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The trade war unleashed by Donald Trump may be a pioneer for much greater turmoil in the global economy. What tariffs look like when dust settles, deficits, surplus and trade patterns are still shaped by financial flows. It’s only a matter of time before another economic policy war burns. In fact, it has already begun. Welcome to a new era of financial suppression.
Financial restraint refers to policies designed to steer capital to fund government priorities, rather than where it flows in unregulated markets. In the decades after the war, Western countries used regulations, tax design and prohibitions to limit cross-border capital flows and directly restrict domestic flows to favorable uses such as government bonds and housing construction.
The United States then led decades of financial deregulation and globalization, which led (and led to) the global financial crisis. The United States now reveals abundance of its rejection of its traditional role in dismantling the financial barrier between its nations and securing the global fiscal order.
Rumors about the “Mar-a-lago Accord,” which manages the value of the dollar while forcing global investors to lock in loans to Washington, have created a shocking mistrust from other countries. But it’s not just Mar-a-Lago. Several policy proposals have emerged recently, and can be grouped quite well as measures of financial nationalism.
These include taxes on remittances, national foreign investment interests with policies disapproved by Washington, and promoting dollar-controlled stubcoins and loose bank leverage regulations. The last two both encourage the flow to US government debt securities.
The US represents the biggest swing of the pendulum, but other large economies take the same direction from free flowing funds.
China has not stopped practicing large-scale financial suppression. Hold non-convertible currencies and manage exchange rates. Using a network of state-controlled or state-influenced banks, businesses and sub-national governments, we guide the flow of credit to outlets as demonstrated by the various economic development doctrines that Beijing has preferred over the years. The latter had both success (the electric vehicle industry) and obstacles (house building bubbles). China is also working to replace the dollar-based international payment system.
Europeans have long been purists about free capital mobility, not only originally within the EU single market, but also in other parts of the world. But there, there is a change in attitude.
Influential reports from former Italian Prime Ministers Enrico Letta and Mario Draghi highlighted the Bullock sending hundreds of billions of euros abroad each year. This invites policymakers to adopt measures to redirect financial flows. This is also the agenda for unifying national financial markets.
The purpose of making the euro a more attractive reserve and investment currency is also energised by its appearance of a light-heartedness to Trump’s role in the dollar. A large EU-level borrowing programme appears to be at least conceivable, with an official digital euro ongoing. In parallel, the UK is trying to share pension funds to put more savings into the hands of UK businesses.
Europe may not end up with a completely run-through fiscal oppression, but it is now open season for policies to implement the policies that governments, as well as the market, do what they think are most needed. The reality is that commitment to the climate and digital transition and defense-related infrastructure leave no other options.
What should we do about the return of this fiscal state’s activism?
First, note that financial globalization is already declining. The rapid growth of banks’ cross-border financial claims halted in 2008. Such claims have been reduced to 30% from almost 50% of the global economy in early 2008. It may have been partially offset by non-bank activities, but in any case, it happened without deliberate policies to keep money in the home.
Second, complaints about surplus in other countries could quickly change if a trade war becomes a scramble of capital available worldwide to make it seem like a child’s play.
Third, many things can go wrong. The liberalized finances are not overshadowed by glory (not). However, state-oriented finances are high-risk activities that tend to be misleading as unprotected chronism. Still, that may be necessary. If everyone wants to keep more capital in their homes, it’s even more important to put it in the best possible use.
Martin.sandbu@ft.com
