An Eric Original, erm, Original: A Primer on Financial Repression
Reprinted from a main blog (home page of this site) post: https://www.tfmetalsreport.com/comment/46651#comment-46651
A Primer on Financial Repression
Submitted by Eric Original on October 25, 2011 - 11:17am. Hat Tip! 35My post from Sunday morning, which referenced Financial Repression, seemed to get positive reviews, so I thought it was a good time to put together a little primer on the subject. For background, here's the post:
https://www.tfmetalsreport.com/comment/360601#comment-360601
There's nothing new about "Financial Repression". For those who've been around these issues for a while, you've seen these kinds of statements many times:
- They are inflating away the debt.
- They are printing money.
- The purchasing power of my savings is being inflated away.
- We have negative real interest rates, and that's good for gold.
- Inflation is a "hidden tax".
Essentially, these are "old school" terms for what is currently underway, while "Financial Repression" is the "new school" terminology for the same thing. The "new school" kicked off in March of 2011 with the publication of a scholarly paper by Carmen Reinhart and Belen Sbrancia. Reinhart's paper pulled together a lot of data, put things all together in a rational framework, and resurrected an old name for it, namely "Financial Repression".
A couple of definitions are in order before we get much further.
Nominal interest rates, less inflation, equals real interest rates.
Nominal GDP growth, less inflation, equals real GDP growth. It might be more useful to rearrange that equation to read real GDP growth, plus inflation, equals nominal GDP growth.
Here is a link to Reinhart's paper. It's about 50 pages of scholarly writing, but well worth a read. Lots of data and charts too. At a bare minimum it deserves a good skim.
https://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf
If you are pressed for time, here is an article which summarizes it succinctly.
https://danielamerman.com/articles/2011/RepressionA.htm
If I had to summarize the whole thing in one sentence, it would go something like this: "Negative real interest rates are the primary tool by which the purchasing power of the nations savers is appropriated and ultimately applied toward the retirement of the nations debts".
The first heavy hitter to give it a mention was Pimco's Bill Gross, in his May Investment Outlook;
https://www.pimco.com/EN/Insights/Pages/The-Caine-Mutiny-Part-2.aspx
The next fellow to really give it some traction was Jim Rickards with his KWN interview from June. Rickards does a pretty thorough job of summarizing both Reinhart's paper and Gross's comments, and weighs in on his own with comments about gold, and why he feels that even though financial repression will likely work for a while, it may not be ultimately successful this time around.
https://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/6/4_Jim_Ri...
If you don't have the time to listen to 20 minutes of Jim Rickards (shame on you!) then here's an article with something of a brief summary of some, but not all, of the interview.
https://usawatchdog.com/the-federal-reserve-is-playing-an-inflation-game/
Jump ahead now to just a couple of weekends ago, to another Rickards KWN interview. Starting about 6 minutes in with comments about the Volcker Rule, the discussion is pretty much all about how current events play into the framework of financial repression, with a lot of talk about gold as a bonus.
https://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/10/16_...
A couple of additional comments are in order.
The point of my original post was that real GDP growth was not essential, and that nominal GDP growth was the bottom line. In refreshing my memory for this post, I was surprised to find Rickards saying that financial repression might not be successful this time partially because we are not getting real GDP growth. So I went back to Reinhart to see if she really did say that real GDP growth was essential. I'm not finding it. While it is fair to say that the real meat of Reinhart's paper deals with the post WW2 United States, and that there was real GDP growth in the period, I don't see any statement by Reinhart saying that real GDP growth is essential across the board.
We would all agree that real GDP growth is a good thing. It makes the whole process easier. It keeps people from marching in the streets and from tossing politicians out on their butts every couple of years, but when push comes to shove it is not essential. A bare look at the math will tell you that if nominal GDP growth exceeds the growth in the nominal debtload, then progress is being made. If TPTB can't get real growth, they'll go for nominal. That is to say, they'll do it all with inflation if they have to.
I'll give Rickards the benefit of the doubt here because he was really saying that the Fed is not getting the real growth that they'd like, and they are not getting the inflation they would like, and therefore between the two components, they are not getting the nominal growth that they would like.
What about those inflation rates? The Gov't numbers are an obvious lie. A prime motive for that is to manipulate the public's perceptions about the degree of financial repression that is in place. If you use the inflation data from ShadowStats, or something in between, you realize that you are being financially repressed far more severely than most people realize. Rickards addresses it in the USA Watchdog article above by saying that if you are trying to get inside the Fed's head, and guess their moves, then you need to use the numbers that they use, which are the Gov't numbers. Whether that is really true or not is another question.
And what about gold? It would seem an article of faith around here that gold is one way, probably historically the primary way of escaping the clutches of financial repression regimes. A holy grail of a defense against the dark arts, if you will. Yet Reinhart barely gives it a mention. Under the subject of the creation and maintenance of a captive domestic audience, she states, way down the list of steps, that there must be "prohibitions on gold transactions". That's all I can find. There's really no depth of research here about whether such prohibitions have been integral to a variety of historical financial repression regimes. Again, it might be a product of the focus on the post WW2 United States experience. The public couldn't own gold through most of it, therefore that must be important. Seems rather weak.
I was therefore surprised that Rickards again chimed in on the subject. On his list of reasons why financial repression might not work this time, he adds the fact that the public currently can own gold, and that therefore a primary escape route has not been blocked off. I'm surprised that Rickards jumps on an issue of Reinhart's that seems so poorly researched. And it also begs the question as to whether said escape route might be blocked off in the future. Confiscation anyone? It's been beaten to death on this blog, but not addressed by Rickards here.
Wow, I think that's it for me. Better get this posted before it goes "poof". Have a great day everyone!