rich country consumers borrow and consume is not what we typically think of as a productive investment. As regards the second benefit — well, the less said the better, really.

In a widely noticed article in the FT, Nouriel Roubini has argued that capital flows are now creating major asset bubbles outside the US, as investors exploit the weakening dollar to borrow at negative interest rates and invest the proceeds overseas. If he is right, then central banks are faced with an impossible dilemna. Outside the US, if they raise interest rates to prick incipient bubbles they jeopardize the recovery, and/or attract even more capital inflows. Inside the US, raising interest rates clearly places the recovery at risk.

I understand where Wolfgang Münchau is coming from when he calls for interest rates to be raised sooner rather than later, but having seen the world economy edge away from the precipice, I am not keen on measures that would bring us closer to it yet again.

If the problem is indeed being caused by ‘the mother of all carry trades’, as Roubini suggests, then throwing a few bucket-fulls of sand into the wheels of international finance seems to me to be a far less risky way of trying to deal with it. International capital flows have been associated with enough crises to be going on with these last few years.

International capital flows have had a destabilising effect in several countries in recent years, including Ireland. Arvind Subramanian and John Williamson have an interesting piece on the new Brazilian tax on capital inflows, here.

John McManus has an article today in which he points out that NAMA has the potential to raise the prices of legal and other professional fees by boosting demand for the providers of those services. He also points out that this will be bad for competitiveness. (And, one might add, for the fraying social fabric of this country.)

I would be interested to know how big such an effect might be: in other words, how many professionals in various categories will NAMA hire, relative to market supply?

I agree with McManus when he says that the state should limit the damage, by capping the fees it pays to such people. But it is hard to see how it could actually succeed in ‘driving down professional fees via NAMA’ through such a strategy, since according to McManus NAMA is adding to total demand in the sector.

Courtesy of Paul Krugman, here is a lovely little piece by Calvin Trillin.

It inspires the question of which percentile the regulators have been drawn from, and how this may have changed over time.

Menzie Chinn argues that there has been a structural break here. In other words, the decline in world trade can’t simply be explained by falling income: something more is going on. Amiti and Weinstein provide very interesting Japanese evidence in favour of the view that the something more is trade finance.