Financial repression returns to burn debt… and your savings
When it becomes difficult to predict the future, sometimes the most useful thing is to look at the past, at history. Today, global public debt is at historic highs, government spending remains at relatively high levels and neither major spending cuts nor tax increases are being considered in the short term. Meanwhile, central banks are waiting for the right time to lower rates (some have already started to do so) even though inflation appears to be stuck above the 2% target. The market movements (analysts, investors…) begin to emit the following signals: “Financial repression.” And history comes to confirm this rumor. Echoes of the past tell us that governments and central banks are paving the way to usher in a new era of financial repression, similar to what happened after World War II.
Seasoned strategists explain that financial repression essentially involves keeping interest rates below the inflation rate for extended periods of time to allow debt to ‘burn off’. Societe Generale Albert Edwards, what is the purpose? Reduce debt through silent and controlled evasion of inflation. the victims? Ordinary people, conservative consumers and savers. Winners? normal ones, Governments that will see their debt-to-GDP ratio reduced Without the need to apply actual reductions with the resulting wear and tear.
Some parts of the plan have already been implemented in some economies. Some southern European countries have reduced their public debt by as much as 40 percentage points by bringing public spending back to pre-Covid levels, taking advantage of the tide of inflation and growth. But much of the plan still remains to be seen. Imagine a scenario in which Inflation rate stuck at 4% Whereas the ECB, under the pretext of reviving the economy, reduces the deposit rate to 3% and narrows the yield curve to that level. Well, financial repression and negative real interest rates will already be a reality.
Analysts who have warned about this scenario include. Russell NapierAn economist at Orlock Advisors who has been declaring for years that we are in a new era of debt in which practically the only way out is financial repression. In an interview in March, Napier recalled his initial thesis, which pointed directly to China and its currency devaluation policies in the 1990s: “The artificially cheap yuan exchange rate made Chinese exports highly competitive., which led to significant trade surpluses. China was able to rapidly mobilize resources and became a major player in the global economy. The consequences of this monetary system included high levels of leverage due to cheap credit and extraordinary asset price growth. “The Fed and other central banks reacted to these founder monetary policies, rather than running them.”
From that dust, from this mud. The dynamics that have taken place since then have escalated to the peak of Covid. The pandemic situation sparked an unprecedented stimulus that has further inflated an already massive global debt bubble. The solution, Napier explained in another interview on a podcast a few months ago, is becoming more complex with each passing day and will not suit everyone’s tastes. Economists propose five options to fix this huge problem and only one seems feasible: financial repression.
russell nipperOn debt: “There’s no appetite for austerity… We end up with a thing called financial repression, I think that’s where we’re headed.”
“It is penance. I think there’s no political appetite for austerity, There is the default. But not actually paying often leaves you in a worse situation. It is not clear whether Greece is in a better position after defaulting or restructuring its debt. Lehman Brothers’ default doesn’t leave us in a better place. So, not paying is not really an option. We all have to wait for very high real growth, which will be a productivity revolution. (…) But workforce growth in itself does not bring about change. So we will need a real increase in productivity growth and this is probably beyond the control of the government. This may have to come from the private sector. (…) Then you have hyperinflation destroying your debt and finally, this is called financial repression. I think that’s where we’re headed,” says Napier.
“One of those paths would be the best answer. High real growth, but it is unlikely to manifest, and I think the other three are very unlikely to be adopted politically, which leaves us in fiscal repression “It’s a complete dilution, it’s to reduce the debt at a pace that doesn’t scare the horses or, in this case, savers,” he adds.
year ago, Carmen M. Reinhart, Jacob F. Kierkegaard and M. Belen Sabrancia Published an article in which he explained it this way: “Financial repression is most effective in debt settlement with regular doses of inflation… The low level of nominal interest rates helps to reduce debt service costs, in addition, Significant levels of negative real interest rates help eliminate or reduce the real value of the public debt. Inflation should not be a complete surprise to market participants, nor should it be (historically) very high.
Stuart Kirk, a fund manager, told the Financial Times that “as part of a broader policy known as financial repression, inflation may be the solution (to the debt problem). Inflation needs to exceed interest rates for an extended period in order to reduce debt., which means state control over monetary policy and bank balance sheets. To make the action effective, governments should order the country’s savings institutions (including asset owners and those managing their pensions) to buy domestic assets, especially their own bonds, to ensure that yields rise above inflation. Remain below.
“Wow, what a disaster! Where are we going?”, said Société Générale’s Edwards, without looking at the IMF in its latest report chiding the US for its rising deficit and its mounting debt. According to Napier in his interview, that’s far from China, where debt (total: public and private) has grown to 311% of GDP. “If you fear the US is headed for fiscal oblivion, IMF data shows China is headed for fiscal oblivion,” says Edwards. He said the “end game” would involve financial repression with measures such as control over the yield curve. (YCC) It will come “sooner than we all think.”
“My view is that decades of excessively loose monetary policy have allowed governments to ruin their fiscal positions to such an extent that public debt-to-GDP ratios are on a completely unsustainable path. However, with rapidly rising Look at the projections from the Congressional Budget Office Given the intense populist reaction against high levels of inequality, I can see only one way out of this mess for Western economies: nothing short of financial repression, including yield curve control. Including, yes, the same control that Japan has just given up,” the society strategist writes.
A look at World War II
One possibility, to control sovereign bond yields, adopted by Western central banks (in the US this was actually done after World War II) is also considered by Napier, although he expresses his skepticism. Politically, this can happen in America. “While Western economists mock Japan for its curve control policies, I think the US and Europe are headed in the same direction as incurable government deficits push up bond yields. During the next crisis, we’ll see more Japanization.” Would not be surprised to see “Western central bank policy,” Edwards notes.
The hard-hitting market analyst decried shortly before the pandemic that Western monetary policymakers had begun moving toward an average inflation target, saying they were trying to accelerate economies to generate higher inflation. Will run from: “That was an attempt to move towards financial repression, but unfortunately they were very successful. And they let the inflation cat out of the bag wildly.” “Do the Fed and the ECB really want to get inflation back to pre-pandemic inflation lows? In my opinion, no,” he brushes off.
It is undeniable that financial repression has been a very useful tool in reducing debt. This formula effectively reduced the real returns to holders of public debt. (Helped governments reduce their debt-to-GDP ratio over the period 1945–1980)According to research by Reinhart and the IMF’s M. Belen Sabrancia. According to his calculations, real yields on public debt were negative in many countries during that period.
The Richmond Federal Reserve itself stated in a study that it is very difficult to understand who is to blame for this financial repression due to the “measurement problem”: in practice, it is difficult to determine what is causing these low real interest rates. It was to an extent. Control.” Distorting fiscal effects, such as interest rate caps (curve control), or the extent to which they were caused by inflationary surprises (higher than expected inflation) “It is very difficult to disentangle the two effects that cause lower yields .” said. The complexity of figuring out who is ‘guilty’ provides an opportunity for central banks and governments Unique way to pay off debts by putting hands in the pockets of families (Real interest rates make conservative saving families poorer) without them even realizing it.
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