Financial Repression 2021-2030

What is Financial Repression?

  • https://www.investopedia.com/terms/f/financial-repression.asp  

    • "Financial repression is a term that describes measures by which governments channel funds from the private sector to themselves as a form of debt reduction. The overall policy actions result in the government being able to borrow at extremely low interest rates, obtaining low-cost funding for government expenditures. This action also results in savers earning rates less than the rate of inflation and is therefore repressive."

  • https://en.wikipedia.org/wiki/Financial_repression   

    • "Financial repression comprises 'policies that result in savers earning returns below the rate of inflation' in order to allow banks to 'provide cheap loans to companies and governments, reducing the burden of repayments'. It can be particularly effective at liquidating government debt denominated in domestic currency. It can also lead to a large expansions in debt 'to levels evoking comparisons with the excesses that generated Japan’s lost decade and the 1997 Asian financial crisis'."

  • Another relevant text   "This Time Is Different: Eight Centuries of Financial Folly" by Carmen Reinart & Kenneth Rogoff

 

  • Russell Napier explains why we are entering into a period of Financial Repression.

    • https://themarket.ch/interview/russell-napier-we-are-entering-a-time-of-financial-repression-ld.462  

    • As always with Russell, this is a great article.  And "always" with Russell from a 5-10-year perspective, I think Russell is likely to be correct. Russell talks about the economic world from a fundamental perspective, and so it does not help at all from a short-term (1-2-years) timing perspective. Always love reading Russell's assessment because he has such great understanding of the economic world etc.    But Russell's Financial Repression might be why we are seeing negative real returns on US inflation linked bonds

  • Jon Pain  24/7/2021
    • "What we are seeing today is an extraordinary, and powerful, strategy of financial repression being implemented by central banks across the developed world. Every central banker knows that they cannot get close to a so-called normalisation of monetary policy...I’ve said before that we don’t even know what normal means anymore. In essence central banks know that they need to keep interest rates below, if not well below, the level of inflation so as to rid themselves of the growing gargantuan mountain of debtIn this regard central banks will keep interest rates as close to zero as long as they possibly can and much longer than they would have ever dreamt was possible, or imaginable. I, and many others, have suggested for some time that the world’s central bankers are all turning Japanese  Governments and central banks are now acting as one. They are effectively one entity. The days of central bank independence are over. In this fundamental regard they have embraced the Japanese model and are now following the Bank of Japan playbook, or roadmap. These observations might get some of you hot and bothered and you could say that there is no evidence of the so-called ‘monetisation’ of debt, when the central bank buys government securities directly from the Treasury. I’m happy to have that debate with you, however, I would argue this is all semantics and the net effect of the central bank’s purchases of securities is the same, whether it is in the primary market or the secondary market. In war time governments are given extraordinary powers and today we are at war with COVID. Those extraordinary powers would not be complete, if not impotent, without the central bank’s unlimited, if not infinite, capacity to buy all the debt that has been created fighting that war.  Clearly we have two visible hands, one from the central bank and one from the government, with the interaction of both resulting in a suppression of the free market pricing mechanism in the bond markets. Put another way the price discovery mechanism in the world’s major bond markets has been broken."

  • The following chart is the Real US (inflation-adjusted) bond yield 24/Jul/2021

Inflation_adjusted_US_bond_yields_negative_210724.png
Japanese_govt_bond_yields_since_1990_210724.png

Above is a chart of Japanese government bond yields since 1990 to 24/Jul/21.   This may be what is ahead for Western bond yields.

The chart below - the last time that the USA implemented financial repression, was to help fund the debt created in World War II.

Financial_repression_last_seen_in_USA_post_World_War_II.jpg