Economist Carmen Reinhart did an interview with “Der Spiegel” this week.  Recall that she was co-author of the seminal paper on Financial Repression.  In the interview, she essentially restates her expectation that FR is here to stay. A few excerptsSPIEGEL: Ms. Reinhart, central banks around the world are flooding the markets with cheap money in order to spur economies and support governments. Are these institutions losing their independence?Reinhart: No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become politically more independent. The pendulum seems to be swinging back as a result of the financial crisis.. . . SPIEGEL: As a historian who knows the potential long-term consequences very well, doesn't such short-sighted decision-making frighten you?Reinhart: I am not opposing this change, I am just stating it. You have to deal with the debt overhang one way or the other because the high debt levels are an impediment to growth, they paralyze the financial system and the credit process. One way to cope with this is to write off part of the debt.SPIEGEL: You mean some kind of haircut?Reinhart: Yes. But we are in an environment where politicians are very reluctant to do write-offs. So what happens is that money is transferred from savers to borrowers via negative interest rates.SPIEGEL: In other words: When the inflation rate is higher than the interest rates paid on the markets, the debts shrink as if by magic. The downside, though, is that this applies to the savings of normal people.Reinhart: The technical term for this is financial repression. After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit default. After the war, governments imposed interest rate ceilings for government bonds. Nowadays they have more sophisticated means. . . . SPIEGEL: The United States is very highly indebted as well.Reinhart: Yes, but who are the large holders of government bonds? Foreign central banks. You think the Bank of China is going to be repaid? The US doesn't have to default explicitly. If you have negative real interest rates, the effect on the creditors is the same. That is also a transfer from China, South Korea, Brazil and other creditors to the US.SPIEGEL: And what happens if the creditors don't continue to play along and the interest rates on American government bonds climb? Do you see the danger of a debt crisis in the US?Reinhart: Why do we have such low interest rates? The Federal Reserve Bank is prepared to continue buying record levels of debt as long as the unemployment situation isn't satisfying. And China's central bank will also continue to buy treasuries, because they don't want the renminbi to appreciate.SPIEGEL: That sounds like a perpetual motion …Reinhart: ... of course it is!The interview is brief and worth reading IMO. Don’t worry, the interview is NOT in German, it is in English.Thanks,Yodaorange Der Spiegel interview with Carmen Reinharthttp://www.spiegel.de/international/business/interview-with-... Reinhart & Sbrancia: The Liquidation of Government Debthttp://www.imf.org/external/np/seminars/eng/2011/res2/pdf/cr...
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