11/03/2014 - GOVERNMENT PAPER REFERS TO FINANCIAL REPRESSION AS THE “LIQUIDATION TAX”
“THE LIQUIDATION OF GOVERNMENT DEBT”
“The saving (or “revenue”) to the government or the “liquidation effect” or the “financial repression tax” is the real (negative) interest rate times the “tax base,” which is the stock of domestic government debt outstanding.”
Working Paper 16893, National Science Foundation Grant No. 0849224
ESTIMATE 3-4% of US GDP Y-o-Y
“Such annual deficit reduction quickly accumulates (even without any compounding) to a 30-40 percent of GDP debt reduction in the course of a decade”
“Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes:
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Directed lending to government by captive domestic audiences (such as pension funds),
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Explicit or implicit caps on interest rates,
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Regulation of cross-border capital movements, and (generally)
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A tighter connection between government and banks.
“In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year.“
