Financial repression

Source: Wikipedia, the free encyclopedia.
Not to be confused with Economic repression.

Financial repression comprises "policies that result in savers earning returns below the rate of

lost decade and the 1997 Asian financial crisis."[1]

The term was introduced in 1973 by

emerging markets
."

Mechanism

Financial repression may consist of any of the following, alone or in combination.:[5]

  1. Explicit or indirect capping of interest rates, such as on government debt and deposit rates (e.g., Regulation Q).
  2. Government ownership or control of domestic banks and financial institutions with barriers that limit other institutions from entering the market.
  3. High
    reserve requirements
    .
  4. Creation or maintenance of a
    capital requirements
    , or by prohibiting or disincentivising alternatives.
  5. Government restrictions on the transfer of assets abroad through the imposition of
    capital controls
    .

These measures allow governments to issue debt at lower interest rates. A low

taxation,[6] or alternatively a form of debasement.[7]

The size of the financial repression tax was computed for 24 emerging markets from 1974 to 1987. The results showed that financial repression exceeded 2% of GDP for seven countries, and greater than 3% for five countries. For five countries (India, Mexico, Pakistan, Sri Lanka, and Zimbabwe) it represented approximately 20% of tax revenue. In the case of Mexico financial repression was 6% of GDP, or 40% of tax revenue.[8]

Financial repression is categorized as "

macroprudential regulation"—i.e., government efforts to "ensure the health of an entire financial system.[2]

Examples

After World War II

Financial repression "played an important role in reducing

UK, government debt declined from 216% of GDP in 1945 to 138% ten years later in 1955.[9]

China

People’s Bank of China "started to undo decades of financial repression" and the government now allows Chinese savers to collect up to a 3.3% return on one-year deposits. At China's 1.6% inflation rate, this is a "high real-interest rate compared to other major economies".[1]

After the 2008 economic recession

In a 2011

financial crisis of 2007–2008.[5]

"To get access to capital,

sovereign bonds."[10]

Criticism

Financial repression has been criticized as a theory, by those who think it does not do a good job of explaining real world variables, and also criticized as a policy, by those who think it does exist but is inadvisable.

Critics[who?] argue that if this view was true, borrowers (i.e., capital-seeking parties) would be inclined to demand capital in large quantities and would be buying capital goods from this capital. This high demand for capital goods would certainly lead to inflation and thus the central banks would be forced to raise interest rates again. As a boom pepped by low interest rates fails to appear in the time period from 2008 until 2020 in industrialized countries, this is a sign that the low interest rates seemed to be necessary to ensure an equilibrium on the capital market, thus to balance capital-supply—i.e., savers—on one side and capital-demand—i.e., investors and the government—on the other. This view argues that interest rates would be even lower if it were not for the high government debt ratio (i.e., capital demand from the government).[11]

postwar politicians clearly decided this was a price worth paying to cut debt and avoid outright default or draconian spending cuts. And the longer the gridlock over fiscal reform rumbles on, the greater the chance that 'repression' comes to be seen as the least of all evils".[12]

Also, financial repression has been called a "

nominal interest rates lower than they would be in more competitive markets. Other things equal, this reduces the government’s interest expenses for a given stock of debt and contributes to deficit reduction. However, when financial repression produces negative real interest rates (nominal rates below the inflation rate), it reduces or liquidates existing debts and becomes the equivalent of a tax—a transfer from creditors (savers) to borrowers, including the government."[2]

See also

Reform:

General:

References

  1. ^ a b c d "China Savers Prioritized Over Banks by PBOC". Bloomberg. November 25, 2014.
  2. ^ a b c d Carmen M. Reinhart, Jacob F. Kirkegaard, and M. Belen Sbrancia, "Financial Repression Redux", IMF Finance and Development, June 2011, p. 22-26
  3. ^ Shaw, Edward S. Financial Deepening in Economic Development. New York: Oxford University Press, 1973
  4. ^ McKinnon, Ronald I. Money and Capital in Economic Development. Washington, D.C.: Brookings Institution, 1973
  5. ^ a b c Carmen M. Reinhart and M. Belen Sbrancia, "The Liquidation of Government Debt", IMF, 2011, p. 19
  6. ^ Reinhart, Carmen M. and Rogoff, Kenneth S., This Time is Different: Eight Centuries of Financial Folly. Princeton and Oxford: Princeton University Press, 2008, p. 143
  7. ^ Bill Gross, "The Caine Mutiny Part 2", PIMCO
  8. The American Economic Review
    , Vol. 83, No. 4 Sep. 1993 (pp. 953-963)
  9. ^ "The great repression". The Economist. 16 June 2011.
  10. ^ a b "Financial Repression 101". Allianz Global Investors. Retrieved 2 December 2014.
  11. ^ cf. Paul Krugman's point of view: Secular Stagnation, Coalmines, Bubbles, and Larry Summers, The New York Times, November 16th, 2013, retrieved November 28th, 2013: „[…] a situation in which the 'natural' rate of interest – the rate at which desired savings and desired investment would be equal at full employment – is negative. […] when looking forward you have to regard the liquidity trap not as an exceptional state of affairs but as the new normal.“ cf. also: Larry Summers at IMF Economic Forum, Nov. 8, YouTube, published on November 8th, 2013, retrieved on November 28th, 2013: Larry Summers said there: „imagine a situation where natural and equilibrium interest rate have fallen significantly below zero.“
  12. ^ Gillian Tett, "Policymakers learn a new and alarming catchphrase", Financial Times, May 9, 2011
  13. ^ Amerman, Daniel (September 12, 2011). "The 2nd Edge of Modern Financial Repression: Manipulating Inflation Indexes to Steal from Retirees & Public Workers". Financial Sense.
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