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 Richmans' Trade and Taxes Blog

IMF figuring out capital inflows; U.S. still clueless
Howard Richman, 2/22/2010

The International Monetary Fund (IMF) is beginning to figure out that capital inflows are destructive. Alan Rappeport of the Financial Times reported on February 22 that the IMF now favors letting underdeveloped countries limit the financial capital flowing into their countries. 

Their new position recognizes that the inflow of financial capital strengthens the currency of the country receiving a net inflow, thus hurting that country's industries in world competition, The resulting trade deficit, in turn, leads to a financial crash.

Meanwhile, the U.S. government is still clueless. The house price bubble in the United States from 1998-2006 was largely funded by the inflow of capital from Asian governments, which was accompanied by the loss of American manufacturing competitiveness, and was followed by America's financial bust of 2006-2009.

And yet we continue to subsidize the inflow of financial capital by granting that capital special tax loopholes, exempting non-resident foreigners from paying tax on interest earned. We go even further with foreign governments, exempting them from paying taxes on interest or dividends earned. In other words, we directly subsidize the destruction of American competitiveness.