11/04/2014 - Governments Using Financial Repression To Pay Down Debt

images“Financial repression always consists of a combination of different measures, which lead to a significant narrowing of the universe of investable assets for investors. Money, which in a more liberal investment environment would have flowed into other asset classes, is channeled in a different direction. The goal of financial repression is an indirect reduction of government debt by means of the targeted manipulation of the cost of government debt, most of the time accompanied by steady inflation. Financial repression is ultimately a government-imposed transfer of wealth .. A preferably “quiet debt reduction” is supposed to be achieved by the following measures:

•Direct or indirect capping of interest rates (especially on government bonds).
•Measures such as forcing domestic investors to invest in domestic capital markets, such as capital controls and regulations forcing institutional investors to hold portfolios with a “home bias.”
•Taxes that make alternative investments more expensive (e.g. transaction taxes).
•Measures that imply a direct or indirect influence of government on financial institutions
(macro-prudential regulation).
•Negative deposit interest rates, which increase the incentive for banks to invest in relatively risk-free assets. Banks are thus encouraged to monetize government debt – something that can rightly be called an inflation policy.

One of the most important goals of financial repression is to hold nominal interest rates below the rate of price inflation. This lowers the government’s interest expenses and contributes to a reduction in the real value of the debt burden.

– Ronald-Peter Stoferle, Incrementum AG Liechtenstein

LINK HERE to the source article

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