Financial Repression and You
There’s an excellent piece from Carmen Reinhart, writing at Bloomberg, on the topic of financial repression. Reinhart’s work has that certain something that’s missing from the writings of most economic writers. And what is that something? Explanatory power.
Why does financial repression occur and what is it?
As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of “taxation” that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt.
Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. In the U.S., as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.
The lesson: things that cannot continue on forever won’t.
Throughout history, debt-to-GDP ratios have been reduced in five ways: economic growth, substantive fiscal adjustment or austerity plans, explicit default or restructuring of private and/or public debt, a surprise burst in inflation, and a steady dose of financial repression that is accompanied by an equally steady dose of inflation. It is critical to note that the last two options — inflation and financial repression — are only viable for domestic-currency debts (the euro area is a special hybrid case).
Financial repression thus ends up as a least painful/least blameful choice for those insiders with their hands on the levers of monetary policy. But what is the benefit of punishing savers, to include bondholders?
Well, maybe it’s the realization there is no free lunch.
This means asking future generations (and future generations alone) to bear any burden and pay any price is unacceptable. Although the children—and their children—will have to deal with the consequences of the debts of their predecessors, this burden can be mitigated in the here-and-now by
punishing clandestinely taxing those who have the discipline and wherewithal to defer excessive spending and borrowing in the present.
Of course, the idea of punishing borrowers is a bridge too far. Why? Because what bigger borrower is there than the state?