James Saft is a Reuters columnist. The opinions expressed are his own.
Financial repression, the capture by government of capital for its own needs, is coming, if it’s not already here.
If you are a saver, or just rich, for that matter, this means that some of your money will flow to debtors, mostly your government, in a kind of sleight of hand.
Financial repression, which takes many forms, has historically been a popular way for governments to dig themselves out of debt holes, as it can be slow and controlled, unlike a default, and, like the proverbial frog being slowly boiled, is hard for the victims to figure out.
“One of the main goals of financial repression is to keep 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,” economists Carmen Reinhart, Jacob Kirkegaard and Belen Sbrancia wrote in an IMF publication.
“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.”