03/10/2016 - Jim Puplava: Financial Repression Happens When Government Is $20 Trillion In Debt
“Even though government debt continues to climb, by using financial repression they are able to service it cheaper. In the financial crisis, the government spent $450 billion/year interest expense on the debt, which was $10 trillion. Fast forward to where we are today (to the end of the government’s fiscal year ending in 2015) and the annual interest expense on the national debt has fallen by $50 billion even though the national debt has gone up by $9 trillion! How does that happen? Because interest rates have fallen and are being kept at a very low level. To put things in perspective, for every 1% increase in interest rates, the interest expense goes up by $200 billion. If we were to normalize interest rates from 2% to 5%, the interest expense would be $1 trillion, or $600 billion more than what we are spending today. So as long as interest rates remain low and the economy is still growing, albeit slowly, politicians have time to wish this problem away. Once interest rates increase to normal levels, which may not happen for quite some time, or the economy goes back into recession, politicians will be forced to deal with this problem by enacting major entitlement reform, which is the last thing they want to do .. Given the immense size of the national debt, it is very likely that interest rates are going to remain low for much longer than investors anticipate as the government implements financial repression. Financial repression is a way in which high debt levels are gradually inflated away while keeping interest rates artificially low for long periods of time. Not only have we done this in the past, but Japan has had 0% interest rates for two decades. So, from our vantage point, we think interest rates are going to remain low for years to come.”
