Hillary Clinton's Call For Capital Flow Restrictions

The market, and America, got a good look at Hillary Clinton's misunderstanding of capital markets and economics, in an interview on CNBC this week, seen here.

The video clip is a discussion by members of CNBC's morning show, Squawkbox, of the interview, whose tape from the prior day is featured in the clip.

I would like to say that, having revealed herself to be a proponent of returning to an era of international capital flow controls, Clinton has severely damaged her presidential campaign and aspirations. Sadly, probably less than half of the American voting population will even understand what Hillary means by her statements, and how devastating her threats would be to the US and global economy.

Hillary expresses so many misunderstandings of economic reality that it is difficult to know where to begin critiquing her remarks.

First, of course, she is incorrect to suggest that we, the US, is at risk because we have debt outstanding held by foreigners. The debt is issued in our own currency. It is the debt of the world's leading economic growth engine, and only large, reliable and safe economy. The governments of China, and other nations, hold US debt because it affords them a competitive return on low-risk financial assets.

As Larry Kudlow pointed out, our allies hold approximately 80% of foreign-held debt. Further, Fed Chairman Ben Bernanke pointed out this week that our foreign-held debt is not a risk, in that they choose to hold these assets. Our debt is sought after for its relative return and low risk.

Next, Hillary indicated her lack of understanding of a growth economy. As one of the world's largest economies, the leading growth economy, and also a large, consuming nation, the US attracts capital from overseas to fund its growth. Foreigners buy US equities and debt, including that of our federal government, in order to participate in the growth in the American economy. We could not possibly fund all of our growth with domestic assets or savings anymore.

Further, when we spend money to import products, those dollars have to go somewhere. They return to the US via spending on exported US goods, and by investment in US enterprises or government debt. The mechanism of international investment requires US dollars to be used to pay for US investments. Thus, one way or another, US spending and growth leave claims on US assets in the hands of overseas individuals, companies, and other countries. This is simply a fact of global economics.

Hillary made a rather inane comment to the effect that the more we issue debt, the more the Asians buy it. Were that true! It's not that they buy because we issue. They buy our debt because it is offers a good return for the risk.

Finally, Hillary's hint at capital controls and somehow interfering with the issuance of debt or its purchase by foreigners runs the serious risk of triggering a global economic recession.

It was only with the dawn of the 1980s that better information and looser capital controls allowed private investors to discipline heretofore lax central bankers by punishing the currencies of profligate countries. International economics and finance have evolved to the point at which country finance ministers and central bankers must fear and respect the judgement of capital flows when managing their economies and currency issuance.

To retreat from this desired state, and return to the days of artificial controls on international capital movement, is to dismantle our relatively free and efficient global trading system, and harm global economic growth.

I'm very surprised Hillary's handlers even let her give this interview, let alone go afield with the absurd comments she made. It's on video, and will last through the entire election campaign.

Let's hope, first, that she doesn't get elected, and, second, that enough Americans understand what she meant to fear her appropriately.