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Work and prosperity
16 March 2012

Financial repression

Is financial repression as bad as it sounds?

The best answer to that is: no, but only just.

Carmen Reinhart, writing for Bloomberg, provides an introduction to the concept. As the co-author of This Time Will Be Different: Eight Centuries of Financial Folly, she's a superbly qualified guide, because no one – with the possible exception of Mr Micawber – has done more to document the consequences of excessive indebtedness.

While debt bubbles are the ever-present precursors of financial crisis, financial repression is the typical response:

  • "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 injustice is obvious: Prudent investors are punished in order to bail-out the big spenders. One could argue that those doing much of the saving are the rich, many of whom made their money by inflating debt bubbles in the first place. Unfortunately, financial repression does not discriminate between this group and the millions whose only crime was to save for their old age.

The really sick thing is that the current Government has no choice. Such is the scale and spread of debt that repressed interest rates are probably the least worst option for us all, savers included.

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