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Financial Reppression Gets a Shot in the Arm

Written by Gary North on January 10, 2012

Keynesians learn nothing. Here is an article on how great financial repression is when compared with liberty. Voters in the West have accepted this for 75 years.

Financial repression is the name economists give to the various ways that governments encourage or force investors to buy sovereign debt at unattractive prices. Economists Carmen Reinhart and M. Belen Sbrancia have identified three varieties: First, caps on interest rates keep down government borrowing costs. Second, rules that encourage the purchase of government bonds artificially increase demand. These include limits on cross-border capital flows and requirements that banks and insurers hold large quantities of supposedly risk-free government paper. Finally, governments can take direct control of investment by financial intermediaries. Hungary’s recently-nationalised pension funds are increasing their investment in government debt.

All these techniques allow governments to borrow at a lower cost and in larger quantities than they could in a totally free market. With a little help from inflation, governments can even pay back less than they borrow in real terms. Reinhart and Sbrancia calculate that the average real short-term interest rate paid by U.S. government between 1945 and 1980 was -3.5 percent.

This is theft by the printing press. The typical voter does not perceive this. They put their money in a bank for almost zero interest then prices rise. They are taxed on all gains, however small.
The banks want to conceal this.

He thinks voters prefer default by inflation.

In economic terms, such negative rates are the equivalent of a default. But while absolute non-payment wreaks havoc on the financial system — the great lesson of the Great Depression — banks and other leveraged institutions have less trouble dealing with the erosion of value through financial repression. And at least in some countries, many citizens seem to prefer to pay the government through hard-to-calculate losses in the financial system than through quite visible taxes.

The governments are in charge. They will not turn loose voluntarily.

But governments still call most of the shots. So repression is blooming, just under new names and with some interesting excuses. The central bankers who set negative real overnight rates in Europe and the United States may believe they are promoting growth, but the effect is to lower government borrowing costs. Investors cannot escape. Real rates are low almost everywhere and regulators will not allow too many bets on higher-yielding alternatives.

Similarly, when central banks buy government debt with newly printed money or when prudential regulators require banks to hold larger buffers of liquid government debt, they artificially increase demand — and depress yields. More traditional direct techniques of repression may also be making a comeback. Italy has recently seen a campaign for patriotic bond-buying.blockquote>

The author not deplore this. He praises it.

Such artifices may appal devotees of totally free financial markets, but they are less damaging than more natural alternatives. Government defaults are disastrous and more fiscal austerity might spark another recession.

Investors should hesitate before complaining about meagre yields in the new era. Financial repression could even have a civilising influence.

Default through inflation is positive, we are assured. It destroys the naive people who bought government bonds.

Continue Reading on uk.reuters.com

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