Capital controls are making a comeback in the West

Many people think that strict government controls over their money are a thing of the past. They're not.

We've written here many times about the arrival of financial repression the various ways in which Western governments will attempt to erode the value of their debts over time by fiddling with inflation and one way and another forcing us all to invest in government debt.

There have been hints recently that our big pension funds will somehow end up invested in state infrastructure projects, but the review of the RPI about to get under consultation is a classic of repression.

The UK government has been using classic repression (keeping interest rates below inflation) for some time now. But it has a problem in that a great deal of our debt is index linked (the index linked market is worth around £278bn) and so can't have its value eroded by inflation. The obvious solution then is to change the definition of RPI to reduce the interest paid out even on the linkers (something that would have the helpful side effect of reducing the annual rises in payments made to those with incomes linked to the RPI).

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When this was first floated a few months ago, it was instantly ridiculed by most fund managers on the basis that "they wouldn't dare". Hmmm. The ONS has now set out a range of options for "improving the RPI". It could be left as it is, but it could also be calculated in the same way as the CPI, something that would make it permanently lower (the RPI uses an arithmetic average and the CPI a geometric average, something that keeps the former about 0.9%-1% higher than the latter see my post on this from last year).

This wouldn't exactly be politically popular (which presumably is why the Treasury is insisting it is an ONS decision) but it would wipe £2bn off our public spending bill in interest and hence deficit every year. I suspect that might be just enough to make George Osborne think it worth the dare.

Also on the subject of repression, I would point you towards John Dizard who writes an excellent column in the FT on Mondays. This week, he writes on another kind of financial repression- capital controls.

Most people have entirely forgotten the history of these in the UK, but until the end of the 1970s it was all but impossible to take cash out of Britain. Instead bar £50 each when you went abroad you had to keep and invest your money at home.

People used all kinds of tricks to get around this swapping bank accounts with people abroad, smuggling money, cashing cheques at casinos (just as the Chinese do in Macau today) and so on. This had several effects, but the main one was to prevent capital flight and all the unpleasant consequences that might have come with it.

Dizard expects formal capital controls to end up in place across Europe controls that will end the ongoing capital flight from Europe and make it easier to for "peripheral banks and governments to unilaterally extend the terms and soften the conditions of their bond debts".

And this is where "growing European demand for small gold bars comes in". It is becoming increasingly difficult to turn cash into a bank deposit in the euro area and to move bank deposits from one eurozone country to another. Why? Soft capital controls in the form of "a significant increase in the amount and intrusiveness of documentation". Gold, on the other hand, is easily transportable and, in small bars, exchangeable.

Most people think that financial repression in the form of government control over our money is something from the past. They are, as Dizard makes clear, entirely wrong. This time around, the "required mechanisms for capital controls are already being put in place".

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.