>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.
Jordan Hayes already dealt with the second half of this strange argument, pointing out that the forward contract would be so priced as to assure nothing like the "sure 15%" return the writer talked of.
But this no outflow of capital from the US argument is also mysterious. The pension fund pays to buy the bonds. It then hedges the currency exposure. But with any derivative contract, the cost of the hedge is only a fraction of its full face value, which is why they speak of "notional" values in derivatives accounting. Relatively little money actually changes hands. So there's still a positive outflow of capital from the U.S. And the pension fund is presumably hedged against currency losses, but it's not hedged against the risk that the Indonesian issuer might go bust & not pay.
I mean, imperialist finance can be fun for the imperialists, but not *this* much fun.
Doug