As a way of putting grit into the wheels of the too efficient foreign exchange markets there appear to be technical arguments that the transactions would find another route, and clever round trips may be one of them. That does not answer the objection to my mind, that the quickest way of finding out what the difficulties are is to try it, especially if it yields a global development fund of the order of $200 billion a year.
(BTW what is the US annual contribution to the UN which it keeps on witholding in order to blackmail it, among other things, to strangle UNCTAD?)
More specifically on Feldstein, I think we need to be able to plead ignorance in the face of arguments like this, if we are to start learning what it is all about. Contributions from Doug, gratefully received, but I think this has got to be a process of collective learning. Here goes.
Feldstein is quoted twice in the final UNCTAD Review (1966) in the article by David Felix of Washington University in St Louis subtitled "The Case for the Tobin Tax".
This may give some clues as to the context in which Feldstein may have described this round trip.
Felix argues, page 76:
"A rising co-variance of stock and bond price movements between OECD markets suggests that capital markets are becoming highly integrated internationally... So does the increasing concern that local bank failures and currency shocks may instigate global crises, which has induced a greater frequency of crisis interventions by G7 monetary authorities. But all such evidence relates to financial asset markets. As concerns the international transfer of real resources, there is little evidence that capital markets have become much more integrated internationally.
Regressing national investment ratios of the OECD countries on their national savings ratios, Feldstein and collaborators have established that investment was as highly correlated with national savings in the 1970's as in the 1960's, and that the correlation declined only slightly in the 1980's when international financial flows were rising explosively (Feldstein and Horoika, 1980; Feldstein, 1994) Replicated by others on different data sets, the findings are now accepted as generally valid. .... The inference for policy of this evidence, which recent Mexican and Argentine policy makers disregarded with disastrous results for their economies, is that countries should not rely on foreign financial markets to fill large prolonged shortfalls between domestic investment and savings."
So the thrust of Feldstein's interest seem clear in these citations, and give perspective to the "paradox" described in the quote from Rakesh. I do not know whether the precise articles refer to the paradox, but they are
Feldstein, Martin, and Charles Horioka (1980), "Domestic saving and international capital flows", The Economic Journal, Vol 90.
and
Feldstein, Martin (1994) "Tax policy and international capital flows", Weltwirtschaftliches Archiv, No 130.
In attempting to understand very approximately the example given below of the "paradox" I suggest it is to do with the advantages to hegemonic powers of having their own currency used as as international reserves. It seems to suggest that a formal investment of dollars in say Indonesia might contribute to a situation in which there is a flow of dollars back to the USA.
Now as far as my amateur eye can see the owners of the hegemonic currency get advantages in several ways. One is that other countries hold their currency for the pleasure of having reserves denominated in it - an interest free loan from the rest of the world of several billions a year to the USA, which must give it some competitive advantage in the race to innovate. Secondly being able to raise loans at lower interests rates than less fortunate countries, such as the Soviet Union and no doubt many more.
Now the ability to do this is partly constrained by the fluctuating nature of the readiness of other countries to hold dollars. A slight reduction in the amount of free dollars in circulation among the banks in Indonesia, might therefore be a counterbalancing of formal dollar investment in Indonesia.
Whatever the technical reasons why there is little likelihood of a significant transfer of real resources, I think the context in which Felix quotes Feldstein is striking: That despite a very great increase in the international of financial assets in the last couple of decades, there is little evidence of a net transfer of real resources.
Another argument why something like the Tobin tax would provide a useful pool for starting to fund structural changes in the balance of the world economy.
Chris Burford
London.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
At 03:51 PM 6/1/98 -0400, Rakesh wrote:
>Many of us read Doug to make sense of the dizzying world of capital
>movements, an example of which below is what the Tobin Tax (I suppose) is
>meant to curb. Here is an interesting excerpt from Capital Cannibalism,
>Currency Chaos and the IMF (ranjit sau, economic and political weekly
>3/7/98):
>
>Hedging a foreign investment can in effect erase cross border capital
>flows. to illustrate, suppose and American pernsion funds buys one million
>dollars worth of Indonesian rupiah denominated bonds. this is a foreign
>investment in the capital market of Indonesia; it brings in dollars to
>Indonessia. Now suppose the pension fund goes to the currency market and
>sells forward, for dollar, the prospective rupiah proceeds from the bonds.
>Then on the basis of that collateral it draws dollar in spot market
>operated by Indonesian banks. Thus, the circle is completed, and dollar
>flows out of Indonesia, back to New York, whle the American pension fund
>continues to own the Indonesian bonds. So American investors in this
>example, can take position in foreign securities without causing any net
>outflow of capital from the US.
>
>Why should an investor do such a roundabout excursion [don't myself
>follow the rest--rb]? In a situation where the covered interest rate
>parity holds an arbitrage of this type reduces exchange risk, but does not
>add to profit. However, the presence of risk premium in currency and
>capital markets can carve out scope for profit making. Suppose that the
>rate of return on Indonesian bonds is high, at 20%. there are risks, no
>doubt; but neither the balance of payment of the country nor the income
>statment of a company records risks. In the US the rate of return is
>relatively low, say 5%. I fthe rupiah is fairly steady an American
>investor can make almost instant profit, of 15 percent, by taking oa
>position on Indonesain bonds without any net expenditure of dollars.,
>relying on the above mentioned scheme of currency transactions. This is
>the essence of what is known as the Feldstein paradox."
>
>Any further elaboration of the Feldstein paradox would be appreciated.
>Brad, Chris, Max, Doug?
>thanks, rakesh
>
>