The Destructive Power of Capital Controls

And why they're coming to America...

'CAN YOU by legislation add one farthing to the wealth of the country?' Richard Cobden asked the House of Commons on 27 February 1846.

The Argentinians think so, writes Daily Reckoning founder Bill Bonner.

So do the Europeans. And, of course, the Americans.

But first let us continue with Cobden's remarks:

'You may, by legislation, in one evening, destroy the fruits and accumulations of a century of labour; but I defy you to show me how, by the legislation of this House, you can add one farthing to the wealth of the country.'

Two news items remind us how vain and treacherous the politicians can be.

First, from the Argentinian press comes a story with the following headline:

'Kirchner government to tighten capital controls'

Uh oh. It's already a pain in the neck to try to keep the lights on south of the Rio de la Plata. If you move money into the country officially, you will take a beating. Officially, the exchange rate is under six pesos to the Dollar. But guys will come up to you on the street and offer you eight pesos to the Dollar – and more.

In Salta, for example, you pull up in front of a bank...at the corner of the central square. You beckon to one of the many money changers standing on the sidewalk. You don't get out of your car.

'How much do you want?' he asks.

'I want to change $1,000,' you reply.

'Then, I'll give you eight.'

'No thanks,' you say...shooing him away.

'Alright, 8.1.'

'Okay...we have a deal.'

You count out your money and go on your way. No standing in line. No need for photo IDs. Cash...and carry. Remarkably efficient. As long as you stay in the black market. You can spend your money, no problem.

But try to do business in an above-board way and you will quickly be caught in a trap. The government is running out of Dollars. It tries to force you to give up Dollars at less than the market rate.

Already, these controls have driven many imported products off the market completely. And now, with even stricter capital control coming, it's going to get even tougher.

But what would you expect from Argentina? Is there any foot in the Argentinian banking system that isn't missing at least a couple of toes? Give them a super-stupid policy... they will aim for their feet.

Europe is a different matter. Or so we thought. More sophisticated. More subtle. More careful. Run by German bankers with memories that stretch all the way back to the Weimar debacle of the '20s.

But here's another story. Europe is thinking of imposing the same capital control policies that are hobbling the Argentinian economy.

Eurozone finance officials acknowledged being 'in a mess' over Cyprus during a conference call on Wednesday and discussed imposing capital controls to insulate the region from a possible collapse of the Cypriot economy.

In detailed notes of the call seen by Reuters, one official described emotions as running 'very high', making it difficult to come up with rational solutions, and referred to 'open talk in regards of [Cyprus] leaving the Euro zone.'

'Some additional laws need to be passed. Overall we are in a very difficult situation,' the official said, according to the notes. '[We're] trying to do everything within the powers to limit any unauthorized outflows.'

We hope you are paying attention, dear reader. The Euro feds are talking about passing laws to stop 'unauthorized' outflows. In other words, they will make it illegal for you to put your money where you want. You will need their permission to move it. They want it right where they can get it...if they need it.

They think they can pass laws and add to the wealth of the nation – or at least parts of it. And it won't be too long before Americans join in. They're already robbing savers with ultra-low interest rates. And the US has already passed laws to make it difficult to keep funds in foreign bank accounts. As their financial problems mount, the feds will turn the screws harder – just like the Europeans and the Argentinians.

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