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Subject:  Financial Repression: why you should care Date:  12/13/2012  7:30 PM
Author:  yodaorange Number:  411245 of 504803

Financial Repression is a term that has become popular in the last two years. You have probably seen or read about it in the media. Before 2011, the term was relegated to high level economic textbooks. That all changed in April 2011 when economists Carmen Reinhart and Belen Sbrancia published: The Liquidation of Government Debt.[1] You might recall that Carmen is co-author with Ken Rogoff of This Time is Different which was the seminal work on 800 years of sovereign defaults.

The new paper is the seminal paper on Financial Repression (FR). It formalized what many economists and investors were thinking. It explained the historical precedent and outlined what advanced economies can expect going forward.

The definition of FR from the paper
1) Explicit or indirect caps or ceilings on interest rates, particularly (but not exclusively) those on government debts.

2) Creation and maintenance of a captive domestic audience that facilitated directed credit to the government.

3) Direct ownership of banks or extensive management of banks and other financial institutions.

The essence of the paper is that developed economies had high ratios of debt/GDP after World War 2. The paper reviews 28 counties in the post WW2 period. FR is a more subtle way of reducing sovereign (government) debts. You might have heard a few comments recently about high government debts in the US.

FR works by creating low or negative “real” interest rates. Real rates are the advertised aka nominal interest rates minus the inflation rate. By having negative real rates, the government has a chance to slowly devalue their sovereign debt. It is purposely a slow, gradual process. Yoda thinks it is